The Latest Advisory Industry & FinTech Trends From #SchwabIMPACT

(Michael’s Note: The video below was recorded using Periscope, and announced via Twitter. If you want to participate in the next #OfficeHours live, please download the Periscope app on your mobile device, and follow @MichaelKitces on Twitter, so you get the announcement when the broadcast is starting, at/around 1PM EST every Tuesday! You can also submit your question in advance through our Contact page!)

#OfficeHours with @MichaelKitces Video Transcript

Neesha: My name is Neesha Hathi from Charles Schwab, and I'm greeting you here from IMPACT 2017. This is an event that we hold every year, and I know Michael, you've been here many years.

Michael: Absolutely. And it's such an enormous event. You have what, 2,000 advisors this year?

Neesha: Two thousand advisors, as well as many thousands of sponsors and others that participate in this community.

Michael: I think The Exchange [exhibit hall] this year is literally larger than a football field, just full of solutions for us and our businesses. It's pretty amazing.

Neesha: That's right, yeah. And, you know, a lot of what we do here at IMPACT is talk about the future and try to help advisors start thinking about their businesses, how they can grow them and thrive. And one of the themes that we like to talk about is technology. So I'm actually thrilled to spend some time asking you some questions. Michael, as many of you know, is a frequent blogger and speaker. His blog "Nerd's Eye View" is a popular one amongst our clients. And so I want to talk tech with you.

Michael: Talking tech, all right.

How The Robo 2.0 Trend Will Influence Financial Advisors [1:10]

Neesha: Let's do it, and start talking a little bit about trends and what you're seeing with more and more advisors when you spend time with them. What do you see out there in the ecosystem? What are the biggest trends that are affecting advisor processes these days?

Michael: So to me, one of the biggest trends that's rolling through our space right is what I'll call "Robo 2.0." Robo-advisor 1.0 was these companies like Betterment and Wealthfront that made really neat tech convenient tools to open accounts, investment accounts, and have them managed. It went directly to consumers. I think we've now figured out that there's maybe a small subset of consumers that want to buy that, but the technology actually has a much broader application. But now it's coming in to say, "How can we use this as advisors?"

I'm 17 years in the business, so I started back in the peak of the tech bubble. And I remember when I was coming into the advisory world in 2000, very much the same conversation. "Why would you be a financial advisor now that we have online brokerage accounts? It's so easy a baby can do it. See the commercials! Why would you become a financial advisor? The internet is going to replace all of them."

And of course, what ended up happening instead is the internet didn't replace us as financial advisors. The internet became the technology we all use! To the point that we don't even say, "I'm a web-based financial advisor because I use Schwab.com instead of just calling everything in." It's just the natural technology we all use.

Neesha: Right, the role of the advisor changes.

Michael: And that's the effect, right? Our role shifts as the technology makes old tasks easier. And so what I ultimately see out of Robo 2.0 tools - the ability to quickly and easily open investment accounts, get the dollars actually transferred, invested, allocated in reasonable models, model management tools to make it very easy to re-balance and handle it all along the way. So the good news is huge cost savings for us. Lots of efficiencies out of the business that let's us re-focus our energies elsewhere.

But a fundamental challenge for a lot of us as advisors is the truth is, for a lot of us a long time we said, "Well, you know, anybody can pick mutual funds, and stocks, and bonds. I will create for you a good asset allocated portfolio!" And now suddenly, you and everybody else who has a piece of software that can do it at the click of a button.

The good news when we go through these kinds of transitions, it's a tremendous opportunities for efficiencies in our businesses. The bad news, though, is it starts to push us to reinvent our business models and our value propositions as well. And, you know, Bernie Clark [head of Schwab Advisor Services] I thought had a great kickoff speech this morning for IMPACT, talking about what I think is sort of the duality of the technology evolution process. Really cool to have some efficiencies, not so comfortable with some of the uncertainties that get created when you're trying to figure out, "What does my world look like on the other end of all this technology stuff?"

And I think very much we're experiencing one of those moments in our advisor community as well. There are all these efficiencies that are coming through the technology. But it's raising some hard questions for some firms about, okay, when you can do all that at the click of a button, what exactly is your value in the process as an advisor? I think there are lots of opportunities for us to add value and build it differently than what we did in the past.

Neesha: Yeah. And you know that other industries have gone through this. When you think about travel, when you think about medicine, right? It's changed over time because of the way technology can be leveraged by the industry.

Michael: Places like the travel industry, I think, are fascinating. We've all heard the story of what the internet did to travel agents, and how it destroyed the travel industry. But being a nerd I actually like to actually look up the data on these things. And when you actually look up the data on travel agents what you find out is the travel agent industry has twice the output now that it did in 2000 before the internet showed up. Their industry got more than twice as large, even as technology came through and, quote, "disrupted them."

Because what ended up happening is about 45% of travel agents did nothing more than what Travelocity, Expedia, and Priceline, and all the rest did, and they got knocked out of business. And the other 55% said, "This technology is awesome. We're going to use it to serve people better and then add more value on top." And so travel agent productivity went up 300% in 15 years. They served twice as many people with barely half the number of travel agents. But the whole value proposition changed. Travel agents said "Sure, you can buy tickets online. I will create a great travel experience for your family!"

The Rebirth Of Next-Generation Financial Planning Software [5:26]

Neesha: Yeah, I'm sure I'll be talking a lot about that combination of human and technology, and I think that's a great example. So let's jump a little bit forward because we also talked this morning in our opening of IMPACT around, you know, future trends. So if you were to fast forward and look into your crystal ball, five years from now, what kind of technology do you think will be impacting our industry?

Michael: So I think the biggest change that we're on the front end of for technology in the industry isn't actually just what happens when some of these robo technology investment tools come through and do what they're doing now with all the operational efficiencies that we get out of them. It's what comes next?

Look back, again, 15 or 20 years ago. I think the transition of financial advisors to the internet was very instructive.

Back then, we lived in a world of phone calling stock orders, faxing orders, and picking funds, and that was our value proposition. Then suddenly it got so easy to do with all the technology that we shifted into asset allocation and financial planning. And sure enough, we saw the growth of the financial planning software tools, the growth of asset allocation tools. The entire category of rebalancing software didn't get created until the internet showed up to make all of that possible.

So when I start looking out 5 to 10 years from now, I try to see what kind of technology we need once some of the investment stuff all starts to fall in the background, because it's so easy to do? And what I see, and what gets me excited is a rebirth of the next generation of financial planning software. When planning software gets past just "hey, we're going to project out some long-term account balances to make sure that you're reasonably on track for retirement," and we drill down to the next level. Because then consumers are going to say, "Ok, I got it. An asset allocated portfolio, it projects fine. It's reasonably diversified, I'm saving. What else are you going to do for me for the next 5, or 10, or 15, or 20 years?"

And it forces us to focus in other areas of financial planning. Other value propositions. I know Bernie this morning was talking about things like doing more with HSAs and having healthcare conversations with clients. There's also debt management issues. Even people who have a lot of assets sometimes also have a lot of debt. And just planning around the cash flow of a household, and what happens with spending.

After all, we see in our firm - and I know a lot of other advisors out there as well - that we're lucky if 20% or 30% of clients log into their investment portal once a year. But there are over 10 million people that log into Mint.com to look at their spending and cash flow every day and week of the month.

Neesha: Absolutely. It is a dashboard, right? They track their cash flow.

Michael: Yeah, it's their dashboard. And it's not about tracking what's happening with their investment performance. It's about tracking what's happening with their entire household, the net worth and the cash flow statement at the household level.

And so I'm really excited about what kinds of tools we get to move deeper in the financial planning end once we don't have to or need to spend as much time on some of the investment tasks that we do today. And of course, for those who want to build for or towards financial planning, that's an exciting time. For those who build all their value proposition around the investment side, this is a challenge. And again, that's kind of the split that travel agents and a lot of other industries go through when the technology forces a change in the value proposition.

Artificial Intelligence and Big Data vs "Small Data" For Financial Advisors [8:31]

Neesha: Absolutely. So let's try to squeeze in one more question. One of the other things that we talked about this morning that Bernie highlighted in his speech was artificial intelligence and machine learning. And I know in my experiences, I spend time with advisors and other folks in our industry... there's a lot of fear around what could come with this. The robotics, and kind of not needing the human anymore. And you just talked a little bit about that changing role of the human advisor. But maybe you can share a little bit from your perspective. How do you see artificial intelligence and machine learning, even data playing a role in advisor business?

Michael: So I have to admit, I'm very skeptical about a lot of the discussion of artificial intelligence and big data coming into advisor businesses. And it's not like I'm anti-tech or a technophobe. I love our technology world. I breathe it.

But the challenge, to me, around it is what we do with clients are not big data problems. Every client's unique when you get down to the individual. Every advisory firm is unique. And the world of big data is about millions and millions of data points. But we don't have millions of data points as advisors. We only can handle a couple dozen clients at a times and then we cap out!

Neesha: I like to call it little data.

Michael: Yeah, we don't have big data problems, we have "small data" problems.

Interviewer: There you go.

Michael: And so, there are huge opportunities for firms like Schwab and how you can leverage big data to bring insights about what's happening in the entire industry, or at least across the entire advisor and client base of everybody in this institution. For $3 trillion plus dollars. I think it will be fascinating, and we'll learn new things about how advisors behave and what consumers are doing that we don't have perspective on now.

But when I look at the individual advisor level, my biggest excitement is not about an AI system and big data, it's about the advances in small data. It's things like every advisory industry benchmarking study, we all evaluate practices the same way if we want to look at how we're doing in growth. We have some starting balance, then you had new assets from new clients, new assets from existing clients, lost assets from terminated clients, lost assets from existing clients, and then some change in markets for performance.

Neesha: And you calculate that every year?

Michael: Right, that's how you reconcile the components of your core growth as an advisory firm. And some people even break out the lost clients into sub categories, from "they fired us for bad investment performance" or "they just weren't happy". Some advisors might break out the growth categories as well. These were client referrals, these were COI referrals. It's the most basic dashboard to track growth.

And none of us have the tools to do it! We all have to manually recreate it from the portfolio accounting software tools because they're just not built today to give us the kinds of small data insights that we need to run our businesses with.

And so I'm sure someone will roll all that data up across 1,000 advisors and create a fascinating perspective into what's happening in the industry, but I'm excited at the advisor level just to get better perspective on my practice when we start solving some of these small data problems, and give us better metrics to really run our businesses like data driven businesses.

Neesha: Well, it's such a sign of maturation of the industry, right, because now you have so many advisors that are rolling it up we have the data and we can use it.

Michael: Yeah, until all the technology connected all the data we didn't have any way to roll it up. So, you know, it's all the inter-connectivity that makes all this possible. But just when I look at what we do with all that data at the enterprise level, fascinating opportunities for big data, at the advisor level, I'm excited about the small data.

Neesha: Yeah, that's great. Well, wonderful perspective. I want to thank you for being here with us at IMPACT.

Michael: Absolutely. Thanks so much for having me.

Neesha: And I want to thank all of you for joining us today. If you want to follow along in the conversation you can follow us at #SchwabIMPACT. Lots of exciting stuff going on here, and we're excited to celebrate with our clients.

Michael: Awesome.

Neesha: Thank you, Michael.

Michael: Thank you!

So what do you think? Is Robo 2.0 providing valuable tools for financial advisors? Will Robo 2.0 spur the rebirth of next-generation financial planning software? Is it "big data" or "small data" that will play a bigger role in the advisory industry going forward? Please share your thoughts in the comments below!