Datos expects AI will be an increasingly transformative force in wealth management this year.

Late last year, Datos reported that more than a third (36.7%) of firms plan to spend more than $50 million on generative AI over the next couple of years. Datos Strategic Advisor Wally Okby said approximately 32% of those have already begun exploring options, and nearly half are currently testing one or more use cases.

“A couple of areas that we're paying very close attention to this year concerning the integration of AI and wealth management are hyper automation, and hyper personalization with hyper automation,” said Okby. “What I'm talking about here is the end-to-end automation of business processes that were once manual or semi-automatic. This translates to AI-driven tools essentially taking over tasks ranging from data analysis and risk assessment to portfolio selection, portfolio rebalancing and client communication.”

“We firmly believe that we're about to witness a broad AI driven transformation of wealth management,” he said. “With regulation, new capabilities like predictive analytics, personalized recommendations and conversational AI will eventually find their way into the hearts and minds of wealth managers and financial advisors across the world. And, by so doing, transform the workforce.”

The success of new technology tools, and AI in particular, relies on the integrity and integration of quality data, according to Okby. He noted that a Datos report published this year highlights “the urgent need for financial institutions to get their data clean and organized to take just the initial steps to develop Gen AI use cases.”

The AI black box problem creates a particular sense of urgency in the wealth management space, he said.

“Ensuring transparency of how AI algorithms actually arrive at conclusions or recommendations is critical,” Okby explained. “Advisors and clients have to be able to understand and trust AI driven decisions, which requires a high level of explainability in the AI systems. Clear explanations of how data is used and how decisions are made can increase trust and acceptance. On the other side, vague explanations will certainly lead to unfavorable results.”

Things to consider, he said, are the ability to integrate with existing systems and databases, whether the tools are scalable enough to handle varying amounts of client data while adapting to changing needs and market conditions, and the need for comprehensive data security measures.

“Before seriously addressing AI, data management needs to improve dramatically. Massive amounts of missing or incorrect info and data lakes have to be corrected and cleaned quickly. Relevant private client data may be missing; it may be inconsistent, mangled, or just unorganized from past overhauls, or locked into legacy systems; and they may be biased. Take this all in combination and it’s a rather unattractive starting point for any meaningful Gen AI project.”

Okby cited research from Nobel laureate Daniel Kahneman that found 90% of financial decisions are based on emotion rather than logic, highlighting the importance of client reporting as a consistent point of contact.

“So, it’s really no surprise to note that the market for client reporting and portfolio management systems is robust and growing,” he said. Datos predicts the market will grow by 20% over last year to around $1.7 billion, owing largely to the growing number of advisors leaving wirehouses to launch independent practices.

“We expect that, at the minimum, pressure to develop a good coherent game plan to integrate Gen AI into existing enterprise software will in fact force wealth managers’ hands to escalate their data management action plans and protocols,” Okby said. “Furthermore, on the regulatory side we have the SEC marketing rule, accounting and transparency laws, data breach notification laws, data protection laws, form CRS and so forth. All these will work their way deeper and faster into the advisor workflow.”

Datos believes that software-as-a-service applications will be able to “meet the complex demands required to enable strong client outcomes.”

“This is basically due to the fact that today it’s feasible to make a heavy data play, which would have been absolutely cost-prohibitive a few years ago,” Okby explained.  “Comprehensive solutions are now transforming the client experience and, as a result, the market is flooded with options. This year, we expect to support wealth management firms that seek advanced functional differentiators or purchasing factors. It’s going to be an exciting year on that front.”

Likely due to the challenges currently presented by integration, advisors have been slow to adopt some of the more promising technologies on the market. And, as Datos says, cutting edge tech “means nothing without user adoption,” regardless of how well it works.

“We’re still seeing that advisors are incredibly frustrated and angry even with their technology solutions, and it's preventing them from really optimizing those,” said Datos Strategic Advisor Lisa Asher. She attributed this to the rapidly proliferating number of technology solutions and resulting friction every time a new one is added. 

“This has long been a challenge,” said Asher. “We've seen a lot of movement on integration efforts from major players, a lot of consolidation on capabilities, but there's still that frustration and lack of adoption. So, I think this is going to become more a question of, ‘OK, we know this problem, how do we start to really look into solving that?”

Whether it's portfolio management, communications, holistic planning or access to non-traditional services, the trend of the last few years toward offering personalized services to more clients is expected to reach “a tipping point this year,” said Okby, with broad industry adoption.

Datos believes this will be driven by “the increasing ubiquity of Gen AI-powered solutions” and firms focused on reaching younger and more diverse clients, “who will demand these types of services.”

According to a Datos survey of 60 U.S.-based home offices, 58% said at least half their clients are engaging in impact investing or including alternative asset classes in their portfolios, with some allocating at much as 25%.

“While direct indexing has experienced a great deal of industry hype and holds the promise of higher net returns through active tax management, it appears for now at least that adoption has lagged behind both impact investing and the spread of alternative assets,” Okby said. “So, we predict that future growth in direct indexing, outside of the robo-advisory market, will be directly tied to the outcome of the election cycle at the end of the year and its impact on expectations around changes to the tax code.”

Other areas he said are ripe for personalization include content targeting and distribution, as well as non-traditional concierge services, as advisors seek to set themselves apart from the crowd.

A fifth of advisors expect to retire from the industry over the next five years, according to data from J.D. Power cited by Datos Strategic Advisor Bill Whitt.

“While the smartest players in the industry have long maintained robust training programs and are committed to developing their own classes of new advisors, numerous broker/dealers and mid-size banks in recent years have actually reduced spend on training,” he said. “Many independent broker/dealers and RIAs have done a little at all to prepare for the wave of advisor retirements they face in the coming decades.”

While there is no silver bullet, Whitt recommended a range of strategies, including making full use of automation and technology tools to lighten workloads, more incentivization of aging advisors to take on junior partners, and more investments in training and mentoring programs.

“There’s a big opportunity here,” he said. “The associates currently working with advisors—these associates, in many cases, are ideal candidates to be next-gen advisors but too many wealth managers give them short shrift and do an inadequate job establishing a clear career path for them with appropriate mentoring.”

Neglecting to implement any or all of the above strategies will ultimately end in “a game of musical chairs in which there is no real win,” he said.

A 2023 survey of advisors across North America and the U.K. found they’re prioritizing more than one growth strategy, but the “standout” was a game plan to leverage robo-advisory tools and self-directed investing services to attract younger clients, according to Asher.

She said they’re starting to see movement away from robo-services in the wake of JP Morgan’s announcement, late last year, that its robo-advisor You Invest would be discontinued. It would be wiser to focus on the needs of younger generations and the specific services they desire, she suggested.

According to Asher, Generation Z wants improved credit scores and the ability to afford a home.

“We need to provide more than just investing services to this demographic,” she said. “They're looking at things like managing their budget, managing the liability side of their balance sheet with student loans. They're looking to build assets. And so, when we think about the idea of targeting younger investors for our growth strategy, we have to expand more beyond the robo-service offering.

In “simplest terms,” Trout defines holistic wealth management as “management and advisory on the client's entire balance sheet; this would include investing cashflow or day-to-day expenses, saving, borrowing protection or insurance and other functions.”

Holistic advice could extend much farther, depending on client needs and advisor competence, Trout noted. “Regardless,” he said, “wealth managers and the vendors who’ve served them have spent the last two years constructing many of the capabilities necessary to realize the concept of holistic financial advice.”

Datos expects to see more progress in 2024, resulting from improved API connectivity, the addition of advanced capabilities to financial planning software and efforts to reach new client segments and demographics.

“Providing access to a broad range of products and services is important and it offers the opportunity to engage both the current client base and next-generation clients,” he concluded.

Asher identified three sub-trends in the RIA space that present advisors with challenges, most of which may be met with the correct application of emerging technologies.

In the area of talent management, an expected wave of industry retirements has made employee retention more important than ever, while jumping ship has gotten easier. Asher suggested utilizing AI to facilitate training and upward mobility, improve workflows and automate time-consuming tasks.

In the realm of mergers and acquisitions, Asher said technology providers are starting to make resources available to help firms understand the market, improve valuations and manage complicated transitions.

Finally, every four years the upcoming U.S. presidential election offers advisors an opportunity to gain ground with clients who are concerned about the impact it may have on their finances.

“We are going into a major election year and this is always coming up as a conversation with clients,” said Asher. “[They] want to work with advisors that get them, that understand their values, and they ask questions that come up that pertain to politics.”

She acknowledged such conversations can be difficult, especially when client and advisor have differing political views, but said it’s better to “lean into having these conversations,” and that she expects to see plenty of helpful content and resources churned out in response to industry demand.

The rise in popularity of index-based mutual funds and ETFs, along with lower commissions driven by online trading and large retail brokerages, have combined to dramatically reduce revenue streams for many asset managers.

“Many wealth managers have been slow to recognize the problems or to take action like the proverbial frog in a pot that is being gradually brought to boil,” said Whitt. “Wealth managers will need to act with more urgency and take steps to diversify their revenue stream.”

Asset-based lending is “low-hanging fruit,” and adding new sales channels or client segments or integrating complimentary financial products such as insurance could all be effective ways to augment dwindling revenues in the near term, according to Whitt. But he said long-term survival will depend on the adoption of new revenue models that unbundle advisory fees from asset management.

“This, in turn, will lead clients to give greater scrutiny to the advice they receive from their advisor,” he said. “To demonstrate that to clients, wealth managers will need to adopt a holistic advisory model in which advisors help clients manage their entire balance sheet.

“And, equally important, serve as coaches or even psychologists who help clients make possible decisions about their finances, about how to pursue their most important goals. This is perhaps the biggest challenge wealth managers will face in coming years.”