

In today’s digital world, everyday functions such as making dinner reservations or hailing a taxi are done at the touch of a button. Similarly, other, more complex and esoteric functions, such as wealth management, are also moving toward automation.
This evolution is enabled by the creation of state-of-the-art software, which has helped make wealth management more consumer-friendly, affordable and accessible than ever before. While full automation may be appropriate for investors in the early stages of wealth accumulation (<$500,000 in household wealth), a wealth management model that combines best of breed automation with a human advisory element may be a better course for those with greater levels of wealth (>$500,000 in household wealth).
Robo-advisors represent the “Uberization” of wealth management, offering a pure, automated approach. Providers such as Wealthfront and Betterment offer super-streamlined investment platforms where the robo-advisor gathers feedback on an investor’s risk tolerance, objectives, time horizon and other background demographics and uses algorithms to help determine a suitable investment strategy. These solutions are perfect for the lower “strata” of the wealth world, whose estate planning and tax needs are less complex, for example.
While robo-advisors are increasing in popularity because of their lower fees and ease-of-use, there are important services where the current offering from robo-advisors falls short. Just as millennials won’t hesitate to take an Uber or use Airbnb while traveling, a wealthy tycoon will continue to opt for the limo and owned beach home. The middle strata of the wealth management world is, as expected, somewhere in between.
They need a low cost, tax-efficient way to invest, but also want to know that there is a human making the ultimate call on their wealth management decisions. Take personalization, for example. An investor cannot set up a meeting with a robo-advisor to review their account, adjust their investment strategy as their situation changes, ask questions or share concerns. Robo-advisors are not geared for this level of personal interaction.
As a result, they are unable to take into consideration an investor’s personal goals, such as the lifestyle they want to live in retirement, or factor in other aspects of wealth management, such as life insurance or tax planning. While this may not be an issue for millennials who are just getting started, it’s a significant concern for the mass affluent baby boomers who have accumulated anywhere from $250,000-$2 million in savings and have complex financial situations.
While technology can be an important enabler, human advice is a necessary component of personalized wealth management. Several companies are therefore using software to help the advisor be more efficient; think providing the “Moneyball” approach to the advisor channel. More recently, goals-based wealth management is gaining in popularity as it is deemed to be a superior way of connecting a client’s goals with their investment strategy.
This approach goes deeper than applying algorithms to trade and re-balance an investment model. True goals-based software requires greater sophistication, as it must be able to simulate infinite life scenarios, analyzing goal values and investment outcomes. Goals-based engagement adds a personal touch, and the underlying software empowers the advisor to help navigate their clients through myriad life events and market outcomes. By bringing together a technology-driven model and a human-advice element, wealth managers are able to offer a more holistic approach to wealth management.
For example, an investor’s life goal might be to retire in Florida in a condo along the intercoastal, but also have enough money to travel and help put their grandchildren through college — all of this while taking advantage of every possible tax benefit. To assure the investor will be able to achieve their goals, the unique algorithms of the technology-driven component are necessary to process the many complex calculations, while the personal touch of a trusted advisor is needed to help guide the investor and offer firsthand support when either the capital markets or life events inevitably require a shift in strategy.
One firm specializing in a goals-based wealth management approach is Wealthcare Capital Management. Wealthcare was founded in 1999 and is widely credited as having pioneered this style of investment advice. Using a patented process, the firm is able to provide a clear picture of an investor’s financial situation at any point along their financial journey.
Additionally, the process automatically signals to the advisor when it’s time to update the plan or make mid-course corrections. Wealthcare’s simulation technology is able to analyze thousands of randomized market outcomes, testing best and worst case scenarios and reporting back an accurate confidence score to the client.
At any single point in time, the client knows where they stand as it relates to accomplishing his/her life goals. When a change in strategy is required, a goals-based advisor can then sit down with their client and recommend steps to be taken to keep their client’s plan on track.
While this goals-based model has been around for quite some time, industry adoption has only recently begun to gather momentum. However, faster adoption may be at hand thanks to a new rule being proposed by the Department of Labor (DOL), which will demand a powerful technology-driven platform geared toward cost-effectiveness and compliance adherence. Under the new DOL regulation, advisors will be held to a fiduciary standard, thus dramatically changing the rules of client engagement.
As currently written, the proposed rule states, “any individual receiving compensation for providing advice that is individualized or specifically directed to a particular plan sponsor (e.g. an employer with a retirement plan), plan participant, or IRA owner for consideration in making a retirement investment decision is a fiduciary.”
So, how exactly will this impact the industry, and, specifically, technology-driven wealth management?
If the rule takes effect, there will be a new fiduciary standard for advisors to ensure that investments made within an investor’s retirement account align with their retirement goals. This could have a major impact on brokers/dealers and advisors. The new fiduciary standard goes far beyond the current “suitability standard” by which broker/dealers are governed.
A suitability standard simply states that the investment professional must consider the client’s risk tolerance, objectives and time horizons in recommending an investment, but allows the investment professional to also recommend investments that may pay more lucrative commissions to them.
Suitability is a very fuzzy standard, as most clients don’t really know their risk threshold (until after it’s too late) and does not address transparency or fee disclosures. The fiduciary standard, in contrast, requires full transparency, and mandates that advisors or brokers act in the best interest of the client.
Helping clients establish, monitor and achieve their life goals for a fair and fully disclosed fee is as fiduciary-compliant as it gets. Moreover, with a goals-based approach in place, the underlying software provides an audit trail for compliance, as well as a compass to ensure an investor’s wealth continues to be managed appropriately and to the benefit of the client.
Software automation will provide the advisor with auditability and traceability, and will reduce the overall potential liability if the investment strategy matches the client’s plan.
In summary, technology-driven wealth management will continue to reshape the industry. Whether through millennials tapping robo-advisors, mass affluent baby boomers seeking a more personal touch or the coming changes in industry rules and regulations.
We are still in the early innings of a major industry transformation with technology and regulatory changes acting as dual driving forces. It’s going to be very interesting to watch it all play out. At the end of the day, investors are going to be the biggest winners.
