Advisors shouldn’t take their eyes off of robo-advisors and digital advice.
Though advisors have become less concerned about robo-advisors disrupting the traditional wealth management industry, new artificial intelligence applications within digital advice platforms present a direct threat to advisors’ businesses, said Daniel Faggella, head of research at Emerj Artificial Intelligence Research, a firm that conducts market research on AI for enterprise clients.
“When we talk to vendors who have raised $50 million to $100 million, they feel like robo-advisors are just starting to gobble the market,” said Faggella. “A robo-advisor, even with AI, is not going to be able to make me feel warm and comfortable in the same way that sitting in front of somebody does. We’re 15 years away from technology being able to do that.
“But in reality, that kind of personal touch is only important to two categories of people: people with very high levels of needs—what I would call the high end of the market—and for lack of a better term, old people.”
Younger generations at all wealth levels, however, are very comfortable managing their money using technological tools, said Faggella. “Young people are just going to put their money somewhere that doesn’t charge them a crazy fee. They don’t want the fees and complexity that mom and dad were dealing with. As the younger generations replace the older ones, there’s more money in younger hands, and the pressure on financial advisors increases. I think we’re going to see a big shift to robo-advisors in the next five years.”
According to Faggella, the only advisors who are “safe” are ones who work with clients at the highest levels of wealth and complexity—the rest of the industry teeters on the verge of disruption.
Stories about AI’s power to transform the wealth management industry may be premature, he said, but the technology will likely first have widespread impact in a handful of specific areas.
One of these areas ripe for AI infusion is regulation and compliance, he said, because firms are willing to open up their wallets to solve compliance issues or avoid them altogether.
“One thing AI might be able to identify effectively is the actual trading activity that we think might violate some kind of rule, something that sends a red flag up. That pattern can be identified,” he said. “Another side of this is phone and text transcripts. AI can comb through broker and advisor conversations with people to determine if there’s anyone potentially leaning into breaking the rules.”
According to Faggella, five times more money is going into AI-driven compliance applications as is going to marketing, sales and customer service combined.
Similarly, a lot of funding and research is going into cybersecurity applications of AI, where it can be used to identify risky behavior before it’s exploited by criminals.
As AI becomes more commonplace in regulatory compliance, fraud detection and analysis jobs will disappear, said Faggella.
AI will also be gathering and analyzing more novel types of data than it did in the past, he said—analyzing the sentiments of different market participants, or using satellite analysis of retailers, ports and other venues of commerce and trade. That will offer an edge to users.