By redirecting focus, wealth managers can successfully respond to challenges brought on by digital disruption, demographic shifts, and tighter regulation. Wealth managers have seen their fair share of ups and downs in recent years, and while challenges remain, advisers can drive business and growth by paying attention to demographic segmentation, how investors are using technology, and changes in regulation. In this episode of the McKinsey Podcast, Simon London first speaks with PriceMetrix chief customer officer Patrick Kennedy and McKinsey partner Jill Zucker about the North American wealth-management industry; he follows that with a discussion with senior partner Joe Ngai, on the industry in China. Simon London: Welcome to the McKinsey Podcast with me, Simon London. Today, we're going to be talking about financial advice and the people who provide it: financial advisers, or as they're sometimes known, wealth managers. Wealth management is a very big business--and also a business facing a number of challenges, such as new technology, changing demographics, and tighter regulation in a lot of countries. A little later, we're going to be getting a perspective on China. But we're going to start here in North America. For the first part of the conversation, I'm joined on the line by Jill Zucker, a McKinsey partner based in New York, and Patrick Kennedy, who's based in Toronto. Pat is chief customer officer for PriceMetrix, which provides data and analytics to the wealth-management industry.
Artificial intelligence (AI) has become a buzzword in the wealth-management industry lately -- and rightfully so. AI is already having an impact on this business and will likely lead to a paradigm shift in the way financial advice and investor communications are delivered to clients. AI differs greatly from automation systems that rely on rules-based programming to help automate certain aspects of wealth-management processes. That's because AI enables machines to learn, over time, how to do certain tasks the way humans can. AI is the broader concept of machines being able to carry out tasks in a way that we would consider "smart" and is often augmented with machine learning -- an application of AI and a branch of computer science that builds systems that can assimilate large volumes of data, then adapt output in response to growing, changing sets of data.
The 220 people who work for robo adviser Betterment LLC gather in the New York company's cafeteria twice a year to hear from their chief executive. There, Jon Stein, a 38-year-old former bank consultant, often has addressed one of their biggest beefs with him: Even after years of trying to rein in his own worst habits, Mr. Stein remained a micromanager. Mr. Stein sometimes was "sticking his nose in when he wasn't being productive," said Eli Broverman, who co-founded Betterment with Mr. Stein in 2008. "Maybe it's particularly tough for me because I built this company," Mr. Stein said. "The first lines of code were mine.
Morgan Stanley's recent decision to partner 16,000 financial advisers with algorithms that can identify trades and prod brokers to reach out to clients is evidence of yet another in-road being made by machines into human roles. If brokers embrace this mind-and-machine partnership though, the payoff is job security in an industry in which returns are paramount. The financial services industry is highly Darwinian in nature, with its culture of "survival of the best performers." Now, bringing artificial intelligence (AI) into the mix is turning the competition up a notch. The most vulnerable, ironically, could be the high-performing brokers who might be tempted to continue alone without algorithmic assistance.
A funny thing happened on the way to the robo-adviser revolution. Robo advisers--automated investment services that assess risk tolerance and manage a portfolio of exchange-traded funds at a low cost--are running into the realities of the highly competitive wealth-management market, including thin profit margins. So they are expanding in areas that didn't used to be associated with robo advisers, including managing "529" college-savings plans, administering 401(k) retirement accounts and adding account features that involve partnerships or co-branding deals. In effect, as traditional brokerage firms challenge the robos with their own lost-cost offerings, the robos are evolving. For individual investors, this evolution is blurring the line between the robo advisers and the more traditional investment firms such as Vanguard Group, Charles Schwab Corp. SCHW -0.74 % and Fidelity Investments, which are quickly adding automated services.