[Editor's note: A different version of this commentary was posted earlier in error.]
I don't usually write to the owners of large independent advisory firms (those with $10 million or more in annual revenues) in my columns for one primary reason. There are way more firm owners under $1 billion in asset under management who need more resources.
However, with that said, this is a blog for the owners of larger firms, about the current trend of adding artificial intelligence (AI) platforms into your businesses.
Simply put, if you add AI the right way, it can be a huge boost to your business — and to the independent advisory industry as a whole. But if you do it wrong, it can irreparably harm your business and your clients.
By way of background, my firm has worked with many of the larger independent advisory firms (roughly 8%) of them in the arena of AI since 2010. But, before I get to that, here's a quick note to the owners of smaller advisory businesses who are considering adding AI to their businesses as well: DON'T … yet.
For one thing, it's too costly in the current market for a smaller firm. And, more importantly, you'll run the very real risk of undermining the reason your clients come to you now. (See below for more on both of these points.)
Perhaps someday AI turnkey systems will be viable for advisory businesses under $10 million in revenue, but the technology just isn't there yet. So, don't waste your time and resources on what currently will be an expensive distraction.
The reality is that for smaller firms, the independent industry has matured to the point that there's a well-known system for growing your business. Ironically, we used AI to figure out the growth curve.
Small firms don't need their own AI to do it. The steps to growing smaller advisory businesses might be new to you, but they are at least a decade old now to consultants.
On the other hand, for firms with $1 billion or more in AUM, they have to innovate. And that means they are in uncharted territory. In rough estimates, there are only about 1,000 independent RIA's in the country operating over $10 million in revenues. That's a small number.
One of the "innovations" that many larger firms make today is adding AI. But unfortunately, thanks to some tech consultants, they are using it wrong.
From my observations, most "tech consultants" in our industry, most who entered post 2014 have backgrounds creating client interface platforms and they've usually come out of large brokerage and investment companies.
Consequently, most advisory firms that add AI platforms today, focus on the client experience going directly to the end user — the client. This "empowers" the clients to solve their own problems and/or get information on their own about their financial situation. Or at least, that's how the narrative goes.
A Rethink
Perhaps you can start to see the problems with this approach. For one thing, if clients can "solve" their own problems, what do they need you and your firm for?
These days, every larger financial-services company in the country has some type of interworking client experience system — for their customers — at little or no cost. How are yours any different, except that you undoubtedly charge more for them. We've found in charting this course with our larger clients, it's not a formula for success.
With that said, an even bigger reason that these AI client interfaces became a big mistake for independent advisory firms of any size is that they do not address the reason people go to financial advisors in the first place.
There are plenty of "how to" personal finance books out there, and we all know that most personal finance isn't all that complicated, anyway. Yet clients in the millions still flock to financial advisors.
Why? Because family finances scare most people. It's basically foreign territory, and yet their futures, and those of their families depend on their decisions.
And when people are scared, or uncertain about something, we humans tend to talk about it, hopefully with someone who knows more than we do. Someone who can suggest what to do and reassure that we don't have to worry.
The Fear Factor
Fear is the primary reason why people go to financial advisors, human financial advisors. Helping clients to not panic during market downturns is perhaps the classic example.
In my experience, most advisory firm clients don't like using an AI platform. They don't like doing it themselves because it creates stress, fear, confusion, and they don't trust the "computer."
In our work, advisory clients want the comfort of talking with a real person, and don't feel they are getting good, personalized, service on an AI platform.
Now, all that is not to say that I don't think there is a place for AI in advisory firms. I believe there is. In fact, there is a huge place for it. But it's not to put your clients to work. It's to increase the productivity of your business and the quality of its advice to clients.
AI can increase efficiency and scale, so that your advisors can work with more clients, your staff can better help your advisors, and service your clients when necessary. And over all, you can better service your clients.
When it comes to money, history has shown us clients like to talk to real people. It helps them overcome their fears around money. To use AI to enhance client experience you have to understand first, the human experience. We have found most AI developers, with the exception of a rare few, ignore humans.
