5 Sci-Fi Trends in Wealth Management

The future is here: 2015 is the year of self-driving cars, virtual reality worlds and palm-sized flying drones. So let's talk about how science fiction is becoming reality, and the impact it will have on wealth management.

Trend 1: Integrated Wearable Computing

Just around the corner is the ubiquitous integration of smart computing into the fabric of our everyday life. What used to be expensive and enormous, in the form of mainframes and desktops, is now compressed into the smallest shapes of hardware. These shapes will be worn on our bodies, attached to clothing and built as sensors into the environment.

This trend, called wearable computing, is already in the marketplace in glasses, jewelry and watches. The devices are revolutionary in both their collection and communication of data. As passive objects integrated into our daily routines, they can measure and store our physical markers like heart rate and hours of sleep. A connected GPS can map out our path through work and leisure. Embedded video cameras will record every moment of life, and save the stream to a private, secure database.

Financial institutions will have more information about prospects and clients than ever before. Devices will generate personal data on an unprecedented scale, to be saved and accessed whenever needed. Controlling such access through privacy and security will be paramount. Advisors will be able to access not just financial information, but anything a sensor can track and a client wants to share. From insurance products to service models, this data will create a picture of households that will be truly holistic.

Impact for Advisors: Wealth management workflows will also be impacted. For example, we already use a tap of the thumb on a small computing device to authorize financial transactions. Similarly, a wearable sensor that authenticates through Apple Pay would be more secure than any paper process the advisory industry uses today.

Trend 2: Image Recognition

Now that we have all this data, how do we make sense of it? How do we parse it and gain a true understanding of the individual underneath?

The answer is machine learning. Based on a recent development in artificial intelligence called "neural networks," computers can scan billions of images and look for faces and objects within them. Think of an image that we may want to find: a face of a friend, a dog, a mountain. For each of those images, an algorithm is trained to be the expert finder.

Google Photos offers this functionality freely today along with infinite storage. The developers' hope is that users will find it more convenient for software to organize and tag their photos than through manual intervention. And as the sheer volume of information continues to increase, machine learning will be the only way we can keep up.

Impact for Advisors: Every individual who allows algorithms to categorize their images will, as a byproduct, create a full graph of expressed preferences that is true and accurate in a way that no risk questionnaire can hope to capture.

An advisor can learn if their client is a cat or dog person, whether they like to travel or renovate their home, how many children they have and what age they are. Software can impute risk tolerance and capacity for risk taking. It can prompt the opening of a 529 plan after noticing a photograph of a newborn baby.

Trend 3: Natural Language Processing

In addition to the preferences generated with images, we already have the ability to create personality profiles based on what people say to each other on the Internet. A computer can analyze all of the written and spoken communication from a particular person, and then translate the words and sentences into moods and meanings. Over the longer term, a picture emerges about the personality of the writer, her biases and individual quirks.

One example is Five Labs, which uses semantic analysis and natural language processing to understand what written language implies about the author. Another provider is IBM Watson, a supercomputer with machine learning capabilities.

Impact for Advisors: Watson unearths an even deeper behavioral profile, called Personality Insights, and is working with wealth managers today. It can uncover whether your clients are introverted or extroverted, inventive or conservative, and value achieving a larger purpose or a life of comfort. All this before a single meeting takes place.

Amazingly, many of the tools and technologies to run such a complex analysis are already open source, meaning they are available for anyone to grow and modify. The input text, whether on Facebook, Twitter or other social media, can be analyzed into sentences and intended meanings, and then can be associated with broader topics, moods and personal attributes. This technology makes paper risk profile questionnaires woefully antiquated.

Trend 4: Digitization of Cash and Securities

Once we know our clients better than ever, let's explore innovations in the technology of the investing product itself. There are numerous innovations happening within asset classes, particularly in improved algorithms for matching lenders and borrowers. But the most fundamental innovation of the decade is, without question, digital currency and its infrastructure.

Bitcoin is famous for its volatility, which unfortunately distracts from the actual vision — the unique technological infrastructure that enables a bookkeeping system without the need for a centralized authority. Traditionally, the supply of cash and other financial instruments (like stocks and bonds) is determined by a government or individual private institutions. Digital currencies, however, use a completely different system called the block chain, composed of a public ledger of all transactions, shared between every participant in the system. Each individual user may not be particularly trustworthy, but taken together, with each participant algorithmically checking the accounting of everyone else, the outcome is highly secure and reliable.

Impact for Advisors: This infrastructure can be used for much more than digital cash. It can drive trusted and secure authentication, contracting, financial data and private transactions. Large banks (Goldman Sachs, Barclays) and credit card companies (Citi, Visa) are now backing the innovative technology by investing in digital wallet companies, and forming consortiums to back innovation.

What if the U.S. dollar itself became fully digital and the Federal Reserve adopted and approved a block-chain-type ledger for the expansion of a digital USD? Digital dollars matter because they can be divided into tiny fractions that allow for micro-transactions. This would usher in a new age of online commerce: Imagine 5 million underbanked clients being able to pay their financial advisors 0.25% on $150.00.

Similarly, a digital version of a stock or ETF could be divisible into infinitely small fractions. As a result, a newborn with a 529 plan would have an institutional-quality global asset allocation model with just $0.25 in her account. Account minimums become irrelevant in an age where tech-enabled advisors select the appropriate asset allocation, and digital asset management products can implement it.

Trend 5: Crowd-Sourced Asset Classes

Who is wiser, the expert or the crowd?

Traditionally, the wealth management industry comprises experts with superior information and education identifying the "right" ways to invest. Those approaches have included everything from Modern Portfolio Theory to day trading and quantitative hedge funds. But what if the crowd is indeed wiser?

Impact for Advisors: From a retail distribution point of view, crowdsourced investment products have struggled. Interactive Brokers recently bought Covestor, and Wealthfront famously pivoted to a passive investing model. However, from an asset management perspective, there is a new generation of meaningful and interesting new financial products that could be part of an allocation selected by an investment advisor.

With Quantopian, a crowdsourced hedge fund with a browser-based algorithmic trading platform, developers can write code and share investment strategies as a community. Motif Investing has over 130,000 motifs created and customized by its users. AngelList Syndicates, a platform to invest in early stage private companies, which traditionally requires understanding detailed legal and business information, allows investor to follow a trustworthy investor "lead" with as little as a $1,000 investment.

These online algorithms compete with the beta-only robo-advisors and serve investors of all investment personalities, from Vanguard Bogleheads to returns-chasing day traders. Such investment technology will inevitably become widely available. Already, there are open source robo-advisor code repositories and Black-Litterman portfolio optimization white papers. All that remains is to create a distributed community where the best algorithm is matched with the client's financial situation and personality in a secure environment. Accounts open, data flows and fees are paid digitally and automatically.

What Should You Be Doing?

These trends are a fundamental transformation of our industry. The current focus on digital advice providers — the robo-advisors — is merely a precursor to much larger developments.

So what is the role of a financial advisor in a future accelerated by technology?

The short answer is that the advisor's role will continue to be that of mentor and guide through a complex financial landscape. The advisor will build and maintain relationships with clients, and use tools that align investors with the right products and algorithms. The long answer is yet to come, and I look forward to exploring it with you in future columns on ThinkAdvisor.com.

—

See also: Space Travel, Robots and Your Clients' Retirement; Futuristic visions that haven't materialized still carry lessons