The future of Robo Advisors and financial advice. [Final Chapter]

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Part 4: The Future Has Arrived for Financial Advice

Is it possible to get very high quality, tailored, fiduciary financial advice at a low cost? We know that Robos aren’t fiduciary, Humans are expensive and inconsistent, so what is the answer? It is not the hybrid solution- Robos hiring more human advisors. That results in a worst-of-both-worlds situation — with higher costs, a lack of scalability, and the often-overlooked issue that the model is predicated on the client knowing what the right questions are to ask. Because Robos are relying on the client having enough savvy to be able to come armed with the right questions, the analysis remains as generic and obtuse as in the original “Robo” model, and hence the advice is neither good nor fiduciary. Something fundamentally different is required to provide the tailored, fiduciary advice required at an affordable price. What is needed is something that can satisfy these three tests:

a. Frequency Test- an advisor must check every account at very regular intervals (continuously would be ideal!), and ensure that it is reviewing the advice that is being dispensed to clients against changes in their financial situation and market factors.

b. Replicability Test -A client should receive identical advice (output) for the same financial circumstances and economic data (inputs), from anyone at the same firm. If the advice is different, one client has not received fiduciary advice. Likewise, if clients with very different economic circumstances receive the same advice, one of them has not received fiduciary advice.

c. Audit Test- Every firm must have internal standards and checks to prove that the investment advice it provides is Fiduciary, including validation of assumptions and methodology used. This must be auditable and available to regulators upon request and include proving that there are no conflicts of interest.

How to get there? The solution is rooted in technology- a different and much more advanced technology than Robo advisors have developed. It is possible today to fully analyze and “learn” every dimension of a client’s financial life. In fact, with the right technology this can be done in much greater depth and consistency than any human advisor could ever achieve. Leveraging advances in Artificial Intelligence, the ability to create uniquely tailored solutions that are completely fiduciary, can be created. Clients- and regulators- will in the future be able to take comfort in knowing that clients are getting actual, good and fiduciary advice- which can be audited to be so. As in so many areas of our lives, technology can provide a new way of doing things that can resolve many of the challenges that we face. Like “precision agriculture” or “precision medicine” which both make use of AI to leapfrog efficiencies and reduce costs, “precision finance” is becoming a reality today.

Why is AI different? We see this clearly in the advances in transportation. A GPS can be very helpful in telling a driver how to get from point A to point B, but they do nothing to actually help with the driving- the managing of the challenges along the roadway. This is very different from a self-driving car, which using AI can not only get you from point A to point B but will drive the car, and in doing so evaluate traffic patterns, safety issues, speed and many other factors to help you arrive safely. It is this ability- to be able to synthesize millions of data points and complex inputs, that demonstrates the power of AI. The analogy holds in personal finance as well. Having tools that can identify not only where you want to be, but all of the complexity of how all of a person’s goals fit together and mesh with the markets, their current financial situation- literally millions of data points for each individual client– and come up with the optimal path forward- is what AI can do that neither humans nor Robos are able to achieve.

I joined Pefin as CEO because I know that many people do not have access to top quality (or in many cases any) financial advice. Financial illiteracy and poor financial decision making go hand in hand. Children don’t learn how to manage their finances in school, and typically parents pass down the information they have about finances to their kids- which is often not enough. There are some great human advisors out there- but they are expensive which rules out most people making use of them. For people who have a good handle on their finances, they often don’t have the time or resources to deeply analyze things like how changes in social security will impact their retirement, or how sending your child to college will impact your ability to buy a home, or the complexities of the tax code on their investment decisions-so this analysis remains undone. That is bad for the individual and bad for our society as a whole.

Pefin was founded to deliver sound, fiduciary financial advice to everyone. Unlike many Fintech companies today which start with a “cool” technology and try to figure out what problem to solve, Pefin was created specifically to help real people to get a handle on their finances today and in the future (see video here of Pefin founder Ramya Joseph explaining why she started the company). Because of the complexity of personal finances when considered against the backdrop of regulation, myriad economic variables, personal financial circumstances, and so much more, AI was the natural technology to use to attack the problem.

Today, for the first time, the general public can get fiduciary financial advice that is practical, easy to understand, highly tailored to their unique situation, and affordable. Personal finance has lagged behind transportation, medicine, communications and so many other industries from a technological perspective- but no longer. The future of financial advice is now here.



Jay Gopalakrishnan