Marrying automation and traditional banking

Tony Virdi, VP of Banking and Financial Services in the UK & Ireland, Cognizant 

The data created by software automation processes is the big reward for banks in the long-term

While the discussion around the benefits of automating jobs continues, numerous banks are already using software automation to improve operational processes and efficiency. The power of smart robots, which we at Cognizant refer to as intelligent process automation (IPA), may in fact enhance today’s knowledge-based jobs and even create entirely new job categories.  

With banks at the forefront of adopting software automation, one area that can especially benefit is wealth management, where providing prescient financial advice hinges on the ability to conduct real-time monitoring of risk. 

In recent years, a combination of factors including rapidly developing digital technologies as well as changing customer demographics, have led to a number of disruptive start-ups entering the wealth management arena. The rise of new financial vehicles, such as passive exchange traded funds, enable these start-ups to offer automated services that make customers’ asset allocation decisions easier while also lowering costs. 

Robotic wealth management start-ups use IPA to provide automatic asset allocation advice and have created a new business model that challenges traditional wealth managers. The competition from disruptive start-ups has led traditional banks to start looking at possibilities to adopt similar models and technologies to maintain their competitive edge, especially with regard to catering to Millennials.

When it comes to wealth advice, Millennials do not place as much emphasis on person-to-person interaction and are much more comfortable making choices and decisions regarding their asset allocations online. As a result, the competitive landscape for banks as traditional wealth managers is evolving rapidly and financial institutions are now closely monitoring robo-adviser start-ups and considering selective investments in similar digital capabilities.

Furthermore, globalisation has led to more variables for wealth managers to consider, requiring analysts to monitor an increasing number of factors that influence risk. These include global interest, currency exchange rates, election outcomes, policy decisions, geopolitical events and more. Wealth managers are turning to robots, using software automation for continuous monitoring of risk based on a variety of factors. This enables them to offer clients increased real-time intelligence as an added value service.

While revenue, speed, efficiency and savings clearly drive banks to adopt software automation processes, the data generated by those same processes is potentially a bigger reward for banks and financial institutions in the long-term. 

As disruptive robo-adviser start-ups transform the wealth management industry, adopting similar software automation services is quickly becoming a necessity for traditional banks. 

Nonetheless, in wealth management as in nearly every other industry, there are some tasks that robots just cannot do and that is where a blended model of automation augmenting talented people can provide extraordinary outcomes.   

Sam Swift, Data Scientist, Betterment.com 

By operating at a larger scale, digital advisers can help improve investor behaviour

Robo-advisers are not creating new investing strategies, trading faster, or promising alpha. You might even argue that digital investment advisers are not offering anything more than traditional advisers have been providing for years. 

But they are creating low-cost, personalised investment advice and automated portfolio management to mimic smarter investor behavior at scale. 

It would take thousands of man-hours from hundreds of human advisers to provide what a robo can provide in minutes to potentially millions of people. 

Digital wealth management combines data analytics with advances in technology to create highly customised advice and advanced management tools that can be offered to a much wider audience because of the drastically lower marginal costs.  

Critically, by operating at that larger scale, digital advisers now have an unprecedented opportunity in the wealth management industry to systematically observe and help improve investor behaviour.  

What does this look like in practice? Take Betterment’s new RetireGuide, which shows whether your clients are on track for a comfortable retirement and calculates how much they will need. It epitomises how well-integrated data and algorithms work together to create customised advice. While it took months to develop the algorithm and structure the incoming data from multiple sources, the average customer spends less than 10 minutes building a comprehensive retirement plan. 

Of course, once you create the goals and deposit funds for your clients, it is the automated investing service’s job to help maximise take-home returns. 

Many of the routine strategies used by traditional investment advisers are clear value propositions, but they are labour intensive to execute manually. 

Tax loss harvesting is a perfect example. What was traditionally an end-of-year process once reserved mainly for high net worth clients can now be constantly monitored and executed for every client in real time. The data and computational requirements are not trivial – but the technology scales very efficiently so that hundreds of thousands of customers can be supported at once by a small team.

Even routine cash flows can benefit from automated attention to the details. Each dollar of cash flow in or out of the account is used to reduce allocation drift and tax lots chosen to help minimise tax costs, for example. The result is that every investor, no matter their balance, has access to some of the most sophisticated portfolio management strategies available.

By implementing extremely low marginal cost solutions for advice and investment management, automated investing enables you to profitably offer services to a wider spectrum of clients than ever before. This is central to the ‘robo’ business model and the essence of democratising investing. From a data perspective, it is a truly new opportunity to advance our understanding of investor behaviour and improve  advice.  

Traditional advisers have always needed to talk reason into their clients during trying markets and have gauged the success of different approaches through experience and discussions with colleagues. In the digital space, we can measure the impact of each customer’s behaviour down to the basis point, every quarter. 

Some of our research at Betterment measures the impact of allocation changes on returns. The findings revealed that our more active customers appeared to make allocation changes in reaction to the market, and are likely to underperform as a result. More than just trend spotting, the research was able to quantify the impact and set a benchmark for improvement. 

Using smarter technology allows us to run randomised experiments testing different hypotheses about advice and behavioral improvements and keep the features proven to be effective. By combining financial advisory services with automation, advisers can bring new value to the advisory relationship and continue to improve real investor outcomes.  

Dirk Klee, Chief Operating Officer for UBS Wealth Management 

Wealth managers increasingly understand how to use data to improve the client experience

People used to say there were three people who truly knew them – their banker, doctor and wife. If your neighbours visited the doctor and you arrived with the same symptoms, he would see the pattern and diagnose you quickly. 

Wealth managers need to have that same ability to serve clients by spotting patterns and providing tailored solutions. Our mission is to keep the traditional personal service level, retain the trust of our clients, and to enrich their experience using big data, machine learning, and artificial intelligence.

Today, each of us are known best by the Amazons and Netflixes of the world. They track our behaviour, everything we like and dislike, and tailor their recommendations and enhance the user experience. With every click, tap and scroll, they build a more complete picture of who we are, and gain a better sense of what we want. Using their global network and data, Netflix can predict that after watching the original Star Trek, I’m probably interested in the original Mission: Impossible. Using data analytics, the client experience is improved.

 Like the big digital companies, wealth managers are increasingly understanding the importance of data to better tailor advice. As big data becomes a larger part of what the industry does, client expectations demand the insights and advice they are offered are tailored to their preferences. They will expect their wealth manager to know what products they like, what geographies they are allergic to and what industries they have faith in. 

With the capabilities financial institutions have, clients do not want to have to repeat themselves at every meeting; they want their wealth management firm to know them and the markets – whether they walk into a branch in Zurich or Hong Kong. We want to use technology to improve the client experience, balanced with our commitment to confidentiality.

 Last year, I was in Singapore and saw some of the start-ups that will help decide the wealth management industry’s winners of the future. More than 80 teams competed in UBS’ Innovation Challenge. Their brief was clear: “Extract the information most relevant to an individual client from an explosion of data and deliver this tailored content to clients’ mobile phones, iPads and other digital devices.”

 The winning team created a cloud-based computing engine, driven by AI, which analyses openly available, unstructured data, to find all possible combinations of the preferences and interests of Singapore’s six million inhabitants, based on a list of 130,000 everyday activities. The technology allows us to build a profile of a potential client showing likely matches with various types of wealth management products, without ever identifying individuals.

Yet at the same time banks must also focus on ensuring the highest levels of security and data protection. Clients must trust us with their data if we are to use it to enhance engagement. 

Other industries have already been down this road. Those who embraced technology have thrived, those that didn’t followed the Blockbusters and Kodaks of this world. For UBS, this is a marathon, not a sprint, and we also need to embrace a culture of innovation. We need to keep our eyes open and be responsive to what our clients expect.