WealthTech Insights #8 with Michael Thrasher: Technology and Financial Services Take Advantage of Each Other

For today’s episode of WealthTech Club, we interviewed New York-based reporter Michael Thrasher.

Michael Thrasher
Reporter at wealthmanagement.com (WM).

At WM, Michael covers private banks and brokerage. Before joining WM, Michael covered insurance at Forbes and worked as a recruiter for tech companies.

We asked Michael Thrasher about his vision on WealthTech development, and discussed potential industry changes in the near future.

Q: Could you tell us about your background and how you ended up in the wealth management industry?

Michael: My relationship with the industry goes back a number of years. When I was in college, I started as an economics major with the intention of going into finance. Whether that was to be in investment banking or wealth management, I didn’t really know. I got two years in and was looking for an internship and didn’t have a ton of money. I couldn’t find anything for the summer in an investment bank. In addition, I didn’t have a lot of money to travel or take advantage of other opportunities.

I lost a little bit of interest in economics and I was no longer really sure if it was something I wanted to pursue. A friend of mine, who was journalist, asked me: “If you have an interest in economics and a fair bit of understanding of financial services, have you considered journalism? People with at least a little bit of exposure are frequently in higher demand than others.” That was the beginning of a number of jobs that I had working for publications. I also took a break for a couple years. I worked as a recruiter for software developers, and then I worked at a startup here in New York. Now I’m reporting again and, this time, specifically on wealth management.

Q: Taking into account your background and your professional circle, could you share your thoughts on the wealth management industry of recent years? What kind of trends do you see prevailing in WealthTech?

Michael: I see a couple things happening. I’ll preface by saying that I really cover the four wirehouses and the largest brokerages. I am always looking through that lens, because I’m talking to those people—advisors, and managers, directors, and senior leadership—more frequently than I am talking to people in the independent space, for example.

As for the changes, it’s important to point out the DOL’s [the Department of Labor] retirement savings rule. That’s a huge change for the industry, affecting both the large brokerages as well as independents.

A good timeline to look at some of the changes is also the financial crisis. Obviously, wealth management units tend to do better when the economy is growing because people have more money to invest since they’re in better financial circumstances to take advantage of those types of services.

Post-2008, the businesses have changed. If companies wanted to grow their business in the years following the crisis, they were investing a ton of money in recruiting advisors from other brokerages. The industry saw this tremendous inflation in compensation packages paid to recruit top advisors.

Today, companies have reevaluated how they recruit advisors and created or improved programs to train new advisors. The industry labor force was on a path to becoming a major hurdle for this industry. There have been a few numbers put out over a few studies that indicate the average age of an advisor is between 57 or 58 and almost 60 years old.

A lot of these changes are not just happening because of the retirement savings rule, or just in relation to the economy’s rebound since 2008. But companies are also trying to figure out who is going to usher them into the next phase of the industry. Advisors servicing the Gen X and Millennial generations might not look the same as they have previously.

“Depending on the individual you might need a long list of services or advice on things that a robo-advisor just won’t be able to provide.”

Q: In technological companies that provide robo-advising solutions, co-founders and engineers tend to be younger and have both financial expertise and understanding of technology applications (e.g., robo-advising) to provide better services in wealth management. Do you think that there is a risk that more conservative financial advisors will not be able to compete with these young, ambitious stars?

Michael: I do think that an advisor or company that is not leveraging new technology is certainly at a disadvantage, at least in comparison to their competition. That doesn’t mean that they’re necessarily incompetent advisors or an incompetent practice. However, compared to their competitors, they are disadvantaged because those tools are not just about improving portfolio performance for a client, they’re also about practice management and efficiency.

Everybody wants to improve those things, no matter how experienced or old an advisor or a company is.

A number of robo-advice companies have taken a direct-to-consumer and end-investor-focused approach. But more and more of them develop and become interested in the business-to-business (B2B) space in the industry. Frankly, it happens because it’s just an easier avenue to get to the end investor. If you are out there trying to get individual investors to invest a sum of money that you aren’t really advising them on, and don’t really have any influential control over, you’re leaving at least some of that to chance.

On the contrary, if you’re working within a group of advisors, or, maybe a better example, for a large brokerage, you’re developing a robo-advice tool that is going be a part of the portfolio allocation that every advisor is taking into every meeting with every client. Then, all of a sudden, you have a lot more end investors that are effectively using this product as a resource.

Q: You mentioned that for B2B and for B2C we have quite different solutions for wealth management. Do you think that in the future there is a possibility that B2C WealthTech and robo-advisor offerings will totally replace B2B solutions?

Michael: That’s a great question and one that everyone is scratching their heads about. I don’t see robo-advice platforms replacing the financial advisor, especially going forward. Advisors have come a long way from just executing transactions on behalf of clients. They have become more holistic advice givers, and that is only going to increase as time goes on—and not just in response to the DOL rule, but in large part because of what clients are interested in. They’re offering a lot more than that, especially the individuals who have much more complicated financial situations than the average person.

A lot of times, the sort of basement or ground-zero level that an advisor will work with is around $250,000 of investible assets. Every situation is different, and depending on the individual you might need a long list of services or advice on things that a robo-advisor, or any kind of algorithm, just won’t be able to provide. I think that one issue that I know a lot of people bring up is that many people that have their own brokerage account through something like Merrill Lynch or  E*trade (not just the robo-advisors), and these companies don’t ask many risk questions, such as  “How soon are you planning on purchasing a home?” Or, “What are some other things happening in your life?” because if you have $25,000 and you’re planning on putting it toward a down payment on a house in 10–15 years, then investing that money in the market might make sense. If you’re doing it in one or two years, however, all of a sudden, investing that money in the market might not be as wise a choice.

Those are questions even very wealthy individuals, if they haven’t gone through that process previously, might not ask themselves. If nobody is there asking them and helping them work through those decisions, and they don’t have to do it on their own, they could end up in a situation where they might be as well off had they worked with an advisor. I would consider that example of just saving for a down payment on a home.

Obviously, if you start getting into estate planning, if you’re a business owner, it gets much more complicated. For these situations, advisors with experience in such areas are needed. These services are just very far away from a computer algorithm being able to answer effectively for every individual.

“For an advisor to hear somebody at that young age taking care of all these basic housekeeping things and then come to them 10 or 15 years down the road and already have a good foundation, that’s great. That’s the ideal client.”

Q: You mentioned risk tolerance. Do you think that questionnaires are effective for calculating risk tolerance? What could be improved in this process?

Michael: I’m neither a developer nor an expert in behavioral finance, but what I do know from talking to people who work on these types of products is that the consensus is almost everyone is using something like this. But the effectiveness is really up in the air.

I was just at Morningstar’s conference a few weeks ago and attended a session where they had some behavioral scientists talking about this. They said that it’s a two-pronged failure a lot of times because there are many questions that are poorly constructed: The types of questions asked or the number of questions, and how they’re asking them.

It can’t just be something that helps you in terms of compliance. These tools have to be something that is invested in; a quality product that’s being correctly implemented and used. Those are the two areas where these things, I’m told, tend to fail. It’s something that is improving over time.

Q: We are seeing more and more young people starting to invest earlier. Do you believe that these robo-advisor solutions can promote the investment culture and speed up the process for Millennials so that they start investing at a younger age?

Michael: For the majority of the advisors that I have spoken to, or just people in the industry in general, this is an exciting thing. The earlier that somebody recognizes they need to be saving for retirement, the better advantaged they will have in the future. If you’re a new graduate and you’re spending the majority of the money that you’re making, for example on your rent and, probably, your student loans, going out, etc., you are doing some form of investing when you start saving cash or putting money into some kind of brokerage or robo-advisor.

That’s great because you probably aren’t in a position to work with an advisor in the first place because you don’t have a high enough volume of investible assets that you’re going to get value out of working with an advisor anyway. If you’re doing those things on your own, that’s great. Then, 10–15 years down the road, when you’ve accumulated more assets from an account standpoint, you’re someone who is eligible to work with an advisor, but also over that time your financial situation has likely gotten more complicated. Maybe your student loan debt has been paid off or is coming to an end, but now you’re thinking about saving for a home. Or now you have children. Now you’ve started your own business. There are so many more scenarios where, all of a sudden, it’s not quite as cut and dry.

I mean it’s pretty simple when you’ve just graduated from school. For a lot of median and high-income people, when they first graduate it’s not very complicated. I don’t know if they necessarily need an advisor as long as they’re taking care of their expenses, doing some budgeting, saving appropriately, maybe doing a little investing and paying down their debts.

For an advisor to hear somebody at that young age taking care of all these basic housekeeping things and then come to them 10 or 15 years down the road and already have a good foundation, that’s great. That’s the ideal client. I don’t think that makes them nervous. If anything, I think that they’re encouraging that type of behavior.

“There’re opportunities for data science and software development in finance. Software development has completely changed finance and the latter has opened up all kinds of opportunities within development. ”

Q: There are two groups of experts: financial advisors, business people who are involved in the wealth management industry, and software engineers who are building these new WealthTech and robo-advisor solutions. Do you think those two groups need to learn more about either capital markets or technology? In what ways can this knowledge gap be reduced?

Michael: I feel comfortable saying this, having been a recruiter for software developers across all different types of companies, not just financial services, and companies big and small. I think that there is a knowledge gap there. Just like there is across any industry because you’re talking about two complicated subject areas with so many different areas of expertise.

Part of the reason a lot of people in these industries make so much money is because it’s very complicated and the skills required are very specific. They can’t be mastered in a short time period. So if you’re trying to merge those two things like that together, of course there’s going to be a knowledge gap because there are a finite number of individuals who can comfortably call themselves experts in both of those fields – if any.

How you bridge that is challenging. I think the first thing anybody can do is just be realistic about it, understand that they’re not going to put people at a table in a meeting and have everybody on the same page in one hour.

These two fields are also changing continuously—in large part because of one another. There’re opportunities for data science and software development in finance. Software development has completely changed finance and the latter has opened up all kinds of opportunities within development. Because there is a need for improved services, finance has helped in the application and nurturing of many specific areas of software development.

The wise thing to do is to acknowledge that everybody has their own expertise, but nobody is really an expert in everything, and it will take some time to figure out how you can help one another.

“People might be willing to sacrifice a little bit of performance or an interest rate that might be less favorable for the simplicity.”

Q: We have seen different companies trying to apply blockchain for different uses in FinTech. The most successful case has been that of cryptocurrencies (Bitcoin, Ethereum, and so on). How can blockchain technology be applied to wealth management?

Michael: I’m sure there are ways that the technology could be implemented to improve practice management. From a company’s perspective, it is about their efficiencies.

If blockchain can improve some of these processes and cut back on back-office and paperwork, that would be significant. Even if you shaved off one hour of that kind of stuff a week, times the weeks in a year, you can see real value, especially across a network of advisors. All of a sudden you have a lot more man-hours that advisors are actually out there spending with clients and getting new ones on board.

Q: Could you please highlight a few companies that you think are the most innovative in this area?

Michael: I know that Two Sigma is a really interesting company, for a number of reasons. We were talking about the value in developing this robo-advisory platform in technology for other companies. They’re obviously doing that and attracting a lot of attention, so they’ve, at least thus far, proven that they’ve got a product that’s very valuable.

I think another company that’s interesting is SoFi, that started with, I think, student loans and then mortgages. That company has been pretty open about moving into wealth management. They want as many products under their roof as possible, which is a great strategy. You know a lot of times users or clients also want that. Even myself, I have to admit, there is something nice about logging into my Chase app and being able to see my checking account, my savings account, my credit cards, etc.

I think that people might be willing to sacrifice a little bit of performance or an interest rate that might be less favorable for the simplicity.

There’re so many companies. I think that we really are in a fascinating time to be an investor. There are more products than ever and it is easier and more affordable than ever to be one.

“Technology folks were just going after the low-hanging fruit first. Then, as things improved and changed, other opportunities have come about, like financial services.”

Q: I agree with you about that many experts feel having a robo-advisor in place will not replace real human-to-human interaction. If the investment is not too big, they can go for a robo-advisor. However, if they start investing a major part of their capital, they won’t be comfortable using some automated tool. They want to talk to a human before they entrust big sums of money.

Could you share your vision on the future development of WealthTech and the wealth management industry?

Michael: Let’s think about eCommerce, for example. Everyone that sells anything has a website or they’re selling on Amazon, etc. Now, online presence is a necessary component of retail. If you’re a company that’s designing an eCommerce platform and you’re going up against Shopify or some of the others, it’s a tall order. It’s a developed, crowded space now. Those were easier spaces, I think, to infiltrate and to change, compared to others. That’s why there are so advanced now and had early interest.

And technology itself has developed and changed, industries that seemed so complicated and impenetrable now feel like opportunities to explore.

Insurance and financial services are an example. These industries have changed too, for a lot of reasons—such as regulatory, compliance, just the size of the companies, etc.

It’s not that financial services didn’t want to take advantage of technology, or people in technology weren’t interested in financial services. I think technology folks were just going after the low-hanging fruit first. Then, as things improved and changed, other opportunities have come about, like financial services.

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.

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