Humanizing Financial Advice with Fintech

A man shaking hands with an AI

Facing unprecedented industry disruption, Canadian financial institutions have been announcing plenty of organizational changes, research commitments, and digital-solution incubators—all aimed at keeping globally competitive. But if you look beyond the lofty statements, it is difficult to see tangible evidence that our finance sector is serious about keeping up with the industry-leading Jones driving the fintech revolution at dizzying paces in other parts of the world.

Of particular concern is the fact that Canada is falling behind other markets in the area of robo-advice solutions. A major reason for this appears to be fear of a Terminator scenario killing off industry jobs. And that’s unfortunate because Ivey Business School research suggests that a broader deployment of digital advice technology could be used to help clients, advisors, firms, and policymakers effect stronger outcomes for investors and savers alike.

Change always spawns trepidation. Nevertheless, in this case, failing to adapt to the forces of disruption will lead to, well, industry disruption. After all, while there is no question that technology will free advisors from a growing number of routine tasks (ranging from rebalancing a portfolio to determining an optimized asset mix), there is also no question that advisors will be able to use that time doing what robots can’t—developing human relationships.

As AI industry executive Steve Woods recently noted in a Globe and Mail commentary, the last islands of human employment in the Digital Age will be areas where we don’t desire robotic replacement. “Relationships, trust, guidance, caring, nurturing and social interaction are traits that these jobs will share. Many of the underlying tasks, behind the scenes, in those roles may be automated, but the relationship cannot be, and will not be.”

The irony in this proposed vision is the “back to the future” nature of the outlook. As the advisor/client relationship shifts away from the technical jargon, we are in effect making the relationship with clients more human and more service-oriented.

The future of the advice sector isn’t dominated by robots. It is a hybrid market in which human advisors use digital techniques to gather data and generate sound recommendations faster and more objectively than they do today. In other words, the challenge is not fending off extinction, it is shifting skills.

Future advisors will require stronger behavioural skills to “nudge” clients towards behaviours that provide a higher probability of meeting goals (as the role of advisor changes, advisor licensing and training will also need to change). The conclusion that financial advisors are moving to a “behavioural-based” world was laid out in Financial Advice in Canada: A Way Forward, an Ivey paper written in collaboration with Ivey’s Scotiabank Digital Banking Lab. The report examined the impact and future of robo-advisors. One of the most important conclusions was the affirmation that while certain tasks should be automated, there will always be room for human advisors.

To help frame what people do best and what we may wish to entrust to the machines, the authors of the above-mentioned paper discussed Daniel Kahneman’s description of System 1 and System 2 thinking. System 1 thinking is the automatic, intuitive mind that lets us navigate the world easily and successfully. It moves quickly and effortlessly between thoughts, can be highly visual, and is a great storyteller. It is also prone to bias, can sometimes make unwarranted leaps in logic, and struggles with complex options. System 2 is our controlled, deliberative, analytical mind. It works with data and logic to perform complicated actions. In some circumstances, System 2 is also used to manage System 1. The challenge with System 2 is that it requires sustained focus and effort—thereby limiting how often it can be used over the course of a day or week.

For financial advisors, System 1 allows them to interpret requests from clients, probe to ensure understanding, and simplify complex topics. System 2 is what they use for the heavy lifting—activities such as analysis, due diligence, exceptions, and complex calculations—all of which can be delegated to machines and automated (if they have the right data). The ideal scenario appears to be one where human advisors use digital techniques to assist with the System 2 processes. Research is beginning to show that the combination of a human with a digital assistant is more effective than either one by itself (See Chart 1). We might think of it as (system) 1 + (system) 2 = 4.

The goal is to use technology to augment what advisors can do in furtherance of stronger client outcomes. Some things people will always do better, such as soothing a panicked client’s nerves, or guiding them through the labyrinth of confusing investment choices. By providing machines with the right data, they can help advisors do a better job, just like medical technology helps surgeons in the operating room—without performing the operation itself. Financial technology can therefore free up human hours, so advisors can, for example, shift their focus to client relations or good old-fashioned customer service.


Examples of System 1/System 2 Activities in Financial Advice

Machines Do Well

(System 2)

Humans Do Well

(System 1)

Goals Empirical options Prioritization, balancing trade-offs, confirming values, clarifying aspirations
Savings Discipline Projections, scenarios, holistic view, visualizations Creating a call to action (fight inertia), helping with financial literacy
Asset Mix Risk required, risk capacity, optimization, rebalancing Confirming risk tolerance
Fees & Taxes Optimization Product due diligence, deep expertise,

handling exceptions

Catastrophic Risk Projections, scenarios Articulating product options, overcoming inertia

Financial advisors don’t operate in a vacuum. They rely on a web of enablers to help them service clients. In particular, they look to their firms, schools, regulators, and industry experts (such as fund company wholesalers) to ensure they are doing the right things, the right way. And with the industry about to change, the following five things need to happen:

  1. Schools need to shift their curriculums. Universities and colleges across Canada still have curriculums that are heavy on technical skills. In a quick survey of the electives offered by some of Canada’s top finance schools, approximately 95% of the curriculum is devoted to hard technical skills. Nobody is suggesting that we should abandon those skills, but a balance closer to 75% technical/25% behavioural would better prepare students—i.e., future advisors—for the new world. Given our universities and colleges’ penchant for moving carefully and thoughtfully, changes made today won’t manifest themselves in new advisors for six to eight years—which is about five years too late. The Canadian finance schools therefore need to make this an urgent priority.
  2. Regulators need to change their licensing and proficiency requirements. As with the schools, regulators and self-regulatory organizations still heavily favour hard technical skills in assessing advisor proficiency. For example, the Canadian Securities Course allocates approximately 85% of its curriculum to technical topics, while the Conduct and Practices Handbook course allocates only a 7% weighting to “client communication.” Because many of the technical skills are embedded in the new fintech, advisors are required to be proficient not at generating the math but at interpreting and explaining the outcomes from the math, in the context of their clients’ goals. The Ontario Securities Commission has taken a good first step on the issues in its Staff Notice 11-778. But this should be taken a step further and applied to advisor proficiencies across all the regulatory constituencies.
  3. Firms need to refine their recruiting and hiring criteria. Similar to the points made above, many firms today still recruit new advisors on the basis of their technical skills. Firms should not cast those criteria aside, but they should add a new set of criteria that demonstrates a recruit’s capacity to learn and deliver behavioural-based insights. We would normally suggest you have three to five years to figure this one out, but with the looming retirement of the baby-boomer advisors, it is probably closer to two years.
  4. Advisors will need to go back to school. The brave new world doesn’t just apply to the new recruits—existing advisors will need to extend their CE credits into the same behavioural-based insights—with help from the schools, the educational providers, the regulators, and their firms.
  5. Product providers (such as fund companies) will need to fine tune value propositions. If you examine the literature produced by the product manufacturers, it is sprinkled with technical jargon such as “volatility,” “beta,” “duration,” “time-weighted,” “PMIs,” and “NAVs.” But as we automate many of those calculations, the jargon disappears into the bowels of Amazon and Google’s servers, leaving the manufacturers with little to talk about and reducing their products to commodities. As a point of differentiation, the manufacturers may want to look at how they can support advisors in a digital, behaviour-centric world. A good starting point might be the use of Thaler and Sunstein’s “Choice Architecture” to help advisors better frame client decisions.

The irony in this proposed vision is the “back to the future” nature of the outlook. As the advisor/client relationship shifts away from the technical jargon, we are in effect making the relationship with clients more human and more service-oriented. As the machines step into more of the current activities, it gives advisors the opportunity to step back into the traditional definition of giving advice—“to give guidance about what you should do, or how you should act, in a particular situation.”

Maybe, for financial advisors and their clients, the future will look less like this:

The economic outlook has strengthened in recent months and fundamentals look strong, so we expect further gradual adjustments in the stance on monetary stimulus. We are encouraging an aggressive rotation in asset classes with an overweight to…

And more like this:

Good morning, Mr. Grace, how can I help you today?

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