Technology Changes Core Functions of FAs at Wealth Firms
With profit margins beginning to stabilize following years of financial crisis aftershocks, wealth management companies are emerging from cost-cutting into spending on technology as they build profits by reshaping advisors’ roles, according to a new report on the industry.
Pretax profit margins of U.S. brokers, banks and registered investment advisers averaged 22% in 2016, The Boston Consulting Group said in a report on the state of the “global wealth” industry released on Tuesday. That still trails the industry’s 36% peak in 2007, but firms are now headed toward high profits through technology-driven changes in their business models that systematize client interactions and reshape the roles of advisors, BCG said.
“[W]e have observed an inflection point over the past year, with more wealth managers beginning to increase strategic investments to transform their businesses,” the report said, highlighting a transition from years of firm efforts to ease the profit-margin squeeze through cost-cutting.
Firms are beginning to automate paper-intensive back-office work and investment platforms ideas, and are employing algorithms and smart data to prompt cross-selling of loans and bank products so that brokers transition from salespeople to “relationship managers,” it said.
“One of the things we expect is a massively more productive relationship manager,” said Brent Beardsley, a BCG managing director, in a presentation on Tuesday.
As he was making his forecast, Morgan Stanley Wealth Management’s chief digital officer, Naureen Hassan, gave some concrete examples of the shift at a financial firms’ conference the firm was sponsoring a few blocks away in midtown Manhattan.
The U.S.’s biggest retail broker-dealer, as measured by its more than 15,000 advisors and some $2.2 trillion of wealth management client assets, is deploying technology to make advisors “more effective and efficient” in branch operations, client management and prospecting for assets, she said.
“Our financial advisors continue to spend too much time away from client engagement on service-oriented tasks,” Hassan said, noting that 7,000 client service associates and others process millions of pieces of paper a day, ranging from wire transfer requests to research reports to notices about maturing bonds. “There has to be a better way,” she said without making specific references to recent cost-cutting measures in the structure of its wealth management group. “We really believe that technology can help us close this gap.”
On the client-management front, Morgan Stanley is programming predictive “machine-learned” analytics into client-management systems so that brokers can send seemingly personalized communications on products, market-moving events and mundane issues such as birthdays.
“When a client sees it, it’s not coming from a Morgan Stanley bot but from their advisor,” she said. “It’s authentic and genuine.”
The firm also will be introducing robo-like investing with ETFs and mutual funds in the second half of 2017 as a key tool for growing assets among the next-generation’s wealthiest investors.
Using “very targeted digital marketing,” it will prospect children of the firm’s core base of high- and upper-high-net-worth clients as well as lower-level employees of its corporate stock plan programs that currently focus on C-suite executives, she said.
Digital programs are being tested at certain branches, she said, and contrary to press reports about broker resistance to digitalization brokers are asking for the changes to come faster, she said.
One concrete example of widely applauded digital advance is an e-authorization process for wire transfers that cuts processing time from hours to minutes, she said. Another is a digital mortgage application tool that will eliminate reams of paper documents and checklists that applicants had previously received physically.
The firm also is working on digital investment algorithms for alternative investments and insurance products, Hassan said.
“Process by process, we’re moving from disconnected paper-based systems to workflow engines,” she said, “from reactive processing postures to proactive one helping FAs grow their business.”
Morgan Stanley chose to build its own robo-investing platform so it can integrate with functions of its core businesses to increase sales, distinguishing it from rivals such as UBS Wealth Management and Wells Fargo Advisors that are using outside robo providers, according to Hassan.
Converting existing advisors to the new methods will be challenging, but firms are placing their bets on developing a next generation of home-trained advisors acclimated to the digital world and open to changed responsibilities and incentives, according to BCG.
“The relationship manager will look very different,” Beardsley said. “The tech savviness and ability to interact with clients who are more digitally savvy puts a lot of strain on the traditional model of the financial advisor sitting behind a mahogany desk.”
Morgan Stanley will judge the success of its digitization efforts on various metrics, including “how many FAs use” predictive analytics and other tools to change their client-relation habits, said Hassan.
Another measurement tool will be new-asset accumulation via automated investing. Only about 5% of people in stock plan programs administered by Morgan Stanley currently become full clients, she said, whereas the conversion rate is closer to 30% among “best-in-class” branches and competitors. “Cycle time [of converting prospects] is another metric,” she said.
Like other executives in the brokerage industry who are fearful of antagonizing their still-productive traditional advisors, Hassan asserted that the firm is well-positioned for future growth because of its roots. “The winning combination is going to be people and technology together. We have the people and that’s, frankly, the harder part to build,” she said.