WEALTHTECH INSIDER: Investment Management Is A Catalyst, Not A Commodity


By Eric Clarke

Dear Reader,

With our third installment of Wealthtech Insider, I wanted to discuss the third pillar of the advisor-client journey: Investing.

For years, the lion’s share of tech advances focused on investment management, because that was what clients needed and valued. Over time, innovations like robo-advice, efficiencies of cost and scale have transformed most aspects of investing into commodities, while an advisor’s work became more consultative in nature.

Does that mean technology has sapped investment management of its value as a differentiator? Absolutely not. You cannot separate a client’s investments from their values and goals. The best advisor tech enshrines asset management as part of a greater whole, offering real value to clients through the traditional drivers of advisor alpha.

Risk measurement. Understanding a client’s appetite for risk is one of the most crucial parts of an advisor’s work. Many tech offerings produce risk scores from quick self assessments. Those should be the start of the process, not the end, for one major reason: it’s human nature to overestimate ourselves. (For example, eight out of 10 men believe they are better-than-average drivers, according to AAA.) To move beyond the realm of a commodity, risk tolerance tech needs to be more insightful and interactive.

Asset allocation. Asset allocation tech cannot escape the realm of a low-value commodity if it only offers a shallow range of conservative versus aggressive investment strategies. While this might free CFAs from measuring asset allocation, not enough advisers recognize the value of the tools that exist. A more engaging user experience will provide a deeper understanding of personalized investment goals that target the needs of clients.

Tax structure. Plenty of technologies exist right now that can allocate between qualified and nonqualified and can automate to locate income-oriented assets into qualified accounts. These tools can also help reduce tax burdens and identify tax harvesting opportunities. Capturing tax alpha is a tremendous service for clients, who traditionally do not engage in that area of focus on their own.

So what separates a commodified investment tech offering from one that makes your practice more valuable? In my experience, tools that weigh a client’s personality type against their relationship with money have huge potential to increase advisor alpha.

These behavior-focused investment solutions have been difficult to automate. After all, humans are complex. But there have been tremendous advancements in understanding the personalities of individual clients, including the use of Myers Briggs tests to understand specific human needs and directly investing in an automated and personalized way.

We have seen companies moving in this direction to help build customized portfolios that align with individual behaviors and social views. Knowing that investors want to screen out certain investments is important from a behavioral perspective. But it is possible to go a step further. Investing tech could tilt the portfolios so clients concentrate more of their assets into what they care about most, whether that means specific ESG considerations, environmental impact, or diversity of board rooms. When clients can put their money behind what they value, it drives better outcomes in the long run.

Some of the biggest names in our industry see the value of investment tech infused with behavioral insights. Charles Schwab recently purchased Motif, while Goldman Sachs purchased Folio Financial. These platforms help clients understand themselves (and feel understood), which in turn lets advisors personalize each investor’s portfolio. And they can do so while allocating assets that align with behavioral traits in the most tax efficient way at a low price.

This is why planned outcomes are one of the first things an investor sees when they log in to our own client portal. They know quickly what the future looks like, which personalized goals are funded, and what range of outcomes they can expect in the future. Viewed in this context, investments are not a commodity. They’re fuel to get clients closer to the outcomes they want, as efficiently and effectively as possible.

Enjoy the week,

Eric Clarke  

Eric Clarke is founder and CEO of Orion. Connect with him on LinkedIn or follow him on twitter at@EricRClarke.