The wealth market in the US, UK, and Canada; expectations and benefits of using big data analytics; the promise of the blockchain, and the anticipated future of wealth management.> More details
WealthTech Insights #11 with Ryan Shanks: High-Tech and High-Touch Model Drives Retention
Ryan has over 17 years of experience in financial services. He provides transition consulting, outsourced recruiting and succession planning to financial advisors. Moreover, he advises startups on business strategy, raising capital, and customer acquisition.
Here, we discuss factors of growth in WealthTech and their impact on the whole industry; competition between humans and robo-advisors; the challenges of Big Data; and calculating risk tolerance. In addition, Ryan shares his vision regarding the further development of the wealth-management industry.
Q: How did you get into the wealth-management industry?
Ryan: I sort of accidentally backed into this industry. I was recruiting in technology before the bubble burst. When that happened, I pivoted and identified this industry. During my research, I discovered that when you’re doing recruitment in the wealth-management space, if you can identify the characteristics in a financial advisor that are desirable, the entire marketplace will hire that type of skillset all day everyday. That’s really kind of what drove me into this space.
So, I got into recruiting, and then I left the franchise environment and created my own recruiting firm out of Texas. I gained some corporate experience I felt I needed with two organizations before I launched this company in 2006. In its simplest form, I essentially provide matchmaking to the wealth-management industry around financial advisors and finding services companies. I’m not matchmaking in terms of clients or investors; I’m matchmaking financial advisor affiliates with one type of organization and financial services companies. Mostly, the work that we do is on the independent side of the industry. We’re helping advisors go out and start their own company. We’re helping to determine who they should plug into from an institutional perspective to support their vision.
“You’ve got an aging population of financial advisors that are on one end of the spectrum and you don’t have enough young advisors coming into it. If we’re not careful, we will eliminate the human element as computers will outlive people.”
Q: What changes have you observed in wealth management in recent years?
Ryan: There’s a number of things. Obviously, the whole robo thing, the digital automated platform has probably been one of the biggest talking points and, frankly speaking, probably the most over-discussed topic in the industry. But it’s relevant, because you’ve got an aging population of financial advisors that are on one end of the spectrum and you don’t have enough young advisors coming into it. If we’re not careful, we will eliminate the human element as computers will outlive people. If we don’t focus on trying to get a new generation of folks to come into this profession, the older advisors will die and investors will be left to just leverage technology that has questionable sustainability.
It’s caused financial advisors to rethink the way they interface with clients. All of this is just automation. It allows for individuals to scale themselves without having to incur the same time required in person. It’s allowing for more substantial wealth-management companies to provide a digital offering to smaller investors. It’s not the ideal for clients now, but could be in the future. I love that because that’s allowing smaller investors to get a better entrance into the financial services industry versus just opening an online account and stumbling around in the dark on their own trying to make decisions without an advisor. That’s a substantial piece that I’m seeing. The technology is driving down prices, so advisors are having to focus more and more on “how much value can I truly provide?”
One of the most significant things that I’ve seen in wealth management in the United States is the ability to leverage the technology to scale a business. The only way for you to grow is to get more clients, grow those assets, and then hire more people to serve those clients. Technology’s now making it possible to provide some level of interface with those clients. So that’s creating increasing enterprise value.
Q: If we don’t focus on trying to get a new generation of folks to come into this profession, the older advisors will die and investors will be left to just leverage technology that has questionable sustainability?
Ryan: In a very simple form, folks have looked at the industry and said, “What is really in the offering that you provide to your client? Is there really that much value included in what you’re doing?” Again, like I said, you can interface with more clients by leveraging the technology.
If you think about a robo-advisor, it’s really not anything new. It’s automated technology to open accounts, to track investments, and to provide some interface for reporting to the client. You get that in a lot of different institutions where you’re maybe opening up your own accounts. It’s just that it’s been coined “robo-advisor.” It’s taken on an interesting dynamic and folks have flocked to try and create business models solely around that component.
I don’t believe that a robo-advisor made of just technology will truly impact the wealth-management space, meaning retail, high net worth individual clients. I think that it will always require a human component. I think that’s where firms have an opportunity to really maximize this robo-automated technology—by leveraging it and then augmenting it with a human element.
It’s also woken up a lot of retail financial advisors. You need to check yourself and make sure you’re providing a high degree of value to your end client because technology could beat you at a fraction of the cost that you charging clients. If you can’t show differentiation and that you provide a great degree of value to those clients for what you charge, then those clients may leverage the technology and pay a third of the price.
I think it’s starting to hold the industry a lot more accountable for measuring out “For what I do, I charge a set price for and how am I structuring my billing? What does that equate to in the service that I provide, and is that fair?”
“The old-school advisors have to reinvent themselves. They have to determine whether they have the ability to do something as simple as starting to penetrate the next generation of clients, whether they have the ability to communicate and interface with that demographic.”
Q: Do you think there is a risk that conservative advisors will not be able to compete with young, ambitious entrepreneurs who have both financial experience and understand how to leverage the technology?
Ryan: I do think it may be a risk on a number of points. First, what you end up finding is that the age typically correlates directly between financial advisor and client. So for the 65-year-old financial advisor, there’s a substantial amount of their clients that are in that 65-year age range. If you’ve got the average age of a financial advisor getting close to 60 across the United States, what are you going to do with this young generation that’s coming out? This technology speaks to the demographic in their 20s and their 30s, they’re out there looking around trying to find their peers to provide investment advice. As an industry, we don’t have enough of those peers coming into the business.
That’s happening because the younger generation are drawn to technology. We use technology to interface in all aspects of our lives, from getting a car to pick us up, to making a reservation in a restaurant, etc. If we’re familiar with that, it’s a psychological reality that we’ve acquired the ability to interface without people in so many other aspects of our lives. If there is going to be such a component, why don’t I test out putting my investment over here and working with some sort of old-school advisor? I think the old-school advisors have to reinvent themselves. They have to determine whether they have the ability to do something as simple as starting to penetrate the next generation of clients, whether they have the ability to communicate and interface with that demographic.
When I think of myself, the banking that I do, it’s 99% technology. I’m not dealing with folks by going into the bank and sitting down the way that it used to be 20 years ago. Back then, a banker provided value. You could go and have a conversation and over time you get to know him and the number of things he can do to help you in your business. Now, it’s all technology. Advisors need to be really in tune with technology to be relevant as we go forward. I think that this will remain relevant over the next five to ten years.
Q: The wealth-management industry was traditionally mainly associated with the chance to secure one’s retirement, and players in this niche used to be more than 40 years old. Today, we observe the potential audience becoming younger and younger. Why do you think this is?
Ryan: I think that there’s some truth to that. I think that there are younger and younger folks investing. I mean technology is without a doubt what’s driving that. If you’re coming out of college and you’ve got a little bit of money that you start making you want to start somewhere. Typically, you don’t have an option to go sit down with a financial advisor in their office for that amount of money, as it’s too small for them. In other words, what they’ve done is they’ve built their pricing based upon this big, huge, whole suite of services they provide to their clients.
So what if somebody’s coming in three years out of college and they have $20,000 they want to open up an account with? The majority of financial advisors are not able to service a client at that investment level. It just does not make sense because they’ve built their cost infrastructure to provide a standardized service they think the ideal client needs.
When that happens that investor’s going to go online. They go to Ameritrade, to E*TRADE. They go somewhere to open up an account to make an investment to see their way into this industry. As they mature and that investment goes from $20,000 to $50,000, $100,000 or $250,000; at that point they want to speak to a person to feel confident because the decisions they make might hurt more now than it would have in the past. They have more at risk.
I think technology is the entry point for them into the market. This whole robo thing is the opportunity for those firms who are trying to institutionalize their client service model to have a component of their offering that’s digital and technology based, for the small investors, that does not require that full-suite service at a higher fee. So, it’s becoming a joke that it’s like a “farm team” for the professional baseball league. They come in, you’re still giving them some attention, but it’s not on the scale you would offer to a client that’s got a million dollars invested with you.
An investor coming in at $20,000 has a certain set of needs; coming in at $1 million has a different set of needs. You’re creating an ability to interface with those clients at different segments of their investment life. Technology is without a doubt timing. You’ve got apps out there that can draw down and pull certain amounts of money on a monthly basis to start getting you into the market at levels you’re comfortable with.
“The full robo solution that has no human element and is a shiny object today, fades later, as those investors accumulate larger dollar amounts.”
Q: Do you think that in future B2C WealthTech solutions will totally replace B2B?
Ryan: I think that while a younger investor may come in that’s not working with a full-service financial advisor, it’s becoming the case that the only way for them to proceed is through that technology conduit. So that is the B2C aspect that works. I think there’s an ability to mediate that if financial advisors who are working with clients leverage that technology.
That’s sort of where the race is: does the B2C solution provide enough clarity and comfort to that consumer that they’ll come through the technology door, make the investment, and forever interface with just the technology, without people? Will that remain the case as that investment grows? What is that investment in dollar amounts? We all have a trigger that causes us to say, “Wait a minute. I need to talk to somebody now. I can’t pick up the phone and call and talk to this computer.”
I think the risk is whether the full robo solution that has no human element and is a shiny object today, fades later, as those investors accumulate larger dollar amounts. They will start to go back to the human element—“I need to sit down or I need to get on the phone with somebody or even just video conference. I need to be able to see someone and ask them a set of questions to get answers from them and feel comfortable about those answers.”
I think that’s where we are at now. The technology is sexy. It’s new. It’s giving people a means to enter the marketplace to make investments. But I just don’t know where that’s going to be over the next five to 10 years. Is it good enough that some of those platforms are really well executed purely on the B2C level? I think that for those that are doing B2B, the opportunity is for B2B to be done through a financial services company, through the series of financial advisors that make up that company. Personally, I like that strategy better because I think we’re going to always drift back to that based on need.
Technology will do a number of these different things, but, thinking about it for myself, I would not solely leverage technology and not want to have some type of conversation and advice. It’ll be really interesting to see how this bears out over the next five years, and we can plan for it; there’s a lot of money being invested into companies that are doing B2C, but I think it’s still a little early for total replacing.
If you look at banking and go back a few years we get back to the introduction of ATMs. If you go to this machine and put in your card and enter in some credentials you can get money, withdrawn from your account. You don’t have to wait in the teller line either in your car or inside a physical bank. It’s taken a lot for us to psychologically move from those places. So, when you work hard enough on investments I think it’ll become very simple, convenient, easy.
If you were to say, “Yeah, I’m gonna go open up an account with a million dollars,” you’re going to go open that account through robo technology and just use that.
We’re seeing some issues that have already happened with robo technologies. Robos are sort of defaulted to make decisions on behalf of an entire client base invested through them. I think you can really challenge that as not being appropriate, and definitely not being a fiduciary, meaning that you’re not working according to the best interests of each and every one of those individual clients, who have individual needs. You’re saying, “Well we’re just gonna wrap it all up and make one macro-level decision for a bunch of micro investors that are coming into this platform.” That’s intriguing and that’s one of the areas that is fascinating; I’ll be watching it very closely over the next three to five years.
Q: Could you please list some of the features you think are the most important for the robo-advisor solution right now, or maybe in the next couple of years?
Ryan: There was this assumption that we could go to the market and compete with people to provide advice through a number of conversations and discovery and risk assessments, etc. I think we’re already seeing that corrected.
In terms of features, it’s a function of who can provide the best user experience. So what is my experience of coming in and opening up an account, interfacing with you; to the extent I have a need to talk to a person, can I talk to that person? I think it’s having some of those elements where you’re giving folks a choice, instead of saying, “it’s technology only and that’s it.” It can end up being the technology that’s open, funded, you stay in tune with it, see where you are with that investment. Or you end up deciding that once a year, twice a year, you just want to have a phone conversation with someone to ask a couple of questions. I think that’s important. It’s having some of those features that are not dictated as exclusive and mandatory but more “a la carte.”
Q: Do you think questionnaires are currently an efficient way to calculate risk tolerance, or are improvements needed?
Ryan: Well, I’m a member of the board of directors for a company that has created a risk score for investors. That company is called Riskalyze. What they’ve done is they’ve taken an algorithm that won a Nobel Prize in economics and they’ve driven that algorithm to create a risk score for investors.
This is essentially like a speed sign. By taking those questions and providing unique answers to them, we can dictate the speed limit within which our investment should flow. The company’s doing an incredible job at understanding what that risk is.
Empowering financial advisors who are using that to associate that risk appropriately to clients, to look at where there’s investments pooled together through money managers, to determine whether it is really moderate or more risky than it should be, is allowing advisors to really be the fiduciaries. The client has the influence, and the advisor looks at it, understands the influence and then assures them that where their investments are or are going to be is appropriate for that risk tolerance.
Obviously, I’m a very big fan of that because I like what Riskalyze has done and how they’ve built up what they’re doing. I need to disclose that to you because there is a conflict for me about that question.
“You can ask what, for financial services companies, the role of technology is inside. What’s been supplementing that role is technology experts in the wealth-management business. So these folks are like translators. They’re in the financial services industry but they understand technology very well.”
Q: Can you say a few words about Big Data, analytics, and artificial intelligence? How do you think these aspects should be applied to wealth management? Will they really increase the efficiency of investments, and in what way? To which particular parts of the wealth-management process should Big Data analytics be applied?
Ryan: There’s a lot going on there already. A lot of companies reached that conclusion a number of years back—that Big Data’s important, very important. It’s just the function of what’s always been complicated and how do you take it? It’s such a big block—how do you bring it in? How do you mine that data? How do you use it, most importantly? How do you spin out what you’re looking for from a reporting perspective?
I mean a lot of companies are pooling together different things like that. They’ve been applying whether it’s the actual investments where the money’s going in. For me, a lot of what I see is financial advisors being able to do that in order to take a very intelligent look at the costs.
Let’s say a company has 400 clients. Now they’re able to go in, take that data, look at it, and see where their peer groups are, where the greatest potential with clients lies, what those investments look like, etc.
That drives them on an ongoing basis with regard to how they make changes to the organization in order to grow. We focus on our service model with these types of clients. Which is most profitable for them? How do we find more of them? What have we done to acquire them and service them? There’s a lot that I think is going on. I think we’re just going to continue to grow.
We’re seeing companies getting into the wealth-management space that we historically weren’t sure would. They’re driving some clarity around that. I think it’s great.
Q: Is it important for financial people to have a deeper understanding of technology, and vice versa? Do you see any gaps in the knowledge and skills of software people in understanding capital markets, portfolio management, and the wealth-management industry?
Ryan: I do think that it’s more important now than it has ever been. On the global side, there’s all the technology elements. It’s an automated technology that can scale at a fraction of the cost of hiring a bunch of personnel. People to do those exact same things.
You can ask what, for these financial services companies—which are made up of financial advisors, of people that are managing money internally, and all the others—the role of technology is inside. What’s been supplementing that role is technology experts in the wealth-management business. So these folks are like translators. They’re in the financial services industry but they understand technology very well.
Let’s say a team of financial advisors are leaving Morgan Stanley, they’re W2 employees there. They’re looking at going out and creating an independent wealth-management company. Let’s just say that they decide they’re going to create an RIA. So now they have to go to one of those companies that have the personnel and resources inside of their organizations with this unique skillset of technology and wealth management. There, they come into play and say, “Let’s talk about the type of service that you’re looking for, that you provide to the client, and that you want to provide going forward. Let’s talk about the different technologies you’ll need, the interface between the client, your organization, and the market.”
Then they will provide recommendations about the various technologies that work best together for the RIA, that communicate and whose workflow will accomplish what the company needs. Some freelance consulting companies out there that we interface with on occasion come in and provide that same level of service. But that is one of the roles that a lot of these organizations have brought in-house—over the last five years especially—because they realize it’s added value.
What you don’t want is to say, “Hey, here’s five guys at Morgan Stanley leaving to come start a new business, and they’re all registered investment advisors. You’ve got a billion dollars in client assets. Let’s leave it to them to try to figure out how to become knowledgeable about the technologies.”
There needs to be that conduit between the two sides. When it comes to technology and the development and coding that you’re doing, do you need to have knowledge about wealth management specifically? Or can you just describe use cases of what it is you’re trying to create that can provide efficiencies with respect to that technology? I think it’s more important for folks in the wealth-management space to become more knowledgeable about technology than it is for people in technology to be more knowledgeable about wealth management.
In other words, if you’re using technology, you’re going to take the request and you’re going to build based upon it. Do you need to understand the wealth management macro perspective, the big picture? Do you need to understand that particular use case or whatever it is you’re trying to do with it? You’re drilling down so deep into each of those functions that I think it’s probably best in the vacuum.
“I’m a believer in the high-tech, high-touch model. The high tech allows scalability, standardization and efficiency; the high touch allows service. I think when you blend those two together and the execution is done right, it’s like the recipe cooks out the right way.”
Q: Could you please highlight any WealthTech companies you think are particularly innovative right now, and why?
Ryan: Obviously I’m conflicted with respect to Riskalyze. I think with what’s been built there, what continues to be enhanced there, makes Riskalyze one of the most innovative companies in financial services, not just domestically but on a larger scale. For a number of things that the company’s doing, when you’re able to come in and mathematically pinpoint risk using a unique score, that’s unique.
Then you look at some of the things that we’ve built out of it. We’ve got an automated platform. But it’s not a robo, it’s digital automation but it’s meant to be harnessed and used by the physical financial advisors. Then we built a map store you can go inside. You can open an account and you can decide whether you want to use BlackRock or American Funds or other fund managers.
This platform’s taking a lot of things. Paper account opening, processing—it’s all created in a digital environment and that’s meant to free the advisor’s time up from a lot of mundane information that’s out there. Potentially even free them up from having to hire more personnel because the technology’s doing a lot of the work that people have historically done. So, as a financial advisor you should actually see your company driving a higher revenue number, and the multiple of this is the net profitability. You’re more profitable doing the same business you had done previously because technology is allowing for that. Obviously I think they’re incredibly innovative with what they’re doing there.
Yeah, it’s interesting. There’s another company out there that I’ve gotten a little bit more familiar with and I think that you and I are both connected to—Vestwell in New York. I think you know Aaron Schumm, the founder. They’re doing some really interesting stuff because, as you probably know, it’s on the retirement side. It’s created this whole sort of bundled, very transparent offering, which I like. They say, “Look, these are all the costs involved. These are all the necessary steps involved. It’s all been bundled and here is the pricing for that.” It allows for advisors to leverage it to interface in the retirement space. If you’re not a retirement advisor, it allows for you to take their technology and almost go to the market as an expert because you have this resource. If I’m working with retail, high net worth clients I could actually now go out and get into the retirement space by leveraging this technology.
Historically, it’s always been difficult to get past that threshold because advisors are creatures of habit. I’ve always worked with this type of client, so I’m not going to go into the retirement space. I always like to see technology that enables some segue into them without having to stop what you’ve always done and become an expert in it. I like what they’re doing there as well.
There’s a number of other companies out there that I think are doing some really great things. When you talk about the financial technology space, it is overwhelming. There are so many new players coming in. Every week I see something where there’s some new company that’s coming into the space. I’m not in the financial technology space per se, so I’m not there looking to see what’s coming in and scoring and ranking them. There are folks in the wealth-management business that do that and frankly I’d be happy to put you in touch with some of them because that might lead to some good conversations for you to have.
Q: Would you share your vision on the future development of the wealth-management industry, and what the typical company in wealth management will look like in five years?
Ryan: That’s really interesting. In five years, I think the companies who are succeeding and are leaving behind their competition will be those that offer a hybrid of technology and people. In other words, I think it will be those companies that have an exceptional technology application in terms of interfacing with the market via a human element.
I’m a believer in the high-tech, high-touch model. The high tech allows scalability, standardization and efficiency; the high touch allows service. I think when you blend those two together and the execution is done right, it’s like the recipe cooks out the right way. I think you’re in an incredible position because you’re able to scale and service more clientele at a fraction of the historical cost if you compare. You’ve got a very high touch standard and high levels of care and service. Then that drives retention, so I think that’s important.
Interviewed by Vasyl Soloshchuk, CEO and co-owner at INSART, FinTech & Java engineering company. Vasyl is also author of the WealthTech Club blog, which conducts research into Fortune and Startup Robo-advisor and Wealth Management companies in terms of the technology ecosystem.