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Increasing Automation in Offices Paying Off for Advisory Firms

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Many financial advisory firms are seeing more automation in their middle- and back-office operations, according to industry experts.

The increasing automation process is expected to continue throughout 2018 and is leading to savings, improved efficiency and increased accuracy.

“I believe back-office operations for most professional services, including financial advisory firms, are either becoming more automated or are being offshored to other countries,” Mark M. Davis, a professor of operations management at Bentley University, told ThinkAdvisor. “The main reason, in my opinion, for the automation, is that it costs less, and is faster in terms of being more responsive to the end customers.”

The automation may come from the use of artificial intelligence, machine learning or even older forms of technology.

“Automation, even without taking artificial intelligence into consideration, provides faster, more accurate information at a significantly lower cost,” Davis said. “I don’t believe there are any drawbacks with respect to back-office operations.”

Vasant Dhar, a professor of information systems at New York University, also sees that some back- and middle-office operations are being automated.

“It’s hard to say whether AI is being used to do this or whether it’s just plain old technology, but at the end of the day it is increased automation,” Dhar said.

“If it is being done [perhaps by AI], the ‘how’ part would be done through data that is ingested by machine learning algorithms that learn how to flag unusual or risky items,” he explained. “The way such systems are created is by taking historical data, labeling such data as being ‘good’ or ‘no good,’ and getting a machine learning algorithm to figure out what discriminates between the two.”

When it comes to automation of back- and middle-office functions, Dhar says, “the lowest-hanging fruit is operations — which requires ensuring that things match up and add up, so that reconciliation can be done more smoothly by fewer humans.”

Moreover, there is also “increasing regulatory pressure” where advisory firms are increasingly required to certify things about their operation which requires more due diligence, according to Dhar.

In addition, Lex Sokolin, global director of fintech strategy at Autonomous Research, said that online opening of accounts, automated money movement, trading and rebalancing — are among the functions that “have seen rules-based automation in the last decade.”

Automation also is being found with such other functions as: servicing and monitoring, data aggregation and financial planning, according to Molly Pandya, senior vice president, Product Management at Envestnet.

Overall, financial advisors are increasingly using technology tools to replace manual processes in their back offices, Pandya adds. “What used to be paper-based, wet-signed account forms, have become online account opening forms and e-signatures,” she explained. “Swivel chairs between disparate systems to open accounts, request money movement, and other account maintenance tasks have been replaced by application program interface (API) based integrations to transmit and process data directly between technology systems.

“Also increasingly becoming automated is the monitoring of accounts. Advisors are able to use tools to provide enhanced oversight of account conditions that require action or follow-up. And where the investor used to show up at the advisor’s office with a shoebox full of receipts and statements for the advisor’s staff to manually input, the advisor is increasingly providing an online data aggregation tool which pulls in the investor’s financial data and keeps it automatically up to date. Financial plans, where static data used to be manually input to produce a paper-based plan, now have become digitized.”

Moreover, in the middle office, know-your-customer and anti-money laundering operations can be done using automated checking of photos in a passport, Sokolin said. “Or transaction monitoring can pick up suspicious behavior in real time, alerting Compliance. Internal communications can also be monitored for issues using AI, rather than simple key word searches,” he adds.

Another reason for the increase in automation is that younger investors prefer automation as evidenced by the growing number of apps, Davis said.

Also, Sridhar Rajan, a principal with Deloitte Consulting, said technology is driving rapid automation of three types of functions for financial advisory firms. These include:

  • Processes that require data to be aggregated from multiple sources.
  • Processes that require multiple manual steps for completion.
  • Processes that require speedy analysis of the data collected, to enable — or generate — action or reporting.

He added that there is “considerable automation” around trade processing and trade confirmation, reconciliation of positions and cash, post-trade compliance, and client and regulatory reporting.

Also, artificial intelligence technologies are being used at a “rapid pace” to automate key operational processes, Rajan said.

Yet, artificial intelligence, and especially machine learning, for wealth management and financial advice is still in “fairly early stages,” Sokolin said.

“The human relationship in customer service remains the most persistent value in delivering financial advice,” Sokolin added. “The nuts and bolts of the practice, however, should just be done by robots…. Most of digital wealth is actually about automating the back and middle office, not just the front office.”

— Check out Innovation Is So Last Year. It’s Time to Execute on ThinkAdvisor.