Let’s get some basics out of the way. This article is not about low-cost beta ETF roboadvisors (Betterment, Wealthfront), or private-label RIA robos (Vanare | NestEgg, Trizic). It is not about data aggregation companies (ByAllAccounts, Yodlee, Quovo), beautiful client portals (Wealth Access) or web-based financial planning (Advizr, Wealthminder). No.
We won’t talk about those things because they already happened. The industry has already changed, and trillions of next-gen assets are on the move. If you’re an RIA and looking to solve this, give me a shout on Twitter.
So now, let’s talk about the future.
1. Blockchain and Open-Source Data
Bitcoin is famous for its volatility as a currency. What is not as well advertised is its unique technological infrastructure. Bitcoin and other digital currencies use a system called the Blockchain comprised of a public ledger of all transactions, shared between every participant in the system.
This infrastructure can be used for much more than digital cash — it can drive trusted and secure authentication, contracting, financial data, and private transactions. Most importantly, it can provide accuracy and verification of sensitive data without a need for a centralized financial institution or government.
Think of thousands of robots wearing green eye shades, all checking each other’s accounting. Individually the robots (or their owners) are not very trustworthy, but collectively, coordinated by mathematics, they produce results of high reliability and security. (Quote from “The Dawn of Trustworthy Computing”,Nick Szabo)
The Blockchain will remove the need for a “stamp of approval” from large financial institutions, while allowing clients to trust and store their data securely in the cloud.
2. Wearable Computing
In the 1970s, governments and large corporations were the only ones to afford computers, housing enormous mainframes in their offices. By the 1990s, thanks to Apple and Microsoft, every household had a personal computer. Today, every individual owns multiple large and small computing devices, from their home and work desktops, to tablets and phones.
Just around the corner is the ubiquitous integration of smart computing into every day items. This trend, called wearable computing, has already been implemented for glasses, jewelry and watches. The devices are revolutionary in both their collection and communication of data. Bio-signs, like heart rate, can be measured and stored. Embedded video cameras can record every moment of life, and save them to a private, secure database. GPS can map out every step of our daily work and leisure.
Our senses will be augmented to be far more lasting and persistent than ever before. The data generated by all these devices can be shared at will, and used by financial institutions to create a holistic picture of clients that will be truly unprecedented.
Authentication will also be easier than ever before. As implemented by Apple Pay, a tap of the thumb to a small computing device is faster and more secure than any paper signature process the advisory industry has in place today.
3. Image Recognition
Not only can technology collect what we experience, but it can now learn and describe what we see. Just recently, Google Photos launched with unlimited photo storage. By uploading your library to the service, the user (1) makes it accessible across all devices with an installed app, and (2) allows image recognition software to comb through and categorize all the images.
The results are uncanny.
The software reads faces of people in the photos, and can identify and tag them across ages. From adolescence to retirement, the machine knows who you are. It can also find and understand objects and environments, presenting neatly every sunset ever photographed.
Here is the implication for financial services: every individual that allows algorithms to categorize their images will, as a byproduct, create a full graph of expressed preferences that are true and accurate in a way that no risk questionnaire can hope to capture.
An advisor can learn if their client is a cat- or dog-person, whether they like to travel or build up their home, how many children they have and what age they are. Software can impute risk tolerance and capacity for risk taking. It can prompt the opening of a 529 Plan after noticing a photograph of a newborn baby. And the technology works already. The next step is to combine this type of data with a privacy and security layer (e.g., Blockchain) that protects information, and generates value for both client and advisor when shared.
4. Semantic Analysis of Social Media
In addition to the preference graph generated through images, we already have the ability to create personality profiles based on a social media presence. One example is Five Labs, which uses semantic analysis and natural language processing to understand what people mean when they says things to each other on the internet.
Another provider of this analysis is IBM Watson, a supercomputer with deepmachine learning capabilities. Watson unearths an even deeper behavioral profile, called Personality Insights, priced at just $0.60 per API request.
It is incredible that many of the tools and technologies to run such a complex analysis are already Open Source, meaning they are available for anyone to grow and modify. The input text, whether on Facebook, Twitter or other social media, can be parsed into sentences and intended meanings, and then can associated with broader topics, moods, and personal attributes. This technology makes the financial advisor’s paper Risk Profile Questionnaire woefully antiquated as a result.
5. Financial APIs
None of this data (“Big Data”) is useful unless our super-powerful computers can talk to each other. That is where APIs come in. APIs allow developers to build applications that connect one complex, messy data set to another using a standardized format.
Companies like Plaid are working to liberate financial data from the centralized legacy systems of our major financial institutions. The prior decade’s data aggregation firms have made it possible to see all of a client’s transaction in a single place. These new API services will make it possible to actually use that data within other applications.
Plaid is embedded into multiple Roboadvisors to authenticate ACH transfers in seconds, rather than several days. Other companies like Stripe and Braintree enable developers to program online payments into their applications. For example, Uber uses Braintree in its application to create a seamless checkout experience.
Using such APIs, we can build algorithms tied to a user’s Facebook or Google identity that combines a financial Income Statement & Balance Sheet (detailed transactions across multiple banks), a behavioral profile based on social communication patterns, and a personality profile based on imaging data.
These can then be used in a predictive way to understand what financial products the client is going to need in the future, similar to how Google can predict what a user is about to search. Financial accounts can be opened online, authenticated personal data transferred seamlessly, with funding and trading occurring in mere seconds thereafter.
6. Digitization of Cash and Securities
Next up is the actual investment. Already, we have secure digital cash and wallets via Bitcoin and its sisters (LiteCoin, DogeCoin, etc.). Whether such currencies move from a $4 billion market capitalization to full ubiquity remains to be seen. More interesting is the idea that the US Dollar itself could become fully digital. What if the Federal Reserve adopted and approved a Blockchain-type ledger for the expansion of a digital USD?
Digital dollars matter because they can be divided into tiny, tiny fractions that allow for microtransactions. This would usher in a new age of online commerce: imagine 5 million underbanked clients being able to pay their financial mentors 0.25% on $150.00.
Now what about securities? A digital version of a stock or ETF could be divisible infinitesimal pieces. Stockpile, a stock gifting start-up, has already built the fractional security transfer technology. As a result, the newborn with the aforementioned 529 Plan can have a sophisticated-quality global asset allocation with just $0.25 in her account. Account minimums be gone!
7. Community-Driven Investing
Have you heard of Quantopian?
Quantopian is a crowd-sourced hedge fund that provides the world’s first browser-based algorithmic trading platform. On our platform, you can write code to execute your investment strategies, instead of relying on manual trades and emotional urges.
How about Motif Investing?
With motifs, your investments reflect your views. Explore the catalog of 150+ professionally built motifs and 130,000+ motifs created and customized by our community.
But certainly a community approach to selecting the best investment manager works only for publicly available securities? Can it ever apply to hedge funds or private equity? Actually, it already does. See AngelList Syndicates.
A syndicate allows investors to participate in a lead investor’s deals. Investors can also invest as little as $1K. Leads get carry for their investments. Startups get more capital with fewer meetings. They get the attention of a lead who is making a large investment.
These online algorithms compete with the beta-only Roboadvisors and serve investors of all investment personalities — from Vanguard Bogleheads to return-chasing day traders. Such investment technology will inevitably become freely available and open the industry’s Pandora’s Box. Already, there are open source Roboadvisor code repositories and Black-Litterman optimization white papers.
All that remains is to create a trustworthy, distributed community where an investor selects the best algorithm for their financial situation and personality in a secure environment. Accounts open, data flows, and fees are digitally paid. The back office is on autopilot.
8. Brand as Currency
What is the role of a financial advisor in a future world accelerated by technology? The short answer is that the advisor’s role will continue to be a client’s mentor, counselor and guide through the complex financial landscape. The advisor will generate and reinforce Trust and Brand, building relationships that align investors with online products and algorithms.
In a prior article, I suggested that advisors will receive a new type of credential: Behavioral Financial Therapy (“BFT”). The best BFT on the market today is without question Carl Richards of Behavioral Gap. His unrivaled ability to communicate complex ideas simply and create confidence has allowed Carl to reach an audience of millions through asset managers like the BAM Alliance and publications like the New York Times.
Such good advisors will be voted up (while poor ones will be voted down) on a website like Reddit or Product Hunt. With the benefit of automation and technology, this trusted advisor will manage not 50 clients, but 5,000 or 500,000. They will be paid with either digital cash, or additional social currency — referrals will be quantified and measured. Already today, you can get paid with a Tweet.
So what should an advisor do?
These 8 technology trends are a fundamental transformation of our industry. The current focus on Roboadvisors is a mere symptom of much larger things to come.
Advisors should spend the time now to deeply analyze their practice and goals:
- Are you building a lasting enterprise or maintaining a set of relationships? The answer will determine how rapidly you should adopt new technologies.
- Do you prefer spending time on investment selection or client acquisition? Specialization on the true value-add of your practice is a necessary byproduct of ever more software in the industry.
- What is your investment philosophy, and how do you implement it? Different technology choices are appropriate for active/passive approaches and different investment vehicles (stocks, ETFs, SMAs).
- How do clients think about technology and would they benefit from innovative but experimental approaches to communication? Age may be responsible for differing opinions, but respect the early adopters!
That’s a lot of work for us to do. Let’s get to it.
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