The Future of Financial Advisors in the Age of AI

Advisors: What Does Your Future Hold?

As technology continues to advance and client expectations evolve, advisors are adapting to stay relevant. The shift from transaction-based compensation to fee-based accounts has been a significant change, but with robo-advisors, AI-based advising, and other changes in the sector, financial advisors can feel like they're on a ship being tossed so much they can barely make out the horizon ahead. They have enough to deal with -- how can they plan for what's coming? Yet, the success of many of them requires doing so. In recent years, consumers have gained a host of low or no-fee alternatives to financial advisors. Correctly or not, they put robo-advisors at near parity in terms of knowledge with their human counterparts. Nevertheless, about three-quarters of them would still rather have human over robo-advising. It's not likely a coincidence, then, that an equal fraction of consumers say the most important qualities for them in financial advisors are developing a connection/relationship and finding someone empathetic to their personal situation and needs. Meanwhile, it seems the public is far less sanguine about the "disruptive" potential of AI in financial planning than many in the industry, with about a third of men and a fifth of women in a 2023 survey describing themselves as "hopeful" about the impact it would have on the sector. "Advisors will just need to leverage AI and other technologies to provide high-quality advice to a lot more clients," said Brian Schmehil, managing director of wealth management for the Mather Group, which launched its TMG Innovation Lab in 2023 in part to keep ahead of changes in the industry. "That being said, the desire will always be there to have a human being assist you making sense of everything and ensuring you don't let your emotions get the best of you." Should Schmehil and recent surveys prove correct, then the future of financial advising is not just going to be about adopting new technologies; it's about adapting to clients' changing needs and providing value beyond investment management. Advisors who can navigate the shifting demands of the coming generation of clients will be well-positioned for success. New Approaches to Investing In recent years, there has been a significant shift toward lower-cost investments, such as exchange-traded funds (ETFs) and index funds, and a drop in mutual fund fees. This has been driven by investors' growing awareness of the impact of fees on their returns and the market's strong performance for more than a decade. Costs have gone down across the board. As Schmehil told us, "Portfolio management has become a cheap commodity due to technology. Eventually, other services such as financial planning will follow suit." This has led to a dramatic move away from active management toward passive management strategies, which has made much of the work of many advisors superfluous to some. "The evolution of financial advice is fascinating," said Peter Lazaroff. He picked up on a point Schmehil and other advisors often make, namely that advisors are expanding their roles and services beyond their traditional remit of guiding portfolios. "Clients continue to want and expect more," Schmehil said. "Clients increasingly are looking for one place to handle everything, so being capable of offering tax and estate planning is imperative." But while some industries could face a future of full automation, Schmehil and Lazaroff suggested the future of financial advising is all too human. "Being a good advisor is about connecting with people, helping them solve their problems, and making life simpler. It's not all about spreadsheets; people have wants in addition to needs, and addressing those requires listening and empathy," Lazaroff said. If it were ever the case that traditionally, financial advisors were simply expected to calculate risk and returns, clients can fill that in other ways now. "The best advisors these days resemble therapists more than number crunchers," Lazaroff added. Nicholas Gertsema, CEO of Gertsema Wealth Advisors in Saint Joseph, Missouri, took this further, telling us he thinks financial advisors should change how they think about their practices based on behavioral finance, a set of theories derived from the psychological sciences. "I believe that the advisors who will set themselves apart are the ones who embrace behavioral finance and apply it to their practices." Behavioral finance explores the psychological factors influencing investors' decisions, often leading to irrational and emotional responses to market events. Gertsema said financial advisors can better guide their clients toward more rational and practical financial behaviors by understanding and incorporating these insights. AI and other algorithm-based probability models can only take one so far. Thus, we can quickly see the limits of the future premised on shifting entirely to automated advising. "A Monte Carlo simulation can address the probability of success, but not the probability of happiness," Gertsema said. However, whenever the market turns bearish, advisors will need to rethink the role of passive strategies in their client's portfolios, and clients are going to want advisors who can do the basic blocking and tackling of traditional financial advisors. In any event, passive strategies can only guarantee market performance and lower fees, which means they underperform the benchmark by default. As the industry evolves, advisors must offer comprehensive services, including tax and estate planning, to meet clients' increasing expectations. They will also need to leverage technology to deliver high-quality advice to a broader client base while maintaining the personal touch that investors value during times of market volatility. From the advisors mentioned and others we've spoken to, we can pull together broad predictions, some of which we'll discuss in more depth below: 1. Shifts Toward Low-Cost Investments Will Continue Regardless of the market outlook, fees will likely continue to drop. That doesn't mean that margins will compress as well. As revenues drop, cutting costs will help preserve profitability. Firms have already cut costs by adopting new technologies that automate the administrative and investment functions now performed by advisors. Technological developments have also led to higher client expectations. Consumers are used to always-on access to information and services. While hands-on services are still important, clients expect to review their investments at any time and access investments across asset classes, themes, and geographies while protecting their data. The trend toward lower-cost ETFs and index funds will continue. Lower costs and competitive returns have made these passive investments highly attractive, prompting a widespread move away from actively managed funds, which often come with higher fees and inconsistent performance, as S&P Global's SPIVA reports comparing actively managed and passive index funds have made clear to the investing public. This shift is likely to continue as technology, and increased transparency makes it easier for investors to access information and compare investment options -- long gone are the days when mutual funds could charge high fees while their clients got much of their investing knowledge from their own prospectuses in company human resource departments. In addition, the growing popularity of robo-advisors and digital platforms will continue to expand access to low-cost investment strategies. As more investors prioritize cost-efficiency and simplicity, the demand for low-cost investment options will remain strong, reinforcing the trend toward more affordable and accessible financial products. For financial advisors, this means adapting their service offerings to stay relevant in a market that increasingly favors low-cost investment options. This could mean, as Gertsema put it, "Advisors are changing from an investment-driven industry to an advice-driven profession." They will need to focus on providing value beyond portfolio management, such as comprehensive financial planning, personalized advice, and emotional support during market volatility. By embracing technology and offering a broader range of services, advisors can differentiate themselves and meet the evolving needs of their clients. This also demonstrates the importance of continuous education to keep up with changes in financial approaches while staying informed about market trends. 2. Increased Automation Most advisors simply have too many tasks and not enough time. Automating some of their workload will free advisors to spend more time interacting with their clients. The functions likely to be automated do not require critical or creative thought. Simple communications and routine client servicing are already being addressed by combining AI and clever client segmentation. Asset allocation, portfolio construction, and rebalancing are also candidates for automation. BlackRock has introduced ETFs that select holdings based on machine learning and natural language selection. Their ETF structure and AI-based decision-making make these significantly cheaper than typical managed funds. Managed accounts and model portfolios allow advisors to maximize their available time. For example, the iShares Evolved U.S. Technology ETF uses data science to select companies. The fund has returned an annualized 18.75% since its inception in March 2018. Its expense ratio is 0.18%. 3. Leveraging Technology, Not Being Replaced By It While the rise of robo-advisors initially sparked fears of job displacement, the reality has been more nuanced. While technology will transform the industry, the human element of financial advising remains indispensable. Clients value the personal touch and trusted relationships they build with their advisors. AI can complement, but not replace, the human connection that lies at the heart of financial advice. However, the new technologies provide an upside, given that almost a third of financial advisors say they don't have enough time to spend with clients due to onerous administrative duties. Robo-advisors excel at tasks like portfolio rebalancing, tax-loss harvesting, and generating basic financial plans. By automating these routine tasks, financial advisors will free up valuable time to focus on what they do best: building relationships with clients, providing personalized financial advice, and navigating complex life events. Advisors will tap into AI-driven analytics to identify investment opportunities, optimize portfolios, and manage risk more effectively. Furthermore, AI can help advisors scale their services, reaching a wider audience and providing affordable financial advice to those who might not have access to it otherwise. AI will, at best, complement, but not replace, the human connection that lies at the heart of financial advice. 4. AI-Led Marketing AI can also help advisors generate leads. The software can analyze demographic and public data to create marketing campaigns, analyze response rates, and optimize campaign effectiveness. One area that does not lend itself readily to automation is the ability to provide clients with tax, estate, philanthropic, and other specialized advice. High-net-worth clients typically have more extensive and complicated asset portfolios and require help in areas beyond investment advice, though data analytics will provide help here, too. 5. The Future Is Human A frequent cause cited by clients for switching advisors has been the perception of a lack of time for them and responsiveness. In a world where clients are demanding increased accessibility to their advisors, every minute will count. Technological applications will be most effective by helping advisors maximize their available time and allowing them to devote their time to communicating with clients. The takeaway is that technology could help lower advisors' costs and find more revenue opportunities. The caveat is those who don't adapt could face tough times ahead. The Bottom Line The financial advisory industry is undergoing a significant transformation, driven by the continued shift toward low-cost investments and clients' evolving expectations. As technology advances and transparency increases, investors are increasingly getting competitive returns at lower costs compared with actively managed funds. This trend is expected to persist as more investors prioritize cost-efficiency and simplicity in their investment strategies. Financial advisors must adapt their service offerings and provide value beyond portfolio management to remain relevant in this changing landscape. Clients seek comprehensive financial planning, personalized advice, and emotional support during market volatility.

How AI is Impacting the Financial Advisor Industry, According to ComparisonAdviser Article

REDMOND, Wash., July 16, 2024 (Newswire.com) - In recent years, artificial intelligence (AI) has seen a rapid ascent to prominence in society. This has resulted in many industries adopting the technology to help streamline business processes and serve consumers, including over 50% of financial advisors that have either implemented or plan to include such tools in their firms. ComparisonAdviser's recent article investigates how the spread of AI technology is directly impacting the financial advisor industry, including what it means for both professionals and clients. Click here to access the article: https://comparisonadviser.com/news-and-studies/ai-in-financial-advisor-industry According to the article, professionals currently use AI tools, such as ChatGPT and machine learning, to analyze, interpret, and compile data. Advisors then use this data to help make quantitative decisions and draft financial plans for their clients. This application of AI helps eliminate tedious tasks for professionals within advisory firms, allowing them to spend more time serving the client rather than crunching numbers. The article also highlights robo-advisors as a clear example of how AI has existed in the industry for over a decade. According to Sean Canonica, the author, "Robo-advisor services are an instance where we can see how legislation holds automation accountable through the fiduciary standard." In the piece, Canonica interviews Andrew Bellak, a partner and wealth advisor at Perigon Wealth, about AI's ability to act in a client's best interest as an assistant within advisory firms. Bellak explains that it isn't "that easy" for a computer to know if a recommendation is entirely in a client's best interest. This limitation, Canonica says, "raises questions that clients should be aware of." What AI means for the future of financial advice is also a legitimate concern. Thomas J. Brock, CFA, CPA, an experienced financial advisor and expert contributor at Annuity.org, shares with Canonica that the capabilities of robo-advisors are likely to "significantly increase in the coming years." As a result, this may allow for additional services, such as comprehensive financial planning, to be more readily available through an automated solution. Bellak shares with Canonica in the article that the spread of AI draws similarities with "how the social media genie was unleashed from the bottle," leaving society to "legislate it under control." With the questions and concerns that AI brings, Canonica indicates that it will be up to both advisory firms and regulatory bodies, such as the SEC and FINRA, to guide the industry forward by ensuring the technology is used effectively and ethically.