The financial advisory space does not lack innovations. Financial planning tools transform from spreadsheets into customer-friendly user interfaces that supports goal and scenario-based planning. Robo-advisors evolve from providing auto-rebalancing services to algorithmically optimized investment recommendations to both advisors and customers. Aggregation capability helps to consolidate not only the product carriers for comparison but also one’s financial assets constantly updated in one view. Accordingly, the financial advisory industry today should be more empowering and effective than a decade ago.
A look at the global retirement readiness and mortality protection levels reveals otherwise. The 2018 Aegon Retirement Readiness Survey involving 14,400 participants from 15 countries across emerging and developed markets yielded, on a scale of 0 to 10, a low readiness score of 5.9. In 2012, the score was 5.2. While wealth accumulation for retirement has not made remarkable progress, the mortality protection gap lags behind economic growth. It is estimated that the world population is underinsured by USD 114 trillion. Swiss Re forecasts this gap to increase 0.8% annually over the next six years. Overall, the global financial wellness, being a composite of mortality & morbidity protection and wealth management, is at dismal levels.
To expect that the innovations in the financial advisory space to-date contribute to improved financial wellness, one has to make three critical assumptions – the individual’s financial awareness and literacy, the financial plan’s solutioning and its consistent reviews.
Financial advisory is only embraced when the recipient is aware that he may have a significant problem and has the ability to understand the cause(s). The basis of such awareness and ability is a reasonable baseline level of financial literacy which cannot be taken for granted. Only 30% of the global participants in the 2018 Aegon Retirement Readiness Survey managed to demonstrate correct understanding of compound interest, inflation impact and risk diversification. Financial advisers will find it worthwhile to first ensure that their customers have a good grasp of the basics, before diving into the depths of needs analysis.
Needs analysis and data aggregation have lately become the favorite innovation space, giving rise to tools competing on sophistication and user experience. Like how televisions are furniture unless there is content to display, needs analysis tools are mock displays unless there is sufficient and quality data to analyze. The pre-requisite condition deserves more innovative efforts than there is today. On one hand, customers who have the motivation or sufficient knowledge to use the tools independently are few and far between. On the other hand, advisors who have the time, skill and aptitude to gain the customer’s confidence to share personal and sensitive financial information with them are also few and far between.
Having entrusted his information with the advisor, the customer naturally expects an analysis of significant value-add and recommendations of decent alignment with the analysis. The former is typically well taken care of by the needs analysis tools. The latter is rarely assisted by technology, and when there is, it is no more than a shortlisting automation based on high-level product suitability checks. The recommendation’s suitability may check out but without generating relevant alternatives in all permutations and combinations, subjecting the possibilities through an exhaustive and realistic series of stress-testing and comparing the value outcomes as perceived by each customer in his own way, there is no factual proof that the recommendation is indeed the best one possible to meet the customer’s aspirations and protection needs.
Constructing the best recommendation possible, or technically known as the optimum, should be of utmost gravity in the advisory process. Financial products require contractual commitments and are intended to meet life priorities. Considering that the customer’s aspirations and needs are typically greater than what his budget permits, his advisor must help him make optimal trade-off decisions. To understand his customer, the advisor exercises empathy. To provide an optimized recommendation and cross the last mile towards financial wellness, the advisor needs the backing of science and technology. The financial advisory industry has to appreciate and embrace the technicalities of optimization, such as stochastic and behavioral finance models.
The optimal financial wellness is a dynamic state. It changes with life circumstances, good and bad. Financial institutions find their wallet shares lagging behind customers’ affordability because the touchpoints have been tactical and financial reviews irregular and unproductive. To keep its fingers on the pulse of its customers, the institution must seek bi-directional interfacing innovations that support an omni-channel journey, beginning with periodic reviews of its in-force business to maximize customer value.
Impactful innovations are human-inspired, science-backed and technology-enabled. They augment the human intelligence and enhance the human capabilities to transform and scale the business. In the next two to three years, advanced science and technology will be applied en masse to the industry, reshaping the nature of the financial advisor’s work. The art of advisory tapping on communication skills unique to humans will make a grand comeback.
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