With mobile banking and robo-advisors on the rise, new technologies are reshaping the financial services landscape. But what impact do these seismic changes have on the industry and where will the financial world go next?
According to a recent survey, nearly 40% of financial institutions are working to make digital improvements to their business. And with those improvements comes a shift toward a more personal and customized approach to advisory services.
In addition to changing the way financial services are carried out, digital advancements are also changing the fee structures associated with certain services. So what will that look like over the next 10 or 20 years? “It’s going to seem like a lot of progress because it’s mostly about infrastructure changes and costs coming down,” says Dan Egan, managing director of Behavioral Finance & Investing at Betterment. “That trend has been going on for a long time and consumers are going to continue to see it in terms of zero-cost brokerages, no trade commissions and zero-cost investing,” he explains, emphasizing that those types of cost reductions are here to stay.
The trend toward lower-cost services could also lead to a shift in the relationships between advisors and their clients. “That’s one of the things that can shape the marketplace because it shifts the balance of power toward the consumer,” Egan explains. While that can lead to increased competition, it can also provide an opportunity to build more holistic advisor-client relationships that prioritize long-term planning for all phases of a client’s life.
While new technologies are enabling investors to become more engaged in the day-to-day performance of their portfolios, they’re also having an impact on consumer behavior. According to Egan, that impact is leading to an increased desire for premium products. “We’re starting to hit a point where people want self-defense mechanisms,” Egan explains, emphasizing that control over data and user experience are becoming bigger concerns for investors. “I think we’re going to start seeing people saying, ‘I want to have more control because I value my attention more,’” he says, likening the trend to consumers paying premium prices for personalized experiences on platforms like Netflix (NFLX) and Spotify.
Egan is quick to point out that investor education and trust are also key pieces of the puzzle when it comes to how consumers engage with financial services. “Firms like Investopedia have leveled the playing field of financial knowledge to where it’s easy to get questions answered quickly and feel more competent about the choices you’re making,” Egan says. In order for financial advisors to continue working with informed investors, it’s important for them to build trust and to make complex concepts accessible to their clients. “The industry as a whole needs to move back to a place where it’s trusted and where clients know that you’re sitting on the same side of the table as them.”
So what will advisory services look like as the field becomes increasingly digitized and consumers become more informed? “We’re going to see a really nice Renaissance that’s far less about investments and more about what’s really important in their lives,” Egan says. While advisors have always taken a somewhat holistic approach to their relationships with clients, improved technologies will allow them to make this the central focus of their practice by taking care of the more technical aspects. Instead of calculating risk and rates of return on investments, advisors will be able to focus on big-picture questions like: What’s the best way to divide up wealth between heirs? Does a client have enough life insurance? Where should they live in retirement to maximize their savings?
“For that reason, the really good financial planners are the ones who are good at having those tough conversations directly with their clients,” Egan says, explaining that being vulnerable and understanding the emotional side of clients’ lives will play an increasingly large role in advisors’ success. “By taking away the least human parts of financial planning — the math and the investment management and rebalancing—we’re allowing ourselves to become more human, and spending more time having the tough conversations that only we can answer.”
Changing demographics will also play a role in how advisors engage with their clients and what type of advice they’re able to offer at different life stages. “One of the interesting demographic changes is that more people are having kids at a later age but they’re also more spread out,” Egan says. This means that while some parents are planning financially for a family in their 20s, others are doing it in their 30s and 40s when financial circumstances may be different. This shift is affecting everything from retirement savings to wealth transfers, and advisors need to be able to speak to those shifts in a way that’s personalized to each of their clients. Egan emphasizes that as life expectancy continues to go up, advisors also need to prepare their clients for the fact that leaving a legacy may not be exactly what they imagine. “As life expectancy goes up, you’re planning for a 25-year retirement with some pretty hefty health expenses at the end of it,” he says. “So a big part of the wealth transfer might be from retirees to healthcare providers.”
With tech giants like Amazon (AMZN) and Apple (AAPL) launching their own credit cards, the industry seems poised for increased competition. But will the power shift from global investment banks to the mega brands that are already dominating our lives? According to Egan, it’s likely to be more of a subtle shift than a complete overhaul of the system. “There are some nice but generally niche things that consumers can look forward to,” Egan says, referring to consumer-focused technologies that increase privacy and security. Among these are services that allow consumers to create virtual credit cards for online accounts, thereby reducing the risk of cyber security attacks. But while these services may increase consumer safety, they’re not fundamentally changing the way people engage with financial services, or even with their finances. “It’s great and it makes you more secure, but it’s not a revolution,” says Egan. “What’s going on is that there is a minor reshuffling of who sits where on the deck, but we’re all still on the same boat with the same underlying tech.”
While technological advances are allowing advisors the freedom to focus on big-picture thinking, it’s important to be aware of how these changes will reframe the types of education experts need. For Egan, this means looking ahead at what skills are most likely to be valued over the next two decades. “When computers are doing more of the actual ‘doing’ in the economy, what’s the thing that’s valuable from other people’s point of view?” he asks. The answer, at least for now, is the human element of financial services and the willingness to face those challenges head on. “Advisors are going to face a lot more of the hard questions and the hard conversations,” Egan says. By focusing on clients’ needs and the more human aspects of the practice, advisors can embrace the changes new technologies bring to the field.