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The Rise of the Robo-Advisers?

The robots are here. Not the humanoid versions that you see in Hollywood movies, but the invisible ones that are the brains behind what look like normal online front-ends. They can educate you, advise you, execute trades for you, manage your portfolio and even earn some extra dollars for you by doing tax-loss harvesting every day. These robo-advisers also are not just for do-it-yourself or self-directed consumers; they’re also for financial advisers, who can offload some of their more mundane tasks on the robo-advisers. This can enable advisers to focus more on interacting with clients, understanding their needs and acting as a trusted partner in their investment decisions.

It’s no wonder that venture capital money is flowing into robo-advising (also called digital wealth management, a less emotionally weighted term). Venture capitalists have invested nearly $500 million in robo-advice start-ups, including almost $290 million in 2014 alone. Many of these companies are currently valued at 25 times revenue, with leading companies commanding valuations of $500 million or more. This has motivated traditional asset managers to create their own digital wealth management solutions or establish strategic partnerships with start-ups. Digital wealth management client assets, from both start-ups and traditional players, are projected to grow from $16 billion in 2014 to roughly $60 billion by end of 2015, and $255 billion within the next five years. However, this is still a small sum considering U.S. retail asset management assets total $15 trillion and U.S. retirement assets total $24 trillion.

What has caused this recent “gold rush” in robo-advice? Is it just another fad that will pass quickly, or will it seriously change the financial advice and wealth management landscape? To arrive at an answer, let’s look at some of the key demographic, economic and technological drivers that have been at play over the past decade.

Demographic Trends

The need for digital wealth management and the urgent need to combine low-cost digital advice with face-to-face human advice have arisen in three primary market segments, which many robo-advisers are targeting:

 

  • Millennials and Gen Xers: More than 78 million Americans are Millennials (those born between 1982 and 2000), and 61 million are Gen Xers (those born between 1965 and 1981); accordingly, this segment’s influence is significant. These groups demand transparency, simplicity and speed in their interactions with financial advisers and financial services providers. As a result, they are likely to use online, mobile and social channels for interactive education and advice. That said, a significant number of them are new to financial planning and financial products, which means they need at least some human interaction.

 

 

  • Baby Boomers: Baby boomers, numbering 80 million, are still the largest consumer segment and have retail investments and retirement assets of $39 trillion. Considering that this segment is either at or near retirement age, the urgency to plan for their retirement as well as draw down a guaranteed income during it is critical. The complexity of planning and executing this plan typically goes beyond what today’s automated technologies can provide.

 

 

  • Mass-Affluent & Mass-Market: Financial planning and advice has largely been aimed at high-net-worth (top 5%) individuals. Targeting mass-affluent (the next 15%) and mass-market (the next 50%) customers at an affordable price point has proven difficult. Combining automated online advice with the pooled human advice that some of the digital wealth management players offer can provide some middle ground.

 

Technological Advances

Technical advances have accompanied demographic developments. The availability of new sources and large volumes of data (i.e., big data) has meant that new techniques are now available (see “What comes after predictive analytics?”) to understand consumer behaviors, look for behavioral patterns and better match investment portfolios to customer needs.

 

  • Data Availability: The availability of data, including personally identifiable customer transactional level data and aggregated and personally non-identifiable data, has been increasing over the past five years. In addition, a number of federal, state and local government bodies have been making more socio-demographic, financial, health and other data more easily available through open government initiatives. A host of other established credit and market data companies, as well as new entrants offering proprietary personally non-identifiable data on a subscription basis, complement these data sources. If all this structured data is not sufficient, one can mine a wealth of social data on what customers are sharing on social media and learn about their needs, concerns and life events.

 

 

  • Machine Learning & Predictive Modeling: Techniques for extracting insights from large volumes of data also have been improving significantly. Machine learning techniques can be used to build predictive models to determine financial needs, product preferences and customer interaction modes by analyzing large volumes of socio-demographic, behavioral and transactional data. Big data and cloud technologies facilitate effective use of this combination of large volumes of structured and unstructured data. In particular, big data technologies enable distributed analysis of large volumes of data that generates insights in batch-mode or in real-time. Availability of memory and computing power in the cloud allows start-up companies to scale on demand instead of spending precious venture capital dollars setting up an IT infrastructure.

 

 

  • Agent-Based Modeling: Financial advice; investing for the short-, medium- and long-term; portfolio optimization; and risk management under different economic and market conditions are complex and interdependent activities that require years of experience and extensive knowledge of numerous products. Moreover, agents have to cope with the fact that individuals often make investment decisions for emotional and social reasons, not just rational ones.

 

Behavioral finance takes into account the many factors that influence how individuals really make decisions, and human advisers are naturally skeptical that robo-advisers will be able to match their skills interpreting and reacting to human behavior. While this will continue to be true for the foreseeable future, the gap is narrowing between an average adviser and a robo-adviser that models human behavior and can run scenarios based on a variety of economic, market or individual shocks. Agent-based models are being built and piloted today that can model individual consumer behavior, analyze the cradle-to-grave income/expenses and assets/liabilities of individuals and households, model economic and return conditions over the past century and simulate individual health shocks (e.g., need for assisted living care). These models are assisting both self-directed investors who interact with robo-advisers and also human advisers.

Evolution of Robo-advisers

We see the evolution of robo-advisers taking place in three overlapping phases. In each phase, the sophistication of advice and its adoption increases.

 

  • First Generation or Standalone Robo-Advisers: The first generation of robo-advisers targets self-directed end consumers. They are standalone tools that allow investors to a) aggregate their financial data from multiple financial service providers (e.g., banks, savings, retirement, brokerage), b) provide a unified view of their portfolio, c) obtain financial advice, d) determine portfolio optimization based on life stages and e) execute trades when appropriate. These robo-advisers are relatively simple from an analytical perspective and make use of classic segmentation and portfolio optimization techniques.

 

 

  • Second Generation or Integrated Robo-Advisers: The second generation of robo-advisers is targeting both end consumers and advisers. The robo-advisers are also able to integrate with institutional systems as “white labeled” (i.e., unbranded) adviser tools that offer three-way interaction among investors, advisers and asset managers. These online platforms are variations of the “wrap” platforms that are quite common in Australia and the UK, and offer a cost-effective way for advisers and asset managers to target mass-market and even mass-affluent consumers. In 2014, some of the leading robo-advisers started “white labeling” their solutions for independent advisers and linking with large institutional managers. Some larger traditional asset managers also have started offering automated advice by either creating their own solutions or by partnering with start-ups.

 

 

  • Third Generation or Cognitive Robo-Advisers: Advances in artificial intelligence (AI) based techniques (e.g., agent-based modeling and cognitive computing) will see second generation robo-advisers adding more sophisticated capability. They will move from offering personal financial management and investment management advice to offering holistic, cradle-to-grave financial planning advice. Combining external data and social data to create “someone like you” personas; inferring investment behaviors and risk preferences using machine learning; modeling individual decisions using agent-based modeling; and running future scenarios based on economic, market or individual shocks has the promise of adding significant value to existing adviser-client conversations.

 

One could argue that, with the increasing sophistication of robo-advisers, human advisers will eventually disappear. However, we don’t believe this is likely to happen anytime in the next couple of decades. There will continue to be consumers (notably high-worth individuals with complex financial needs) who seek human advice and rely on others to affect their decisions, even if doing so is more expensive than using an automated system. Because of greater overall reliance on automated advice, human advisers will be able to focus much more of their attention on human interaction and building trust with these types of clients. 

Implications to Financial Service Providers

How should existing producers and intermediaries react to robo-advisers? Should they embrace these newer technologies or resist them?

 

  • Asset Managers & Product Manufacturers: Large asset managers and product manufacturers who are keen on expanding shelf-space for their products should view robo-advisers as an additional channel to acquire specific type of customers – typically the self-directed and online-savvy segments, as well as the emerging high-net-worth segment. They also should view robo-advisers as a platform to offer their products to mass-market customers in a cost-effective manner.

 

 

  • Broker Dealers and Investment Advisory Firms: Large firms with independent broker-dealers or financial advisers need to seriously consider enabling their distribution with some of the advanced tools that robo-advisers offer. If they do not, then these channels are likely to see a steady movement of assets – especially of certain segments (e.g., the emerging affluent and online-savvy) – from them to robo-advisers.

 

 

  • Registered Independent Advisers and Independent Planners: This is the group that faces the greatest existential threat from robo-advisers. While it may be easy for them to resist and denounce robo-advisers in the short term, it is in their long-term interest to embrace new technologies and use them to their advantage. By outsourcing the mechanics of financial and investment management to robo-advisers, they can start devoting more time to interacting with the clients who want human interaction and thereby build deeper relationships with existing clients.

 

 

  • Insurance Providers and Insurance Agents: Insurance products and the agents who sell them also will feel the effects of robo-advisers. The complexity of many products and related fees/commissions will become more transparent as the migration to robo-adviser platforms gathers pace. This will put greater pressure on insurers and agents to simplify and package their solutions and reduce their fees or commissions. If this group does not adopt more automated advice solutions, then it likely will lose its appeal to attractive customer segments (e.g., emerging affluent and online-savvy segments) for whom their products could be beneficial.

 

Product manufacturers, distributors, and independent advisers who ignore the advent of robo-advisers do so at their own risk. While there may be some present-day hype and irrational exuberance about robo-advisers, the long-term trend toward greater automation and integration of automation with face-to-face advice is undeniable. This situation is not too dissimilar to automated tax-advice and e-filing. When the first automated tax packages came out in the ’90s, some industry observers predicted the end of tax consultants. While a significant number of taxpayers did shift to self-prepared tax filing, there is still a substantial number of consumers who rely on tax professionals to file their taxes. Nearly 118 million of the 137 million tax returns in 2014 were e-filings (i.e., electronically filed tax returns), but tax consultants filed many of them. A similar scenario for e-advice is likely: a substantial portion of assets will be e-advised and e-administered in the next five to 10n years, as both advisers and self-directed investors shift to using robo-advisers.

5 Personal Traits of Great Leaders

Many C-suite insurance executives complain about how difficult it is to find leaders in their organization. Many people believe leadership can’t be taught. “You know it when you see it” is a common observation. Finding a consistent definition for leadership is difficult.

How do you develop/teach/articulate a core set of traits of great leaders if it is so difficult to even define leadership? After leading various organizations ranging in size from several people to several thousand, I realize that there are fundamental core requirements needed to be an effective leader. Whether you are an entry-level employee or the chief executive of a large organization, you need these characteristics to lead.

Leadership doesn’t come from your title. It comes from how you act. People follow leaders; they don’t follow titles. As technology allows companies to be leaner, and as Millennials become a bigger part of the work force, we live in a less hierarchical and more collaborative work environment. Leadership no longer comes with a title. Today, companies need leaders at every level.

You don’t need to be outgoing or have the loudest voice in the room. People with low-key personalities can also be outstanding leaders. Personal leadership is not about self-promotion; leadership is the ability to get others to follow what you are advocating. To trust you. To respect you. To feel that your direction and requests are in everyone’s best interests, not just your own.

So what are the traits of great leaders? Here are five core personal leadership competencies that anyone must practice to be an effective leader.

1.         Integrity: Make sure you do the right thing for all the right reasons. In any leadership role, you will be called on to make difficult decisions. If you act with integrity, you will be respected. People might disagree with your decision, but they will accept your direction. One of my mentors told me, “People can spot someone who takes moral shortcuts.” Never forget: A reputation lost is a career destroyed.

2.         Courage: All leaders have courage. The courage to ask why. To challenge the status quo. To go out on a limb. To do what others are afraid to say and do. Many years ago, when  eight bottles of Tylenol were found to have been tampered with, leading to seven deaths from cyanide poisoning in the Chicago area, the CEO of Johnson & Johnson, which produced Tylenol, immediately directed that all bottles of the pain reliever be removed from every shelf in every store. He vowed that Tylenol wouldn’t be back on store shelves until the company knew that every bottle was safe. It was a bold move with a large negative impact on the company’s short-term sales. But when Tylenol did return to the counters and shelves, so did their customers.

3.         Lead by example: Don’t ask anyone to do something you wouldn’t do yourself. If you are asking others to stay late, you had better, too. When I ran a new business unit, our initial office space couldn’t accommodate an office for everyone. So I sat down with my senior team, and we defined objective criteria for an office. I didn’t qualify, and, much to everyone’s surprise, I sat in a cubicle alongside the other employees. It made a statement — I play by the same rules as everyone else. Likewise, any rule or policy we adopt, I make sure I also abide by. You can’t act one way and expect others to act differently. You have to be a role model.

4.         Be a great listener: You can’t understand what’s going on around you unless you listen to others. Listening is how you learn. Listening is how you gain perspective. Listening is how you understand what’s important and what’s not. Listening is how you discover opportunities. A good listener sends a strong message to others: “I respect and care about what you say. I’m not a tyrant.” Throughout my career, the best ideas always came from people closest to the core operations I was looking to improve. You can’t find those answers unless you ask a lot of questions and listen carefully to the answers.

5.         Be a great communicator: Leaders learn to master the form and substance of communication.

Let’s start with the form of communication: the way you communicate. You can’t lead unless people understand you. Language, tone, facial and other physical expressions all send messages that affect what you are saying. (This also applies to listening. If you look away while people are talking they know you are not listening.) Here are a few tips to master good communication form:

  • Keep your message clear and concise. We live in a world of short attention spans. People get drawn away quickly. Spend time thinking about what you want to say and how best to communicate it quickly. I like to pretend I only have 30 to 60 seconds to talk. That forces me to get right to the point.
  • Use examples. They reinforce your points by tying them to real life instead of dry theories.
  • Think like a teacher. Great communicators understand that, when they are speaking to someone or to a group, they are in effect teaching others what they want them to understand.

Mastering the substance of communication means the ability to move people to react to what you are saying in the way you want. In other words, you want your words to motivate, educate and inspire.  By motivate, I mean the ability to get people to want to do something as a result of what you say. Your words ignite your listener to want to react in the way you desire. Educate means you explain why you are asking them to do something. People will follow direction — but only grudgingly if they don’t understand why they are being asked to do something. Good leaders know how to get people to understand why they should take a specific action. Inspire means the ability to touch someone with your words. Engender a positive emotion that enables them to do something they otherwise might not have done.   Inspirational leaders provide the fuel to allow others to find success.

Today’s ever-changing work environment is creating opportunities for people at all levels of an organization to lead. Those who master the personal leadership competencies that I’ve described will enrich their work experience and create wonderful opportunities for themselves and others. Enjoy the journey.

3 Reasons Why Millennials Should Embrace a Career in Insurance – And Why Insurance Needs Them

The insurance industry faces an urgent need to attract a new generation with new talent. According to the U.S. Bureau of Labor Statistics and AARP, within 15 years as much as 50 percent of the current insurance workforce will retire. In addition, the industry is changing so fast that it can no longer rely on traditions and standard practices; insurance requires new ideas and new skills.

While all industries eventually face a time when there is a passing of the baton from one generation to the next, insurance is taking a hit now because we have an older than average workforce. So, we must engage with so-called Millennials to show that insurance is, in fact, an innovative and rewarding industry to work in.

In the early 1990s, when the California dairy industry faced a similar dilemma, it came up with the “Got Milk?” campaign. The campaign resonated with an important demographic, kids aged 12-18, who were being drawn away from milk by massive brand campaigns from providers of other beverages. The campaign was wildly successful, reinvigorating milk sales after three decades of declines.

The insurance industry needs the equivalent of a “Got Milk?” branding campaign. It needs to contain three key messages:

1. Insurance is an increasingly savvy industry.

Insurance carriers have had to adapt and evolve for centuries. Today, insurers are incorporating cutting-edge technology, including big data and predictive analytics. Tech is becoming a mainstay in the industry.

Companies such as Vodafone and Burberry have shown how data can transform marketing, and insurers will follow their example. As a whole, the industry will become much more innovative.

So, the industry should be enticing not just to young talent who are inherently tech-savvy and creative but also to those students who have a history in STEM (science, technology, engineering and mathematics).

2. Insurance is a sustainable industry.

In an unstable and uncertain economy, insurance has longevity on its side. As long as people continue to drive cars, buy homes and, simply, work, there will always be a need for auto and homeowners insurance and workers’ compensation. Insurance offers job security for Millennials who may be nervous about the fluctuating job market.

The insurance industry also provides a unique opportunity for young people to establish a solid foundation for a career with room to grow. Whether someone wishes to be an underwriter, an agent, or an actuary, there is a little something for everyone. Millennials tend toward “job hopping,” and insurance can provide young people with enough internal mobility to maintain their interest while keeping them within the industry.

3. Insurance is a service industry.

The insurance industry serves an important common good by allowing all of us to share risk for a small fee (premium) so that an accident or a storm does not ruin people financially. Without insurance, most people wouldn’t be in the financial position to start a business, own a home or even have a car. The core purpose of insurance meshes well with the interests of Millennials, 63% of whom volunteered for a nonprofit in 2011, according to the Millennial Impact Report. People who have a passion for helping others might welcome being a customer service representative and being the first point of contact at an insurer or might enjoy being an underwriter and ensuring that insurance policies are accurately written to provide a customer with the best protection.

Moreover, as young people’s talents and passions are brought into the industry, insurance carriers can expect to become better at what they do. In other words, the expertise stemming from new generations will allow for more accurate and, most importantly, more responsible insurance practices when handling scenarios such as relief from natural disasters.

The insurance industry truly makes a difference in people’s lives, often during difficult times. Young people can transfer their compassion into a career that delivers tangible results not only for themselves but for other people, too.

How will we attract and lead the new generation?

Where do we go from here? How do insurance companies draw talent when the competition is so fierce?

The first step is to use the tools we have – each other. The insurance industry can unite to overcome this talent crisis and collectively focus on appealing to the Millennial generation. An example of collaboration is Tomorrow’s Talent Challenge – an initiative involving industry leaders to motivate college students to explore the career potential in insurance analytics and technology.

We must also recognize that Millennials are looking for leadership they can relate to. Insurers need to hire people with titles such as chief decision scientist and chief data officer to head new departments of digitally savvy experts, if insurers are to draw young, tech-savvy talent. Creating and filling these roles will not be easy. According to McKinsey, by 2018, global demand for technical and managerial talent will exceed supply by 50 to 60 percent. We need to start working on the problem now.

If we as an industry can attract the right senior-level talent, can effectively communicate the professional and personal benefits we can offer to young people, and can articulate the creative contributions they offer us, then we will be on the right track for everyone to be asking the important question:

Got Insurance?