Whereas some WealthTech companies add value by building convenience, others deliver services that were out of bounds before
Interview with Walter Vester,
CEO at Huygens Capital
Is it right to think of WealthTech as just automated financial advisory routines? If the answer is “yes,” then it would just squeeze human advisors out of the market instead of creating value. Technologies were invented to empower humans to do something beyond their natural abilities. If WealthTech can deliver such differentiated services, advisors will get the perfect mixture of robo and human powers.
Walter Vester very much appreciated being able to take volatility out of his own investments. For that reason, he was searching for ways to forecast how the market will change. The results of his attempts became a commercially successful artificial intelligence (AI) -based equity market signal.
“What does a typical robo-advisor do? It rebalances your portfolio into the falling asset class, which means it actually enhances your volatility during the crisis time. There’s a flaw in that, [even though] eventually the rebalancing could result in higher total return, once the falling asset class eventually recovers, if it recovers. But not lower volatility. ”
Walter utilized artificial intelligence methods and historical data representing market changes over time to teach the algorithm how to signal crises before they start and end. This has enabled him to take money out when the market is crashing and put it back in to get the most out of the recovery.
Creating additional value is crucial
People tend to pay more for more value. The tactics that Walter utilized in his algorithm managed to minimize losses and save more money compared to a passive approach. Thus, he created added value for clients and can now charge for that service.
Walter’s approach is very similar to that of insurance. Clients may pay more, but they get higher revenue and peace of mind in return. Generally, in Walter’s opinion, the partnership between regional banks, insurance companies, and WealthTech platforms has great potential. In this case, solutions like Huygens and regional banks or insurance firms can be mutually beneficial and generate even more value for their clients.
“A typical insurance agent likes to offer wealth-management services in addition to insurance sales, just to increase their share of [the] wallet. But it’s hard for an insurance company or a bank to break into that market unless they want to build these capabilities themselves because they can hardly afford to buy Betterment.”
At the same time, Walter admits that nowadays it takes human advisors increasingly more effort to justify their input. Technologies such as AI no longer scare investors; they feel more able to trust their money to machines. This means that advisors who don’t utilize the extra abilities of technology are going to have a harder time proving their value.
Is AI a silver bullet?
Naturally, different approaches and technologies suit, or don’t suit, a particular task. For example, Walter’s platform has nothing to do with the crypto market. First, there’s no historical data to train the AI on; second, the volatility of that market completely negates all the possible gains.
“We look at the normalized prices per option and functions of their changes over time to tell when sentiment is changing. In the US equity market, I have two really severe crisis periods and many other weaker ones to mine a lot of data from. But I have no data to do the same with cryptocurrencies.”
However, this is another argument for choosing to narrow focus instead to building good old commoditized solutions with just a friendlier interface than before. Walter feels that there’s no point in chasing as many markets as possible; conversely, it’s important to ensure the value you provide is high and the product you offer is well differentiated.
The bottom line
Summing up, AI is very well suited to some of the wealth-management tasks. It really can add value to the products and achieve a differentiated performance that’s far beyond the abilities of human advisors. However, there are cases when it won’t work to the same level, as it’s not a magic pill. It’s vital for platforms to focus on the value they create. Technologies are just the instrument to deploy that value.
Walter Vester is CEO and founder of Huygens Capital. He studied computer and systems engineering plus applied physics. He had a first career in signal processing and algorithm design, focusing on handwriting recognition, secure defense radio communication systems, and many more engineering novelties.
Later on after business school, he switched his activity area to general consulting and then investment management, working at Boston Consulting Group, then AllianceBernstein and Blackstone as an analyst and co-portfolio manager.
He first wrote the algorithm underlying Huygen’s signal by himself to manage his own money. Soon after it proved to be efficient, he founded Huygens to introduce it in a commercial B2B product and rolled it out to the market.
Interviewed by Vasyl Soloshchuk, CEO and co-owner at INSART, FinTech engineering company. Vasyl is also the author of WealthTech Club, which conducts research into Fortune and Startup Robo-advisor and Wealth Management companies in terms of the technology ecosystem.