by Vasyl Soloshchuk, CEO and Co-Owner at INSART
Darren Duffy – Head of Wealth Management Business Solutions at Thomson Reuters
Darren is a subject matter expert in wealth management, mutual funds and fixed income. His prior roles include Head of Strategy and Business Development, Wealth Management at Thomson Reuters; Chief Content Officer and Global Head of Operations at Lipper, a Thomson Reuters company; and Executive Vice President and Board Member at Capital Access International.
Darren has served on the Investment Company Institute’s End of Day Pricing Committee and has spoken at numerous industry events, including the US Securities and Exchange Commission Roundtable, the World Financial Information Congress, and the Hubbis Asia Wealth Management Conference. Darren holds an MBA from NYU’s Stern School of Business, and graduated from the Securities Industry Institute at the University of Pennsylvania’s Wharton School. He is a regular on LinkedIn and Twitter.
We discussed with Darren the role of digital advice in modern asset management, how advisors can benefit from technology advancement, and the various approaches financial advisors can use to cater to the needs of today’s different generations of investors.
Q: Could you tell us a little bit about your background in wealth management?
Darren: I have spent my entire career in the financial information and technology space. I was in the fixed income for the first ten years of my career. After that, I pivoted to the mutual fund arena where I was Chief Content Office and Global Head of Operations for Lipper, the fund research arm of Thomson Reuters. Several years ago I moved into our wealth management business to lead strategy and business development.
My current role has two dimensions: I work on strategy for the global wealth management business at Thomson Reuters, and also execute on the strategy when we are deliver wealth management solutions through partners. At Thomson Reuters, we operate an open-architecture wealth-management technology platform that’s designed to lower total cost of ownership for our customers and partners are critical to the platform. A large portion of my day is spent looking at what’s happening in the industry, considering what parts of the value chain we want to address, and how to do that through partners.
Q: According to your observations, what trends have been prevailing in the wealth-management niche, taking into account the rise of FinTech, in the past few years?
Darren: There are a few major trends shaping the industry.
- First, financial dynamics are creating margin pressure at financial services firms.
- From a macroeconomic viewpoint we’ve been in a prolonged low-interest rate environment. Though that is starting to change, albeit slowly and in small steps, it has certainly impacted the revenue side of the ledger for the financial services industry.
- The growing use of passive investments within the wealth-management industry has also impacted industry revenue.
- On the cost side of the ledger, there is an absolutely crushing amount of regulatory compliance spend that is consuming discretionary development budgets. Layer on top of that growing cyber security expenses and you start to have significant cost pressure
- Just about every firm is investing more money in digital solutions, which is actually exciting because it can help to grow the business and enable companies to better serve customers.
- From a demographic perspective, both the average investor and advisor in the U.S. is getting older. According to our partner PriceMetrix, the average investor is in his or her mid 60’s while the typical advisor is in his or her mid 50’s. This represents material customer and asset retention risk. Wealth management firms need to address this trend from the generational wealth transfer angle while also implementing succession planning strategies such as teaming.
“I like to ask people, particularly younger investors how they go about investing. Often they will hold up their phone and show me an app.”
Q: We see that the term “robo-advisor” is used very broadly. Can you please define what you understand by the term in relation to wealth management?
Darren: I think the best way to describe a robo-advisor is to look at it as a technology-enabled channel for attracting new customers and assets to a firm. The main feature of a robo-making investments based on a customer’s risk tolerance and long-term investment goals—is not new, but the use of technology to operate at scale is a fairly recent development. What makes robos more interesting, though, is the ability to deliver sophisticated investment tools for a very low price. For example, having access to daily tax loss harvesting as part of a 25bps service is incredible.
Q: Do you think robo-advisors will totally replace humans in WealthTech?
Darren: There is a convergence trend underway which is leading to a hybrid model. Traditional financial service firms are adopting robo channels and robos are increasingly hiring human advisors. There are a few drivers for this convergence.
- Traditional financial services firms are looking to robo channels for scalable and cost-effective client acquisition and management in specific market segments. The idea is to bring emerging affluent investors into the franchise through a robo channel and transition them into advised channels as their wealth grows and they need additional products and services.
- Roboadvisor firms also understand that a machine can’t serve all customers and that as an individual’s wealth grows their investment needs can become more complex and require human guidance.
- There will be several lasting effects of the robo trend. First, the cost of investing will decrease. Second, mass affluent investors will have access to account features that were previously enjoyed only by institutional or ultra high or high net worth customers. Third, financial services firms will continue to pursue scale by leveraging artificial intelligence to fully-automate some steps of the financial advisor process while also using technology to augment the capabilities of human financial advisors.
Q: Do you see any difference in how wealth-management solutions are used by different generations of investors?
Darren: There are probably three different components in this regard:
- The use of technology.
- Investor perceptions regarding the wealth management.
- Differing wealth management needs.
Let’s start with the last one. From a wealth-management perspective, at different phases of life you’re going to have different needs. Generally the older generations—the greatest generation and the boomers—have more assets than genX and millennials. They are also in the decumulation phase of retirement planning. Most concerning though is that the older generations are facing massive healthcare and long-term care expenditures as they age. Financial services firms also need to ensure that they are protecting senior investors by implementing appropriate suitability standards and training advisors to recognize the signs of diminished capacity or elder financial abuse.
It’s critical for millennials need to be thinking about retirement planning as well since the decisions they make and investing behaviors they develop early on will have an impact 40 years from now.
In terms of investor perceptions the older generations are probably more comfortable working with individual advisors and have a greater level of trust in humans than in robo-advisors. It’s most likely reversed for the millennial generation. I like to ask people, particularly younger investors how they go about investing. Often they will hold up their phone and show me an app. There sometimes seems to be greater affinity with the app than there is with the financial services firm itself. This becomes a real challenge for firms; they need to connect better with the younger generation.
There is demand for solutions across all cohorts. Younger generations may be more inclined to communicate exclusively via mobile devices but older generations also want self-service features. It’s about opti-channel engagement—the ability for an investor to interact with their portfolio how they want, when they want.
“Risk questionnaires are more about the client’s comfort level because there’s a lot of psychology that goes into it. Big data would probably do a very good job of approximating what their risk tolerance really is.”
Q: How can we improve the various algorithms for asset-allocation strategies using Big Data analytics and relying on certain proven theories, such as modern portfolio theory, or other interesting extensions in this area?
Darren: It’s interesting that you mention modern portfolio theory. When I was in school the Efficient Market Hypothesis (EMH) and Modern Portfolio Theory (MPT) were dogma. Now more attention is being devoted to concepts such as MPT 2.0 and Post-Modern Portfolio Theory. Big Data—massive amounts of structured and unstructured data combined with tools such as Thomson Reuters Intelligent Tagging and increased computing power is certainly driving the evolution of theoretical finance and its real-world applications such as asset allocation.
Q: What is your opinion on how risk tolerance should be calculated or identified for different groups of investors?
Darren: Risk tolerance and compliance are go hand-in-hand so philosophizing about the future of risk tolerance is a bit thorny from a legal and compliance point of view. But it is interesting to think about how Big Data could to determine someone’s risk tolerance more accurately than that person could do themselves. An individual may say, “this is my risk profile and these are my tolerances,” but the Big Data model could look at it and say “this is what you indicated your preferences and tolerances are, but based on everything we know about you and a million other people who share similar characteristics, we think that actually you might be able to bear a little bit more risk.” Risk questionnaires are more about the client’s comfort level because there’s a lot of psychology that goes into it. How accurately people answer right now depends on the motivation and the psychology behind it. I think that big data would probably do a very good job of approximating what their risk tolerance really is.
Q: Should we use people’s digital footprint to calculate their risk tolerance?
Darren: This is a fascinating topic from both a risk tolerance and a credit risk perspective, but as an individual who values privacy it makes me uneasy!
Q: Which features are most important for a wealth-management solution from the technology point of view?
Darren: A great client experience (CX) is critical. Investors have become accustomed to calling a taxi or ordering groceries with a few clicks—or even voice commands. This has to translate to the wealth management space. It means an intuitive and elegant user interface (UI) regardless of platform (mobile vs. web). It has to be 100% technology based (e.g., digital signatures vs. signing hardcopy) and real-time (e.g. instant account funding and trading). A great solution should obviate the need for support, but if support is needed, is should be simple and fast to obtain.
“Wealth managers are human beings, they are individuals. Different people learn and work in different ways. Applications should be flexible enough to appeal to different styles.”
Q: In the WealthTech area, we can probably identify two major groups of experts. On the one hand, we have financial and business people with knowledge about the wealth-management portfolio and everything related to financial services. On the other are software engineers who are actually building the technology, 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?
Darren: The technology should really be there to augment what the advisor is doing—to help them do their job better and be productive—rather than being a hurdle. Steep learning curves are not productive. Wealth management firms that provide powerful but intuitive technology to advisors can differentiate themselves when it comes to attracting talent.
It is important for developers to understand what a wealth manager does throughout the day. What does their workflow look like? Usability testing is also important to determine how a wealth manager interacts with applications. We should also accept that ultimately wealth managers are human beings, they are individuals. Different people learn and work in different ways. Applications should be flexible enough to appeal to different styles, say those who are visual learners versus those who prefer other styles.
Q: Can you give some advice to software developers who have limited knowledge about capital markets and financing on how they can fill that gap?
Darren: I suggest a few approaches including reading, networking and going through the investment experience. There’s plenty of information out there, including different websites that discuss wealth management and issues wealth managers themselves are facing. That is a good way to start, to understand some of the trends, to see what’s going on.
Networking with wealth managers is another way to learn about the industry. Chat with family members, former classmates or neighbors who may be in the business. Ask about what they do during the course of a day, what headaches and challenges they face in their job.
Opening a brokerage account is a great way to experience the wealth management process firsthand and also to speak with practitioners.
“Technology will augment what advisors do and enable advisors to focus more on value-added services than on routine tasks.”
Q: Who would be your pick of the most innovative companies in the wealth-management industry?
Darren: I’m partial to some of the work that Thomson Reuters is doing in the wealth management and risk space. But we have also partnered with and invested in exciting firms.
I find companies that deal with artificial intelligence and cognitive computing to be the most fascinating because those technologies touch every aspect of the wealth management industry and enable wealth management firms to gain significant operational efficiencies.
ForwardLane is one company that I really admire and in which Thomson Reuters has an investment. ForwardLane specializes in artificial intelligence for the wealth management industry. They leverage machine learning, cognitive computing and natural language processing and generation to augment and accelerate how advisors serve customers. ForwardLane addresses the problem of peak human capacity—the idea that humans alone cannot take advantage of all of the data that is available. AI helps us move beyond peak human.
Another firm that we’ve partnered with is New Constructs, which applies cognitive computing to equity research. Their robo-analyst technology enables value investing at scale which is quite exciting.
Q: What do you think a typical wealth-management company will look like in five years? What will the next step for the wealth-management industry be?
Darren: I think you’re going to have wealth-management firms with multiple channels that range from pure robo solutions for emerging investors through full service solutions for high net worth individuals with a number of hybrid, technology enabled channels in between. Technology will augment what advisors do and enable advisors to focus more on value-added services than on routine tasks. Regardless of the channel, personalization will be key—whether a personalized opti-channel experience or personalized investments options such as structured products. I also think individuals are going to be increasingly looking for firms not only with a strong reputation in terms of their ability to manage assets effectively, but also with a trustworthy brand that can protect customers, their assets and their information from cybercrime.
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.