How Technology Is Changing Financial Advice (2024)

With mobile banking and robo-advisors in place for some time, newer technologies are still reshaping the financial services landscape. But what impact will these seismic changes have on the industry, and where will the financial world go next?Below, we discuss these changes with Dan Egan, managing director of behavioral finance and investing at Betterment, first taking you through some of the significant tech changes in the industry before previewing what's coming next.

In recent years, financial service companies have invested ample revenue to create and expand their digital offerings. There have also been major changes in how financial services are delivered and experienced, driven by technological advances. From the integration of artificial intelligence (AI) and machine learning to the rise of blockchain and cryptocurrency, these changes are not just reshaping financial services but are also paving the way for entirely new financial ecosystems.

Understanding Technological Change in Financial Advising

The landscape of financial advising has been undergoing a profound transformation, driven by rapid technological advances, calls for lowering barriers to finance for many communities, and demographic changes. These are not only reshaping financial advisors’ tools and strategies but redefining the relationship between advisors and their clients. Here are some of the technological trends widely discussed in the industry:

• Accessibility and Analytics Through Digital Platforms: The emergence of online platforms and mobile apps has given investors unprecedented access to their financial information and advisors. Few investors now passively hand off their portfolios only to check in occasionally. This ease of access thus means more frequent and flexible interactions between advisors and clients. Investors can now receive up-to-the-minute information on their investments, helping to provide more informed and timelier discussions with their advisors.
• AI and Machine Learning: Besides the work of robo-advising and algorithmic and high-frequency trading, AI’s use for financial advising is still somewhat prospective. These technologies can analyze vast amounts of data to identify trends, predict market movements, and provide tailored advice. They also improve risk assessment and portfolio management, allowing advisors to use more responsive strategies for individual clients. More comprehensive automated investing systems may soon automatically adjust portfolios based on market changes or life events, ensuring that investment strategies stay in line with the needs of each client.
• Cryptocurrency and Blockchain: The emergence of cryptocurrency and blockchain technology has introduced a new asset class to the investment landscape. As interest in cryptocurrencies has grown, investors increasingly look to their advisors for education and guidance on these assets, which in turn has advisors seeking out authoritative sources to do due diligence in this area. While crypto has been a newer avenue for portfolio diversification, advisors also play a crucial role in updating their clients on the regulatory environment for these currencies and managing the risk and volatility that come with them.
• Collaborative Financial Planning Tools: Cloud-based financial planning tools enable a more collaborative financial management approach. Both investors and advisors can view and adjust financial plans in real-time, leading to a more interactive and engaged planning process.
• Cybersecurity and Data Privacy: As more investor data is stored and processed digitally, cybersecurity and data privacy are now a common concern among retail investors. Advisors must ensure robust security measures are in place, which is crucial for maintaining investor trust and confidence.
• DYI Investing: Investopedia itself is an example of a significant shift in recent decades. No longer is financial knowledge walled off in libraries and university courses. Gone are the simplistic pop investing books of the ’80s and ’90s. Ok, those still exist, but there are far more choices for the mass consumer now. The availability of online educational tools and resources means investors are more knowledgeable and engaged. This can lead to more productive conversations with advisors, as clients are better equipped to understand and discuss their financial choices. This can also mean that, like doctors facing a barrage of questions about advertised medications patients don’t need, advisors are part of a filtering process for investment strategies found online by clients.
• Gamification: One of the results of a generation of work in behavioral finance has been the use of nudges and game-design elements in non-video game contexts. Financial advising has taken up interactive tools and rewards to engage clients, making financial planning more approachable and user-friendly, especially for younger investors.
• Goal-Based Investing: While not tech-based per se, it’s influenced how apps and other interfaces for retail investors are designed. The focus in financial advising has been shifting over the last 30 years toward goal-based investing. This approach tailors financial strategies to meet specific life goals, such as retirement, buying a home, or funding a child’s education. The changes in technology enable advisors to tailor their approaches with more precise tracking and adjustments for clients to ensure their efforts align with their client’s goals.
• Open Banking: This is another mostly prospective technology. Banks will provide third-party financial service providers access to consumer banking transactions through apps and online platforms, usually tech startups and online financial service platforms. These services can analyze a customer’s account details and transaction history and match them with participating services from financial service companies.
• RegTech for Compliance: Regulatory technology helps advisors learn about compliance issues and follow financial regulations more easily. This can also help ensure that investors are protected and that the advice they receive follows the latest standards.
• Robo-Advisors: These automated platforms use algorithms to provide investment advice, usually cheaper than traditional advisors. They are particularly appealing to tech-savvy investors or those looking to cut costs. While their appearance has struck fear in many financial advisors, the Bureau of Labor Statistics notes that over the next decade, employment in the industry should grow by 12%, higher than most other sectors, despite their wider usage. This means that robo-advising could increase accessibility, not just kneecap the ability of those in the industry to sustain a living.
• Social Media: These platforms, which include YouTube and TikTok, have become essential for investor relations and education. Advisors can use these platforms to market their practices, share their insights, offer educational content, and keep up with clients.

Where others see significant changes, Egan, whose research keeps him up to date with the latest industry practices, is less likely to wax on about creative destruction in the sector. He says that many new offerings will be relatively marginal to most investors’ concerns, and we shouldn’t lose sight of what will remain the same for advisors.

“There are some nice but generally niche things that consumers can look forward to,” Egan says, noting that some consumer-focused technologies should improve privacy and security. But overall, he’s less sure that a dramatic break is in the offing. “It’s great, and it makes you more secure,” he says about the improved security protocols, “but it’s not a revolution. What’s going on is that there is a minor reshuffling of who sits where on the deck, but we’re all still on the same boat with the same underlying tech.”

Technological and Demographic Change

Part of the reason recent technological changes are so significant for financial advisors is because of demographic change. Let’s look at millennials as an example of how demography and technological change often evolve together.

The millennial generation is often defined by its fluency in technology and how their relationship with other products and services, like listening to music or watching movies, has affected how they think about their relationship with a financial advisor. Researchers who study millennials and finance note some other important distinctions about the demographic:

• They often send money as part of their social networking, such as on Venmo.
• Millennials are moving money to more places faster. They have grown up with smartphones, giving them immediate access to credit and their accounts, no matter the time of day.
• To do so, they may invest earlier than previous cohorts, using robo-advisors.
• Millennials bank without a bank. Many millennials may have never met a bank employee in person or seen them after the day they set up their accounts. Personal interactions for banking services are thus foreign to them as eight-track tapes were to Gen Xers.
• Millennials also want to do more than just put their money into profitable investments. Experts suggest they want their funds to help with social causes and for their investments to have a broader impact.

The recent Investopedia Affluent Millennials Survey sheds more light on essential aspects of the wealthier part of this demographic’s attitudes toward finance and technology.

Like previous generations, affluent millennials planning their financial future often see contributing to their retirement account as crucial, even though many are not yet doing so. More (65%) report having a greater trust in financial advisors than Gen Xers (58%). While media portrayals might lead some to believe they are as likely to get investment ideas from random TikTok performers, millennials demonstrate savvy in this area, with far fewer saying they would trust videos (27%) than advisors and other experts for financial advice.

The survey reveals that despite the many investment platforms and apps, millennials are not as inclined to DIY their finances like their interior design. Millennials who consider themselves knowledgeable about investing are twice as likely to have a financial advisor. Their use of technology, it seems, is to help them find personalized strategies, the survey reports. They still seek out experts who have a stake in their success.

Changing demographics are affecting how financial advisors engage with older clients as well. Egan notes that there’s more diversity among those of parenting age, with some planning financially for families in their 20s, with others in their 30s or 40s. “One of the interesting demographic changes is that more people are having kids at a later age, but they’re also more spread out,” Egan says.

Other demographic shifts are affecting retirement savings and future wealth transfers. Egan says advisors need to be able to speak to those shifts in a personalized way for each client. For example, as life expectancy increases, he says, advisors need to prepare their clients to leave a legacy that may not be exactly what they imagine.

“As life expectancy goes up, you’re planning for a 25-year retirement with some pretty hefty health expenses at the end of it,” he says. “So a big part of the wealth transfer might be from retirees to healthcare providers.”

Technological Change and the Advisor-Client Relationship

The intersection of technological change and evolving client expectations is driving significant shifts in the financial industry. From the way financial advice is delivered to how investment strategies are developed and executed, technology plays a pivotal role in redefining these interactions.

Changes in fees

Technological and other changes have meant that there has been a progressive shift from commissions to fee-based models for financial advisors. Those who bill this way charge a percentage of the assets under management, a flat fee, or an hourly rate rather than earning commissions on products they sell.

Some advisors have adopted performance-based fee structures, particularly in the high-net-worth segment. These fees depend on achieving specific benchmarks or returns, which should align the advisor’s compensation with the client’s investment success. Other advisors are embracing a subscription-based model, charging a monthly or annual fee for ongoing advice and services. This can attract younger clients accustomed to subscription services in other areas of their lives. These changes in how clients pay their financial advisors will invariably affect how they relate to them.

Lower costs and more personalized service

While researchers, regulators, and reporters who cover the industry seem to focus on AI and the supposedly sudden changes coming to the industry, others see these developments as part of a more extended historical trajectory in the industry. Egan, for example, says that the advisor-client relationship will remain central even as costs come down.

“It’s going to seem like a lot of progress because it’s mostly about infrastructure changes and costs coming down,” says Egan. “That trend has been going on for a long time, and consumers are going to continue to see it in terms of zero-cost brokerages, no trade commissions, and zero-cost investing.”

The upshot, he says, is that the reduced costs for clients are here to stay. This means advisors need to rethink their relationship with their clients. “That’s one of the things that can shape the marketplace because it shifts the balance of power toward the consumer,” Egan says.

While this means greater competition—even competition from nonhuman advising systems—this can offer prospects for providing a more efficient and comprehensive array of services since automated processes can handle some of the work for advisors. In short, he says, this could allow advisors to build a more holistic relationship with their clients and emphasize long-term planning for all phases of a financial life.

Trust will remain central

While new technologies are enabling investors to become more engaged in the day-to-day performance of their portfolios, they know more about and want more premium products than they did previously, Egan says. But they are also cautious about their security and privacy.

“We’re starting to hit a point where people want self-defense mechanisms,” Egan says, emphasizing that control over data and user experience are far more critical now for investors. “I think we’re going to start seeing people saying, ‘I want to have more control because I value my attention more.’”

Egan likens the trend to consumers paying premium prices for personalized experiences on platforms like Netflix and Spotify.He points out that investor education and trust are crucial in consumer engagement with financial services. “The industry as a whole needs to move back to a place where it’s trusted and where clients know that you’re sitting on the same side of the table as them,” he says.

The Future of Financial Advice

So, what will advisory services look like as the field is digitized and consumers are more informed? Egan thinks that while there will be more robots, financial advice will become far less robotic. “We're going to see a nice renaissance that's far less about investments and more about what’s important in their lives,” Egan says.

While many advisors have always taken a holistic approach to their client relationships, newer technologies will allow them to make this more central to their work. Computerized systems can take care of more technical aspects of the job that once took up large parts of an advisor's day. Instead of calculating risk and rates of return on investments, advisors can focus on big-picture questions, Egan says. What’s the best way to divide up wealth between heirs? Does a client have enough life insurance? Where should they live in retirement to maximize their savings?

"The really good financial planners are the ones who are good at having those tough conversations directly with their clients,” Egan says before suggesting that being vulnerable and understanding the client's nonfinancial lives will be even more important for advisors' success going forward.

“By taking away the least human parts of financial planning — the math, the investment management, and the rebalancing," he says, "we’re allowing ourselves to become more human and spending more time having the tough conversations that only we can answer.”

The Bottom Line

The financial services industry is transforming significantly, driven by technological advances and changing client expectations. These changes are not just reshaping the landscape of financial services but are also potentially creating new financial systems. Financial institutions invest heavily in digital improvements to meet market demands, increase efficiency, and adapt to advisors' and clients' evolving relationships with technology.

Key technological trends, such as the rise of AI and machine learning, the integration of blockchain and cryptocurrency, and the adoption of collaborative financial planning tools, could make financial services more accessible and personalized and help investors to be more informed and engaged. However, this is still to be seen. The role of advisors could evolve from traditional investment management to a more holistic approach, focusing on broader life goals and personal circ*mstances.