OpinionDec 19 2018

All roads lead to hybrid

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All roads lead to hybrid
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Over the past 10 years, innovations in financial technology, increased regulation and changing generational expectations have challenged our understanding of the client-adviser relationship, and the wealth management industry as a whole.

The rapid growth and proliferation of financial services technology firms has caused a shift in the market by providing digital first, low-cost alternatives; opening wealth management to a broader base of retail, affluent and mass affluent customers.

While the wealth management debate has focused on digital adviser versus human adviser, a third option has emerged - the hybrid adviser model, which combines the best aspects of both traditional human advice and automated digital platforms. 

It is particularly exciting to see what incumbent firms and fintechs are doing to drive productivity, efficiency and robustness in the way advice is deliverable in the UK and Europe. 

Driven largely by regulators, but also by customers, the size, scale and scope of independent or holistic advice is on the rise, where end-investor outcomes become a primary focus. 

Firms that successfully employ the hybrid adviser model will be empowered to evolve their business, attract a new generation of customers, and serve them in a flexible and cost-effective way while realising greater agility in their business model, technology, and product offering. 

Genuine hybrid capability

There are hundreds of use cases for codification and algorithms to be applied to wealth management practices, be it client onboarding, risk assessment and smart profile matching, portfolio rebalancing and tax efficiency management, or reducing administrative functions.

The launch of the first AI-based adviser, Pefin, in the US, is perhaps the starting gun for wide-scale adoption of augmented intelligence to support wealth managers. 

On the other side of the pond, the common regulatory framework within Europe, given Mifid II rules on suitability definitions such as ‘packaged retail investment products’ and ‘personal recommendation’ and clarity on GDPR in terms of what constitutes personal data, allow for a stable base to build a foundational framework for algorithms for hybrid advice.

It is particularly exciting to see what incumbent firms and fintechs are doing to drive productivity, efficiency and robustness in the way advice is deliverable in the UK and Europe. 

Future of advice – all roads lead to hybrid 

Having worked with major retail advice participants globally, including wealth managers, insurers, asset managers and banks - we think that the hybrid model is the future format through which wealth management and advice will be delivered. 

The field of behavioural finance has already started to see mainstream applications of monitoring systems in countering biases in modelling, asset allocations and stock selection in asset management.

The overwhelming body of work done by risk profiling experts such as Oxford Risk, Finametrica, etc. has already laid bare the issues that exist in the poor ‘heuristic’ process of old wealth managers.

Implementing algorithms on various client, product, tax and regulation advice rules requires some serious number crunching, but this is now becoming possible on simple advice and investment procedures. 

From a propositional standpoint, it is important to configure a service model that maintains a laser sharp focus on end investor outcomes, measured by a combination of good advice procedures, greater transparency on fees and robust investment frameworks for generating performance.

The hybrid advice model is a key driver for designing this investor driven proposition across the wealth management and private banking business models.

If regulators across the globe continue to update regulations to foster the development of new advice models, as well as counter any potential ‘systematic’ fallouts or failures that may ensue from mass codifications of advice procedures, by 2025 the scene will be set for “stage left – entry of scalable advice checking and monitoring systems, managed by humans and machines, i.e. the full evolution of hybrid advice”.

Niral Parekh is head of retail wealth and asset management at Capco