In the age of zero-commission trading apps, robot advisors, and hyper-personalization, digital tools can only go so far. Today’s consumers anticipate extremely tailored solutions at fair prices, but despite technological advancements, financial advisors still offer high value and essential services to investors. In fact, according to a 2024 Q2 Market Perceptions Study by Allianz, 54% of Americans who work with a financial professional say they desire more time with their in-person financial advisor than they currently have. Amongst millennials, this number jumps to 71%. This suggests those who have already experienced a hands-on team understand the inherent benefits of personal financial management and the advantage it affords them and their portfolios despite the availability of automated tools. While robo-advisors and AI are certainly the new frontier of the wealth management industry, true value is still recognized by professionals leading in front of the technology – and not the other way around.
Robo-Advisors Can Only Go So Far
Algorithm-based financial planning services took the world by storm a few years ago, promising streamlined, low-cost financial management. However, these robo-advisors do not suit everyone’s needs.
A survey of 1,600 Americans in 2022 by MagnifyMonkey found that 63% of Americans would consider using a robo-advisor, but that only 1% of them currently do. Broadly speaking, 41% of consumers that hold investments have a financial advisor, and six-figure earners (56%) and baby boomers (50%) are most likely to have one, the survey found.
While these digital platforms provide convenience and affordability, they often fall short in addressing the nuanced needs of individual investors. For many investors, the impersonal nature of robo-advisors can be a significant drawback. Financial planning involves understanding not only numbers, but personal goals, fears, and life circumstances. An algorithm can analyze data, but it cannot replace the empathy and understanding a human advisor brings to the relationship.
Clients often value the reassurance and personalized touch that comes from speaking directly to an advisor who understands their unique situation. While there is clear interest in adopting robo-led services for financial advice, there is also a trend evident that human interaction will merge with AI to create a stronger, holistic financial future. CNBC reported that some of the biggest names in the robo-business are offering a hybrid model of human advice backed by algorithmic power. Companies like Betterment and Vanguard have begun providing the option of hybrid services that combine both human advice and AI-powered digital tools to offer financial advice to clients.
Additionally, an Accenture wealth management consumer report in 2021 (during the surge of robo-advisor popularity) stated that only 17% of respondents preferred a completely digital means of receiving and processing financial advice. The same percentage prefers a completely personal engagement model, while the rest is looking for the best of both worlds: “self-service when they want it, personal when they need it,” as the report put it.
Human-Led Approaches Optimize What Technology Can Assist In
A human-led financial advisory approach, supported by the right mix of automation and outsourcing, might make more sense to meet clients’ evolving and increasingly complex needs. Successful AI implementation in wealth management should assist – but not replace – human advisors. Especially as portfolios become more complex and investors’ appetites for alternative investments increase, a human element to holistic financial advice will remain crucial.
Advisors can leverage technology to handle routine tasks, thereby freeing up time to focus on personalized client interactions and strategic planning. This human touch is essential as the demand for skills and the way tasks are executed are evolving due to new technologies and recent expansions into different product areas.
For example, intelliflo redblack offers smart rebalancing and trading solutions that streamline the investment management process. By automating these routine and often monotonous tasks, advisors can save time and reduce errors, allowing them to focus on higher-value activities such as client relationship management and strategic portfolio planning. Similarly, intelliflo’s outsourced services serves as a turnkey asset management platform (TAMP), enabling advisors to offload time-consuming back-office functions like investment research, portfolio construction, and performance reporting. These tools not only enhance efficiency, but also ensure that clients receive tailored and timely advice. The integration of these digital tools allows for the offering of human-led personal advice backed by the power of technology to ultimately offer the personalized hybrid offering clients increasingly want.
This integration also empowers advisory firms to grow their businesses into the holistic one-stop-shop that a 2023 McKinsey report says wealth management clients prefer. The consulting firm found a 60% increase in client preference for holistic advice from 2018, meaning clients are increasingly preferring all their financial needs are done in one place, by the same people or firm. Similarly, the McKinsey study found that traditional advisor-led wealth managers are offering digital-only options, while digital-direct firms are responding to the industry convergence by expanding their human advisory offerings.
Four Key Trends Driving Personalization in Wealth Management
Several major forces are driving substantial opportunities for advisors to grow and differentiate their practices:
1. Market Volatility: With 40% of clients believing that managing their wealth has become more complex over the last two years according to Ernst & Young, advisors have a substantial opportunity to emphasize their value-add while integrating technology. Market volatility and complexity are significantly affecting investors’ requirements and behaviors, leading to an increased demand for personalized client experiences and rebalancing to keep their financial goals and risk tolerance aligned. In times of market uncertainty, there tends to be an increased demand for total portfolio offerings such as model portfolios and outsourced CIO-like services. New demands of portfolio construction – including integrating illiquid private-markets strategies at a significant scale and incorporating ESG criteria – have created new areas of client need.
2. Underserved New Client Segments: Advisors must hone their strategies to serve a diverse range of clients, from women and mass-affluent to high net-worth and younger investors. Increasingly, women are becoming part of the high net-worth segment, representing more than 40% of high-net-worth individuals globally. Additionally, the affluent and low high net worth client segments represent the largest revenue growth opportunity in the industry. A 2023 report by Merrill Lynch Wealth Management said the Asia American and Pacific Islanders community is 25% more likely than a general affluent population to consider inheritance and passing down wealth as part of a financial plan.
3. Generational Wealth Transfer: With an estimated $84 trillion shifting from baby boomers to Gen X and Millennials between now and 2045, establishing relationships with heirs now could produce greater long-term returns. Younger generations are investing earlier than their elders, seeking advice for the long haul, and are willing to pay for it. They’re also three times more likely to give referrals, prefer to consolidate their business with a single firm, and expect more personalization, services, investment options, and technology.
4. Desire for Tax Savings: Creating tax alpha through strategies like tax-loss harvesting and capital gains budgeting is becoming increasingly important for clients. More than 9 in 10 investors said tax efficiency is essential in the transfer of their wealth, emphasizing the need for advisors to incorporate tax-efficient strategies in their plans. Among the most significant ways advisors can provide value to their clients’ portfolios is by creating tax alpha and reducing their tax responsibilities at the end of the year through tax-loss harvesting and capital gains budgeting. Integrated technology like intelliflo redblack helps in assisting with tax-efficient client goals. The potential benefits of tax-loss harvesting can be further prolonged by enabling clients to add cash to their accounts, gift appreciated securities to a donor-advised fund, and regularly rebalance their portfolios to create fresh tax lots.
Threats Facing Advisors
The financial advisory landscape is becoming more competitive, with several key threats:
1. Increased Competition: The rise of robo-advisors and zero-commission trading apps has intensified the market competition. Advisors must demonstrate the ability to deliver levels of customization that fully address each client’s unique financial circumstances and personal preferences. This competitive pressure makes it essential for advisors to differentiate themselves by offering more personalized and high-touch services.
2. Consumer-Driven Consolidation: More clients are looking for banking and wealth management under one roof, prompting financial institutions to offer more comprehensive services. Nearly half of consumers want to consolidate all their financial relationships in one place as per the McKinsey study. Retail banks are increasingly offering financial advice to address this demand, creating a more integrated financial services experience for clients. Banks that address the challenge of financial health head-on with personalized financial advice are earning high customer satisfaction and building strong customer engagement.
3. Expansion of Financial Advisory Services in Commercial Banks: Banks are stepping into the wealth management space, offering personalized advice to attract clients. This expansion poses a threat to traditional advisory practices, as banks can leverage their extensive client base and resources to offer competitive services.
Looking Towards the Future
Advisors can now provide more value through tailored products like target-date funds, direct indexing, and personal advising in conjunction with customized model portfolios. This redefines the value-add in modern times by offering hyper-specialized services that cater to specific client needs. “Hyper-specialization” might allow firms to focus on a niche set of clients who share common needs. This is difficult to do at scale, but by outsourcing part of the process, advisors have more time to grow and offer hyper-personalized advice. Solutions like intelliflo redblack for smart rebalancing and trading and intelliflo’s outsourced services as a TAMP help advisors scale their practices by handling time-consuming back-office functions, allowing them to focus on business development and time with their clients.
While technology plays a crucial role in democratizing financial advice, human involvement in holistic financial planning remains irreplaceable. By leveraging technology to handle routine tasks and outsourcing low-value activities, advisors can concentrate on personalized financial advice that not only adds the value back in but offers the service that clients ultimately want. As the financial industry continues to evolve, the integration of human expertise and technological integrations will be the key to maintaining a competitive edge and providing exceptional client experiences.
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