Could predictive analytics Drastically Change the role of traditional financial advisers?

Data analysis has revolutionised financial services, but human relationships based on trust remain as important as ever.

When explaining goals-based financial planning to clients, advisers can turn to a distinctively modern metaphor: Google Maps.

The days of poring over dog-eared maps or scribbled directions are long gone. Why bother when you can simply ask the internet to plot the quickest way for you?

Clever Google (or Alexa, Cortana – whichever version you prefer) takes your point of origin, destination and a combination of data and algorithms to establish the best route. If traffic jams or bottlenecks crop up en route, it will prompt you with an alternative.

This is predictive analytics in action. And with technology and the data it harvests growing exponentially, financial advisers can make forecasts with an ever-increasing level of accuracy.

“The Google Maps analogy is very apt,” says Wade Matterson, practice leader at Milliman in Australia. “In wealth management, the adviser’s job is to get you from point A to point B, but instead of kilometres we are dealing in years and decades. We look at individuals and their families, establish where they are today financially, then try to extrapolate what they want out of life.”

Looking down the line

Ten years on from the global financial crisis, there is a different attitude to risk. Rather than simply measuring success against market benchmarks, clients are increasingly demanding an approach that takes into account their individual needs, attitudes and goals.

Says Matterson: “Traditionally, financial advisers would try to understand where your point B is – where you want to get to – by asking questions. The challenge is that you’re looking far into the future. Busy people can find it hard enough to say with any certainty where they will be in a fortnight, let alone two decades.

“What’s changed is the accessibility of data. Using predictive analytics, I can look, with a considerable degree of accuracy, at what other people like you – in terms of location, affluence and other key factors – are doing with their money five, ten or 20 years down the line.

I can look at what people like you – in terms of location, affluence and other key factors – are doing with their money five, ten or 20 years down the line.

“So rather than a financial adviser sticking his finger in the air and trying to figure out which way the wind is blowing, based on their experience – which is a very small sample size – we can now look at millions of banking transactional records for real people and see what they do with their money.”

This development has led to a step change in the industry over the past five to ten years. One which, with open banking and other regulatory change in the pipeline, is only going to accelerate as data becomes even more accessible going forward.

Understanding AI’s limits

The challenge lies in persuading clients to trust the technology. Scare stories about the inexorable rise of Artificial Intelligence, with technology supplanting millions of jobs in the process, are legion.

Just using tech has its limits because we are talking to people with emotions, not computers with hard drives.

If financial advisers are going to promote algorithms as the solution to retirement planning, clients are justified in asking precisely who is responsible for the algorithm, and what it does.

As Matterson puts it: “Just using tech is intimidating and has its limits because we are talking to people with emotions, not computers with hard drives.”

Pat Saporito, author of Applied Insurance Analytics and an Advisory Board Member of the Analytics MA programme at the Stevens Institute of Technology, says: “Real life experience and empathy cannot be replaced by an algorithm. No matter how advanced machine learning and AI become, they can’t take into consideration the human aspect.

“You have to remember that the digital economy, which is just the latest wave of technical evolution, creates both personal risk and opportunities. In this climate, financial advisers should be looking beyond asset management and taking a more holistic approach.

It’s not man or machine. It’s man plus machine.

“Health has a huge impact on your earning potential, for example, so that is just as important as any of the other factors, if not more. The job market is more volatile than ever, so predicting future earnings is incredibly complex.

“In the age of predictive analytics, financial advisers are having to evolve. They should look at an individual’s full life span, from cradle to grave.”

A framework for the future

As advisers leverage the power of algorithms to enhance their advice, trust in the analysis they use will be vital. When it comes to financial planning software, this will lead to new approaches that seek to bring together specialist skillsets under a “best of breed” model.

“In the future, financial planning software will provide advisers quick access to high-quality actuarial analysis and investment forecasts from credible firms like Milliman,” says Matterson. “This could allow them to offer robust advice and analysis while devoting more energy to the complex tasks of coaching and empathy.”

Used properly, predictive analytics create a richer conversation between adviser and client, enhancing trust and enabling them to be more forward-looking. Clients are becoming more inclined to question the evidential base for financial advice, welcoming the wealth of supporting data now available.

The net result is that the old advice frameworks – commission-led, driven by selling products – are rapidly crumbling away. Rather than being replaced, however, they are used to create added value. As Matterson puts it: “It’s not man or machine. It’s man plus machine.” Predictive analytics can help financial advisers help their clients to plan with a fuller picture of all their future possibilities.


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