Automated Insights, Inc.

NLG: The Secret Weapon in the War Between Financial Managers and Robo-Advisors

Posted by Joe Procopio on Jul 5, 2017

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When the experts discuss the merits of robo-advisors over financial managers, they'll be quick to point out that the robo-advisor, a form of low-AI personal financial portfolio management, is popular with new and younger investors, and is gaining ground with lower-net-worth investors.

They'll point to fees as the culprit. In other words, the robo-advisor is far less expensive, charging less than 1% of the value of one's portfolio, as opposed to the traditional 1% to 3% charged by most professional financial managers.

They’ll also jump on the shift in user experience expectations from boomers to millennials. Younger people tend to do everything digitally and quickly, with as little personal contact as necessary. That's how they shop, get themselves from place to place, order food, find lodging, and so on. On-demand, push-button, machine-recommended-options are just the way the kids do things these days.

As a counter-argument, the professional managers offer a more -- pun intended -- human touch. Their experience, their ability to research, and the option to call or email or visit the local branch are all selling points.

What the professional financial managers tend to miss is that the human touch, so often lauded as their unique differentiator, isn't as human as it used to be. If professional managers want to reach and accommodate this new investor class, they need to be able to scale the human touch.

Humans Don’t Scale

Chances are, unless an investor has a long-time personal relationship with their professional financial manager and, let's face it, unless they're of relatively high net worth, that human touchpoint with the firm comes in the form of a quarterly statement, an infographic-rich summary delivered via email or snail mail. For more information, investors are sent to the firm's website, where they can slice and dice their own data to their heart's content.

The crux of the financial manager vs. robo-advisor argument is that for most investors, they both pretty much do the same thing. Maybe the professional is hand-picking investments and curating options based on thorough research of who the investor is, where they stand, and what they want out of life. But how does this happen one-to-one when a financial manager takes on dozens, hundreds, or thousands of customers?

It doesn't. What happens is the professional managers just do what the robots do, quarterly updates that summarize the moving of auto-debited money into mutual funds with theses that loosely match some meta-demographical information about the investor's type or risk tolerance.

For the high-net-worth class, a relatively low population of investors, the robo-advisors will never be a threat to the professional financial managers. The driving force in relinquishing the reigns of investment strategy for this class is trust. And machines, as good as they are, will never be bequeathed that kind of trust.

For the latter, the 99% of investors, if you will, the difference between professional managers and robo-advisors comes down to personalization.

But personalization doesn't scale.

Until now.

What Natural Language Generation Means to Financial Managers

If you're a financial manager working with an investor class primarily made up of younger, lower-net-worth investors, Natural Language Generation (NLG) is the secret weapon in your battle against the robo-advisors. Being able to provide a personal touch at scale is going to result in attracting and retaining more customers. And whether you're an independent operator or a massive mutual fund firm, the quality of your NLG will soon be the differentiator between you and the next firm.

The front lines of this war are all about communication.

The Basics: Telling Your Customer's Financial Story

If an investor hires a professional financial manager, or is going to hire one, it's because they don't have the time or the confidence to manage their own portfolio. But they can look at their own investments and size up how those investments performed over any given quarter, so those quarterly statements are saving them maybe 10 minutes every three months.

Furthermore, the only performance insights that are usually revealed in a quarterly statement are breakdowns of the funds themselves. This doesn't do much to instill confidence.

And for the most part, the only personalization on these quarterly statements is the customer's name.

Personalization means more than a %first_name% field in a mail-merge form letter.

NLG can clean up and enhance what those quarterly statements are already doing, by including plain-english historical or cohort comparisons as they directly relate to that individual investor. NLG can create personalized what-if scenarios and snapshots that go beyond a static 5-or-10-year look. With personalization, the financial manager can tell the story of why the current plan is the current plan, or why the plan needs to change.

Intermediate: Insights That Are Actionable

That leads to actionable insights. Rather than just point the investor to their online account, NLG can send the investor to that online account with an investigative theory. Financial management works best when the investor is engaged, so to get them engaged, the manager needs to get them thinking about what the movements in the market mean to them.

If buy and hold ever worked like it's supposed to, financial managers wouldn't exist. People change, needs change, theses change -- and for the financial manager, that means anticipating change and providing options and a call to action.

Personalization can help suggest those options, so the investor becomes more proactive in their portfolio, and thus more involved in their relationship with your firm.

Advanced: Be There at the Right Time

Your customers probably actually don't even want quarterly statements. These likely go straight from in inbox or envelope into the trash can, unless those statements show huge losses or gains. The point is, investors want to hear from you when things are going very wrong or very right, when volatility is high, when opportunities present themselves, when caution is warranted.

Those things don't happen on a recurring 3-month cycle.

If there is power in NLG relating to how you communicate, that power is multiplied when it relates to when you communicate. Automation, combined with personalization, can provoke the right call-to-action at the right time.

When your firm reaches out to investors when they need you, whether they know they need you or not, you instil confidence.

The 80/20 Rule of Automation in Finance

As with all automation, the robots aren't there to replace the humans, the robots are there to enhance the human touch. In the world of finance, the same technological power that can be accessed to improve returns and reduce risk can also enhance the relationship between professional financial managers and investors. It's the 80/20 rule of automation: 80% human, 20% machine. The robo-advisors provide a solution at the far end, generating a customer experience that's at best 80% machine, 20% human. It's time for the professional advisors to flip that ratio.