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Financial Planning > Behavioral Finance

How AI Will Make or Break the Indie Advisory Industry

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[Editor's note: A different version of this commentary was posted earlier in error.]

I don’t usually write to the owners of large independent advisory firms (those with $10 million or more in annual revenues) in my columns for one primary reason. There are way more firm owners under $1 billion in asset under management who need more resources.

However, with that said, this is a blog for the owners of larger firms, about the current trend of adding artificial intelligence (AI) platforms into your businesses.

Simply put, if you add AI the right way, it can be a huge boost to your business — and to the independent advisory industry as a whole. But if you do it wrong, it can irreparably harm your business and your clients.  

By way of background, my firm has worked with many of the larger independent advisory firms (roughly 8%) of them in the arena of AI since 2010. But, before I get to that, here’s a quick note to the owners of smaller advisory businesses who are considering adding AI to their businesses as well: DON’T … yet.

For one thing, it’s too costly in the current market for a smaller firm. And, more importantly, you’ll run the very real risk of undermining the reason your clients come to you now. (See below for more on both of these points.)

Perhaps someday AI turnkey systems will be viable for advisory businesses under $10 million in revenue, but the technology just isn’t there yet. So, don’t waste your time and resources on what currently will be an expensive distraction.

The reality is that for smaller firms, the independent industry has matured to the point that there’s a well-known system for growing your business. Ironically, we used AI to figure out the growth curve.

Small firms don’t need their own AI to do it. The steps to growing smaller advisory businesses might be new to you, but they are at least a decade old now to consultants.

On the other hand, for firms with $1 billion or more in AUM, they have to innovate. And that means they are in uncharted territory. In rough estimates, there are only about 1,000 independent RIA’s in the country operating over $10 million in revenues. That’s a small number.

One of the “innovations” that many larger firms make today is adding AI. But unfortunately, thanks to some tech consultants, they are using it wrong.

From my observations, most “tech consultants” in our industry, most who entered post 2014 have backgrounds creating client interface platforms and they’ve usually come out of large brokerage and investment companies.  

Consequently, most advisory firms that add AI platforms today, focus on the client experience going directly to the end user — the client. This “empowers” the clients to solve their own problems and/or get information on their own about their financial situation. Or at least, that’s how the narrative goes.

A Rethink

Perhaps you can start to see the problems with this approach. For one thing, if clients can “solve” their own problems, what do they need you and your firm for?  

These days, every larger financial-services company in the country has some type of interworking client experience system — for their customers — at little or no cost. How are yours any different, except that you undoubtedly charge more for them. We’ve found in charting this course with our larger clients, it’s not a formula for success.

With that said, an even bigger reason that these AI client interfaces became a big mistake for independent advisory firms of any size is that they do not address the reason people go to financial advisors in the first place.

There are plenty of “how to” personal finance books out there, and we all know that most personal finance isn’t all that complicated, anyway. Yet clients in the millions still flock to financial advisors.

Why? Because family finances scare most people. It’s basically foreign territory, and yet their futures, and those of their families depend on their decisions.

And when people are scared, or uncertain about something, we humans tend to talk about it, hopefully with someone who knows more than we do. Someone who can suggest what to do and reassure that we don’t have to worry.

The Fear Factor

Fear is the primary reason why people go to financial advisors, human financial advisors. Helping clients to not panic during market downturns is perhaps the classic example.

In my experience, most advisory firm clients don’t like using an AI platform. They don’t like doing it themselves because it creates stress, fear, confusion, and they don’t trust the “computer.”

In our work, advisory clients want the comfort of talking with a real person, and don’t feel they are getting good, personalized, service on an AI platform. 

Now, all that is not to say that I don’t think there is a place for AI in advisory firms. I believe there is. In fact, there is a huge place for it. But it’s not to put your clients to work. It’s to increase the productivity of your business and the quality of its advice to clients.

AI can increase efficiency and scale, so that your advisors can work with more clients, your staff can better help your advisors, and service your clients when necessary. And over all, you can better service your clients.  

When it comes to money, history has shown us clients like to talk to real people. It helps them overcome their fears around money. To use AI to enhance client experience you have to understand first, the human experience. We have found most AI developers, with the exception of a rare few, ignore humans.

A Tough Job

With all that said, sadly, adding an AI platform to an advisory firm isn’t easy. Sure, there are consultants who know what’s out there. But what they don’t know is what your firm needs are, and whether you need it at all. So, it’s not something you can pay someone to do — and do well for you. Believe me, we know.

To bring someone from the outside up to speed on your firm and what it needs in the form of AI will take at least a year, and include how your firm works and functions, your service model, and what you do and provide for your clients. If you don’t have one of these parts fully mapped out, you have to map it, before ever even talking technology.

So far, the AI development firms haven’t focused on smaller businesses such as independent advisors. A small, private held firm is still considered to be one operating under $100 million in revenue in the U.S.

When it comes to technology, our industry tends to run about 10 years behind the larger markets. And the AI industry is just starting to look at businesses under $100 million in revenue. Which means, if your firm is looking at it, you are way ahead of the curve.

Consequently, to get good AI in even the largest advisory firms today, you will have to invest in creating a software development team within your company.

It’s a whole new division within your organization, to help develop your own software, that will address both the financial and behavioral issues of your clients. This can’t be canned. Every firm will have its own unique needs.

What Works Best

The good news is, as we have seen in our consulting, that when AI is used to create scale and efficiency for human capital (your staff), it creates a more successful firm. For one thing, it makes training advisors and employees faster and easier.

The vast majority of AI that we have seen successful has been done for training purposes of advisors. For example just as calculators allowed us to stop teaching math, AI will shorten the learning curve of advisors and career tracks, reducing what used to take years down to months. We’ve already seen it happen.

These efficiencies will, in turn, enable advisors to shift their focus to almost exclusively working with (emotional) clients. Which then translates into better client service and more peace of mind, giving headway to more clients per advisor and lower costs per client.

In 2001, when I was graduating college with a degree in financial planning, they were already about AI. They didn’t know exactly what was possible, but they knew it was the future. In particular, they were talking about AI in regards to risk tolerance and stress in market corrections.

So, they taught us, mostly, communication skills, therapy, and behavioral science. We could continue to add value to the clients once computers did all the calculations.

Those of us who graduated from one of the best financial planning schools in the country earned degrees in personal financial planning, family studies and human services.

Now, machines do all of the calculations, and are beginning to predict human behaviors, and in the future will enable the computerization of behavioral finance.

Today, computers are predicting common financial transitions already. What happens if: A client loses their job, gets divorced or their parents die? They go through a mid-life crisis and start spending rapidly? They don’t save young enough or cannot make a decision?

All this will impact many other things that will affect the financial life of clients, their whole life. Which, in turn, will empower financial advisors to suggest strategies to mitigate the bad effects of these events. That is, if we can overcome the current trend to use AI as a tool for the clients to use, rather than for advisors to use.  

Job No. 1

The real job of a financial advisor is to help their clients overcome their fear, and make good financial decisions. So, the AI tech has to be used more by the advisors, not shared wholly with the clients.

Can you imagine what happens mentality to a client when they have to think about all the worse possible outcomes? Most cannot even work through estate planning.

Most advisors I’ve worked with say they give their clients peace of mind. The easiest way to take away peace of mind is to put technology in front of a client and let them see all the bad things that could happen to them. Just as doctors don’t tell their patients all the bad things that can happen throughout the human experience of living.

In my observation of being on the front lines of AI over the past many years with the larger firms, the development of AI has put the “personal” back into personal financial planning. It has also born the rise of a true professional phase of our industry. But, believe us, we have to ensure, as professionals, we don’t use the technology for greater profits and in turn, hurt client psyche.  

With the growing presence of AI in our industry—and just about everywhere else — independent advisors have an opportunity to differentiate themselves as professionals who still work directly with their clients  personally and professionally.

Behind the scenes AI can and should run to help advisors better help the clients. Not the other way around.

The best way to destroy client peace of mind is to have their mind start wondering and worrying about all the hard things that can (and do) happen. Let’s not do that to them.

Computers carry no emotion. Let’s be professional about the development of technology for them. In fact, let’s just be professional, all the way around.


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