The Augmented Advisor: Scaling Efficiency and Margins

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This interview was originally published on WealthTech Club

An Interview with John Prendergast, Blueleaf CEO

The wealth management world has changed, and it makes us queasy.

According to the KPMG report “Forging the Future,” the top source of disruption in the financial industry is emerging financial technology (FinTech). Historically, there has been a human layer between clients and their finances whether that was to access information or to execute transactions rather than customers having direct access via technology. Not that long ago, advisors were the primary source of information and news cycles weren’t 24/7. No more.

Today, TV talking heads, Facebook posts, Twitter and advertorials bombard clients. “Each of these media sources has their own incentives,” John Prendergast, CEO of Blueleaf, points out. “Media works to drive ratings. That means telling the worst stories in the scariest ways, whether or not they are relevant or even true. It’s not where you want your clients’ financial ideas coming from. But they watch and it creates questions and anxiety. Advisors can no longer wait until a quarterly review to respond. We need to counter that propaganda as it happens. To do this effectively, advisors need to adapt and embrace new technologies.” Prendergast believes advisors need to leverage technology to augment their behavior, knowledge and customer contact in order to stay relevant.

Sure, technology is important for scaling the business, but what should we automate?

Handling trading and rebalancing for clients was historically a large part of an advisors’ value, at least as many advisors saw it. Robo-advisors offer a low-cost substitute, which is one of the reasons they continue to grow so rapidly. Now they are moving from simple automated investing, toward machine-learning algorithms for trading and asset allocation, putting increasing pressure this aspect of an advisors’ traditional role. Prendergast believes there is significant value in a hybrid approach:

“The real value of an advisor is helping give consistent perspective and judgment to their clients. And the clients actually need that much more now than they ever have because of the growing dynamics and complexity of their financial lives and the media that they’re assaulted with day and night.”

The hybrid model takes the human touch and combines it with automation technology. The combination delivers much more frequent client touches while also creating more time for advisors to form and exercise their judgment and deliver value. According to research carried out by people like John, the fastest growing and scaling advisors are the ones communicating most frequently with their clients.

“You need to communicate both more and more effectively with clients in order to grow your business and in order for the clients to feel like they’re getting value. But most advisors still view communication with clients through the traditional lens of a performance report and a meeting. And that’s not everything a client cares about. A client cares about their goals and their whole balance sheet and not in the context of your office furniture.”

To enable communication in a broader, more complete, and customizable way, automation is not only a big help, but it is also the only way to meet client expectations toward personalized information and advice.

Profitability is being squeezed, but it’s mid-size firms that are feeling the growth challenge most.

Some financial trends are more or less intense over time. Regulation and compliance concerns, for example, vary with the political and social climate. However, the consistent long-term material trend that isn’t changing is margin compression and therefore a need for greater efficiency.

Blueleaf monitors key financial and performance metrics for advisors’ businesses, including margins. John doesn’t believe robo-advice is the main cause of fee compression, but that doesn’t mean it can be ignored. Future businesses will need to aim for efficiency and automation to make their business manageable and profitable. To accomplish this, businesses will have to service more clients effectively.

“The solo advisor that works from home or a small office, their cost structure is much more favorable than a mid-sized firm with 10 or 15 advisors that’s got one or two offices and has a lot of traditional expenses. This is because they don’t have the scale to spread expenses around the way that a firm with 100 or 200 or 1,000 advisors does. Growing and midsize firms need to become super, super efficient to thrive.”

“Iron Man” is the advisor model of the future.

Robo-Advisors can efficiently deliver simple, continuously rebalanced portfolios and reports, but client relationships and communications are different. That is a human advisor’s advantage. However, with the growing need to serve more clients per advisor, advisors will need to become like Tony Stark (Iron Man). John explained that to scale and grow, “advisors need to become like Iron Man, they’re still intimate in directing the activity — but they need the suit and Jarvis (Iron Man’s supercomputer) to give them the leverage to do more.” The point of this analogy is that automation independent of the human advisor won’t create enough client value. The end goal of automation isn’t just efficiency, it is to take the advisor’s intent and extend it. Advisors will need to adopt advanced analytics, new communication channels, and even artificial intelligence.

Blueleaf calls this superhero model, the “augmented advisor”. The augmented advisor leverages human knowledge and emotional intelligence coupled with superior technology to deliver better client experiences, but at vastly greater scale.

“We want to enable automation that’s super easy and super scalable for an advisor. So whether you’re an advisor that wants to golf more or grow your business, your intentions are augmented allowing you to do more with less.”

Augmented advisors will lead the evolution of wealth management.

The future of financial advisory revolves around better service scalability driven by advanced technology. Blueleaf believes the human advisor is essential, but won’t be able to serve their clients and build their book of business with traditional approaches. One of the ways in which technology can support advisors in their role is in helping to anticipate client needs. Combining client behavioral data with market information and advanced artificial intelligence, systems will spot client needs and recommend actions to advisors who can simply push a button to act. Their judgment is still in the loop, but the machines will do all the work.

“If a client needs a call, we might be able to see that based on their online behavior and based on other patterns and historical patterns with that client. And through machine learning or artificial intelligence, we can raise that up and offer a solution to the advisor. ‘Look, Client X needs Y and here it is, if you want to do it, push this button and you’re done.’”

Part of this intelligence available to the augmented advisor can and should be used to identify prospective clients. This can be achieved by better understanding the client’s situation, which is the best way to uncover a prospective client’s needs.

“We think that there is a lot of opportunity in bridging the gap between servicing 50 clients today and the 500 that you’re going to need to service tomorrow. And that’s going to need to be intelligent automation, so that’s where we’re spending our time.”

Blueleaf has data scientists on staff that are helping to discover the sweet spot, or balance, for creating the augmented advisor, and John said that the application of machine learning is helping to feed the system.

Advisors that lead the change will thrive.

The investment advisory market is being shifted by technology and changing client expectations. Advisors that will thrive in changing conditions are those that embrace the change and incorporate the benefits technology brings into their practices rather than viewing it as a competition.

John Prendergast has a background in both direct financial services and software development. He received an undergraduate degree in economics and computer science from Boston College and an MBA in finance, technology, and marketing from Northwestern. His early career was spent at a series of startups where he worked primarily as a product manager. After a brief period of time working as an advisor with Merrill Lynch, he worked as an investment banker for almost a decade, gaining experience in mergers, acquisitions, and public financing. In 2009, he co-founded Blueleaf, a leading reporting and communications FinTech platform.