CEO, President at Finworx.
Jeremy has led teams through hardships to the stars, helping drive change through business process improvement as Chief Marketing Officer and, later, President of BPV Capital Management. Since 2012, Jeremy has been teaching MBA students digital marketing at the University of Tennessee in Chattanooga.
In 2016 he started Finworx, a company that develops communication solutions to help financial advisors serve clients better by personalizing engagement.
We discussed with Jeremy the trends in wealth management, the role robo-advisory is going to play in the niche’s transformation, and problems WealthTech will have to overcome. In the interview, Jeremy explains why rebalancing too often might not be the best strategy, how effective communication can add up to growing trust between client and advisor, and why he believes in the “bionic advisor” as a future model in financial consulting.
Q: Please tell us more about your background. How are you related to the wealth management industry?
Jeremy: My background is in communication and marketing. I was the Chief Marketing Officer of a mutual fund company, BPV Capital Management. There, I built a content marketing and marketing automation team that really connected and engaged advisors. From engagement to actual communication with financial advisors, I have run all the aspects of marketing there for four-and-a-half years. About a year ago, I started Finworx when I began modifying some software to fill the space at that time.
“I don’t think that individuals are necessarily qualified to make all of their own financial decisions. Maybe they are less than qualified or more motivated.”
Q: According to your observations, what trends have been prevailing in the wealth management niche in the past few years?
Jeremy: What drove me to really move and start this company was the pressure of fee compression in the space, which really created a problem for both asset managers on the mutual fund side and financial advisors who were trying to compete for relevance with their clients. There are plenty of opportunities out there in the market that differ in fees, so by starting my company we have attempted to break into the cycle of the client relationship and capture more of the assets that clients have.
The technology is playing a major role in this disruption with the rise of the machine, whether that is artificial intelligence (AI), algorithmic trading, or some predictive type of analytics that are being applied to the consumer transaction. The completion is tough, too. I don’t think that individuals are necessarily qualified to make all of their own financial decisions. Maybe they are less than qualified or more motivated. I think the financial advisor is essential to that relationship, since it’s really important to have that human consultant that the client trusts.
As the whole industry feels it’s moving either into mechanization or the technical world, I think the human relationship is essential to that. It sometimes gets overlooked, especially with all of the new FinTech applications’ development and new opportunities out there. It makes sense within the banking space to have a self-service model. However, I am not sure it’s a good idea to have a fully self-service model with investing.
Q: Do you think robo-advisors can completely replace humans in WealthTech?
Jeremy: I believe in the model of the “bionic advisor,” which allows humans to be part of the relationship and outsources everything that is mechanical to robos. I think digital solutions play an important role in advising, but from a trust factor, especially when someone is putting their whole net worth into their investments and preparing for retirement, it expands the need for a financial advisor.
That concerns a lot of aspects, such as tax and estate planning, and it is really much broader than just investment. Therefore, I do not believe that robo-advising can entirely replace a financial advisor for the full lifecycle of the financial relationship. There’s a certain segment of the population that can significantly benefit from the low-fee environment of a robo-advisor. However, the human advisor is critical when managing wealth.
I think there are four types of relationships that are essentially human; thus, trust is important when you’re a doctor, lawyer, financial advisor, or accountant. What can be outsourced to machines in those four professions should be, and will be. I think the accuracy (the low error rate), the improved computational abilities, and the learning across the board are significant in using algorithms, machine learning, and AI, but those four occupations really need a human touch in order to establish trust.
“Instead of filling in a traditional risk survey, it’s important to really drill into what factors are at play in someone’s mind when they make decisions. Exposing that through a continuous survey cycle is vital to provide the very best advice.”
Q: In various wealth management solutions, we have some kind of questionnaire based on which we calculate the risk tolerance followed by a number of asset-allocation scenarios. In what way can we increase the efficiency to calculate different things in wealth management using Big Data analytics?
Jeremy: First and foremost, I think using data across the broad spectrum of the population to really hone in on, not just the risk factor, but also the behavioral biases or economic ones that are present in someone’s mind is really important for the financial advisor to be able to give the very best advice.
Instead of filling in a traditional risk survey, it’s important to really drill into what factors are at play in someone’s mind when they make decisions. Someone may self-report that they are very aggressive when, in reality, their behavior demonstrates that they have an overconfidence bias. Exposing that through a continuous survey cycle is vital to provide the very best advice.
We gather information from a variety of sources: not just the behavioral survey, but also information on social networks, for example. If there’s a market correction, we investigate whether the client is calling the financial advisor or sending emails that are panicked when they said that they were a lot more aggressive. Capturing that information can help to provide a whole picture of the client through using data.
Within trading sequences and cycles, we haven’t built a robo. But that’s one of the areas where you see the ability to pull in lots of market trends: lots of information in the building of the algorithm, obviously, to understand how those allocation models work. I think there’s the application within the trading itself as a second point.
Finally, aggregating all information across someone’s portfolio, from their communication references to their behaviors, to their transactions, investments, and really getting a whole picture of them gives the very best indication to stay away from bad decisions. To incentivize people to make better financial decisions, that’s really where the power of Big Data, analytics, machine learning, and AI lies.
I believe many clients have what they call in the medical profession the “white-coat effect.” When they sit in front of the doctor, they tell him a story that differs from the real-world situation. I think the same is present within financial advisory. Trying to pull together all of that information gives us a much broader picture, a more accurate representation of the client.
“We have a pretty massive content library that’s prebuilt for a financial advisor, and has lots of educational information. It’s driven to change the behavior of their client, not just to educate them, but to really drive the momentum to make the client calm.”
Q: Let’s talk a bit about your solution, Finworx. Could you please highlight the major features of your product that financial advisors can benefit from?
Jeremy: Finworx surfaces for the financial advisor the very best-next action, similar to what Spotify does or Netflix does, to say “In order to advise this client best, here is the next communication that should go out or the next phone call that should be made.” Our solution combines the information that we know about a client from their publicly available profile, as well as their digital footprint. The latter includes how they engage with the emails that are sent to them, the website, all of that traffic and information. On top of that, we add insights from the behavioral survey.
We then analyze the long-term engagement trends. We have a pretty massive content library that’s prebuilt for a financial advisor, and has lots of educational information. It’s driven to change the behavior of their client, not just to educate them, but to really drive the momentum to make the client calm. If they’re not in a 529 plan, for example, our goal is to get them engaged in it. If they’re not saving in addition to their 401K for retirement, our aim is to encourage them to do so. Taking in all of that information and combining it to send that right message at the right time is the solution that we’ve put in place.
The complexity for most financial advisors is that they know they should be, or they know they want to be, involved in marketing or more regular communication, but they lack time. Our solution is pretty turnkey. We come in, set up their account, and import their contacts; after that, they can begin sending out the information right away and engaging with their client base. I say it’s dumbest on day one, as it knows the least. As the interactions begin, it gets smarter, more intelligent, pulls that data together in order to engage clients.
The really powerful part is what it’s surfacing back to the advisor. Data analytics are great at providing a lot of insight, taking across data sources and surfacing that insight. The difference is, we’re putting that into action as well. It may be a matter of saying, “Jeremy should send a card today,” or, “You should send an email or make a phone call.” Based upon historical information and client profile, we help advisors do their job better.
Q: During the wealth management process, we can set up different schedules for rebalancing. With new robo-advising solutions, we can probably start rebalancing more frequently—not once or twice a year but monthly or even weekly. Some experts are even talking about everyday rebalancing. What’s your opinion on this? How is your solution related to rebalancing?
Jeremy: Our team of analysts suggests that over-rebalancing is probably not the healthiest strategy. We have certainly looked into that. The way that our solution fits into the question of rebalancing is, we’re not there yet, but what I hope to do is to integrate a robo-advisor into our system so that you can see the transactional information alongside the procedural preferences of a particular client.
The biggest aspect here is really on upholding. We’re not bringing people into the DOL to say that they are within their risk profile. We have a very accurate picture of what someone’s risk profile is and what their behavioral biases are. The way our system works is to try and reinforce the positive behavior and suggest the right asset allocation. If they’re outside their risk profile, we try driving them in the appropriate direction and giving the reasons why they should alter their behavior.
The thing that financial advisors, as a whole, are traditionally brilliant at is the computational side, as they understand markets and finance. So they know how to do asset allocation. However, when it comes to customer servicing, financial advisors have plenty of room for improvement. Many of them got into the business because they love markets. They love the economy. So, really being able to come in and say we’re augmenting those client relationships and allowing them, not only to look at those markets or a robo-solution, but also being able to communicate in such a way that their client starts trusting them more.
“Millennials are more in touch with their finances than previous generations used to be because they are used to managing their finances through their mobile phone.”
Q: We mainly associate the wealth management industry with a chance to secure somebody’s retirement; the target market of wealth management firms used to be 30–40 year olds and older. Right now, we can see potential clients becoming younger and starting to plan their future earlier. Do you think emerging technologies are the only reason for this change?
Jeremy: Planning at the age of 30 or 40 comes naturally, since at this time you have more investible assets and you start thinking long term. I think that the trend will continue to grow among millennials as they get into careers and start thinking about retirement or what they’re going to do with their money. This is the point when financial advisors step into the picture.
I believe that millennials are more in touch with their finances than previous generations used to be because they are used to managing their finances through their mobile phone. I know a number of millennials who have never stepped foot in a bank, as they have their smartphones with the apps needed to manage their finances. Many millennials think about their financial future differently, with some of them choosing to travel today when they are young, for example, instead of waiting until they retire.
Thinking about financing particular opportunities in their life today becomes their priority, the choice they make over long-term investing. That may be a danger for a financial future in terms of compounding and the value of long-term investing. The compounding is such an important aspect of building a solid foundation.
The lifestyle choice to spend more of the money now on a quality of life with the view that there will be long-term opportunity to work and a variety of different things may be a little shortsighted, only in that we’re also looking at a convergence of data analytics and all these things within healthcare. We’re looking at these elongated lifespans, decades added to life expectancy—and that could be a problem for someone who’s only thinking about satisfying themselves now, not keeping pace with the future in terms of financial planning. There’s an opportunity to increase education and encourage millennials to think about their long-term responsibilities.
Q: In the WealthTech area, we can probably identify two groups of people: financial and business people with knowledge about everything related to financial services and software engineers who are actually creating software solutions for wealth management. Do you see any gaps between those two groups of people? Is it important for business people to have deeper knowledge and understanding of the technological part of the business, and vice versa? Should software development staff have more knowledge of capital markets in order to innovate further?
Jeremy: I think within professional services, if you’re not steeped in the tradition of financial services then there is a crisscross. I’ve experienced situations where really high end Wall Street firms would rather take someone that has a finance background and teach them how to become a technologist or a marketer than bring in some outsider and teach him finance.
There are a few reasons why it makes sense. BFS (Banking and Financial Services) is a complex business domain with generations (not just decades) of regulation in the industry. Feeling like it’s a narrow, small club is a big part of it. The outside awareness of what’s really going on within the niche is really low. When the wave of disruption comes through with technology it will have a pretty significant impact on business. That’s from that side.
From the technology side, I do think it’s really important to understand the role of regulation and the industry as a whole. Think of a bank out of California—I can’t remember its name. They came at it from the technology standpoint and said, “We’re going to open a banking platform and go from the tech side, as opposed to going through the regulatory one.”
I believe the experiment did not work as well as they thought. Eventually, they were acquired. Having an appreciation for the industry and the way that it works as a closed society does provide some trust. Finding that middle ground between the two is really important.
I’m really interested to see how their blockchain will play a role in establishing trust through eponymous of validation and trust; that’s going to be a big disruption that, once it’s out there, will be accepted by people within this group.
In order to bridge the gap between the two groups, there must be an appreciation of the rationale for why certain things are in place. You can’t just throw out all the past development of financial services, because I just think there’s a better way to do business today. As I’ve seen, as an outsider coming into the industry, there are a lot of things that don’t make sense as to why they are the way they are. There are a lot of things that are absolutely necessary.
I think that’s executed best within FinTech, and for developers by partnering with people that are within the industry. Some of the most successful FinTech companies that I’ve seen bring someone from within the industry and pair them with a developer or a solution provider that is able to offer the market something that is accepted and compliant, as well as disruptive on top.
Q: We talk a lot about blockchain technology, which is more commonly known as distributed ledger technology. Many companies are trying to apply blockchain for different use cases in FinTech. The one that has been successful is cryptocurrency, but we really haven’t seen other successful use cases. How can we apply blockchain to wealth management, and what use cases can you name?
Jeremy: I think, at the heart of blockchain is transparency. I’ve heard a number of speakers talk far more broadly than just about transactional accounting or measures of trust and validation from communication styles. I’m not exactly sure what that application is. I do think it’s a really interesting idea around how you validate rating systems, for example. If you go on Amazon.com, you’ll see a number of reviews there.
You don’t know if all of these five-star reviews or these one-star reviews are real. The chances those could have been submitted by a marketer are high. Using blockchain or some sort of validation mechanism delivered across the spectrum of a particular user’s interaction is a reality check.
“I do believe anything that can be outsourced to machines will be outsourced to machines.”
Q: Could you please name a few companies that you think are the most innovative in the WealthTech and robo-advising space at the moment?
Jeremy: Some of the apps, like Acorns and Stash, are really interesting in terms of getting people engaged in financial fitness. It changes the perspective of a number of millennials to say, “I’m rounding up my debit card purchases and putting the remainder into an investment account.”
When they see, from time to time, that that is growing at some percentage rate and the investment is paying off, it promotes good behavior. I really like that particular application of a robo because it’s integrating two aspects. One, it drives behavioral change toward saving. Two, it shows the results of a risk-allocated investment style.
Betterment, Wealthfront, and other companies are building great algorithm-powered solutions. I believe now robo-advisors are bringing many users on board, but they’re not getting the depth that they want. I think a lot of the valuations are built on the notion of depth.
I do believe anything that can be outsourced to machines will be outsourced to machines. Nowadays, we have very few people that are investing on their own and taking blind guesses about the market. You’ll always have those, but in the future, the focus will shift toward the relationship between a financial advisor and a client. In terms of robo-advising solutions, there will be consolidation with a few major platforms left that will service advisors best.
My macro observation is: there’s always a pendulum swing in financial services. It moves from disintegrated services, wealth management, all of these things out on their own, to consolidation, where banks bring everything in-house.
Obviously, at some point, a series of mergers and acquisitions is to take place. We see it with Blackrock buying Future Advisor, for example. Many FinTech firms are really built around the idea that they’re going to be acquired in the long run. Who’s going to acquire them is another question.
Those will be the companies that would want to consolidate services and have a better portfolio of offerings out there. So, within Wealth management, we are likely to see a number of services that are solving micro problems that will be paired up or integrated with the bigger solutions.
Q: What is the future of the wealth management industry? In your opinion, what will a typical wealth management company look like in the long run?
Jeremy: If you take a player like Fidelity or Ameriprise, or any other established financial advisor, they have very large infrastructures that have been supported by some very steep fees over time. There’s room for efficiency there. What you see with the FinTech companies like Betterment, while they do have funding and they’ve been able to build their teams through that, they’re still operating very lean compared to their more industry-standard counterparts.
That’s where you’ll see an emergence of one or two major players in the marketplace coming in from the software side, because they’re just more efficient. The greatest challenge within large-scale asset-management firms is longevity, sustainable development over a number of years.
For example, Vanguard has cut their advisory fees to 30 basis points, making a 60% reduction in fees, and everything is focused toward the fee. We see this momentum toward zero. Whether it will actually get to zero, no one knows for now. It’s now pushing all of the competition down and it’s not felt at every level yet, but that’s what we’re going to see within the big companies in the near future. Those that can compete at the lowest fee are going to be the ones that are ahead of the curve.
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.