Peter Drucker noted that “the greatest danger in times of turbulence is not the turbulence, it is to act with yesterday’s logic.” We are certainly living through times of tremendous change, caused by the sudden and unexpected impact of a global pandemic and by more gradual demographic changes. Mitch Wein and I recently hosted Novarica’s virtual Broker-Dealer Technology Research Group and discussed the changing expectations, challenges, and opportunities for broker-dealers in 2020 and beyond.
Changing Customer Expectations and Digital Capabilities
Broker-dealers, like much of financial services, are grappling with changes in customer expectations and demographic distinctions between customers and producers. As of 2020, Millennials represent half of the US labor force; by 2025 that number will grow to 75%. As this largest living generation becomes an increasingly large part of the US work force, digital capabilities will become progressively more important to customers and producers alike.
Mitch emphasized the importance of holistic financial planning and a unified portal experience, noting that technology does not need to be front and center but should rather serve the role of a strong “supporting actor.” He went on to explain the importance of complex product interaction between people responsible for financial management and those responsible for providing the products, explaining that it is more important than the flashy tech.
A participating broker-dealer executive echoed Mitch’s perspective, stressing that technology is not their intended differentiator but that it serves to support what the advisor or planner brings to the table. Another participant noted, “We don’t want to catch up to Robinhood.”
Data Challenges
Broker-dealers receive and process data from a variety of sources, including fund companies, industry clearinghouses (e.g., DTCC), and parent companies. This information arrives in a variety of formats; broker-dealers need to transform the data they receive into consistent, consumable forms so the organization can process it through compensation, compliance, and operations and then populate locally managed books and records platforms. Data transformation is often a manual undertaking that requires care since the results support mission-critical activities.
Participants mentioned a range of data challenges related to receiving data feeds from a variety of sources. All are struggling with getting good non-proprietary product data into their environments and mixing it with proprietary products as well as brokerage account data from their clearing firms. This is something that no one seems to have fully figured out.
Artificial Intelligence and Machine Learning
Artificial intelligence (AI) and machine learning (ML) are tools that promise to help broker-dealers transform and utilize data; however, machine learning is not “machine magic.” We discussed the business case for AI/ML and value-add benefits like retention/training as well as growth and profitability. Mitch explained that machine learning algorithms learn through human training and that AI/ML initiatives should be sold to leadership honestly with an emphasis that employees will play an essential role in training, then managing, these algorithms.
Challenges in the current environment may well create new opportunities in the future. For example, some of the regulatory compliance issues broker-dealers are addressing are emphasizing the need to know more about both customers and sales/trading activities. These “know your customer” efforts paradoxically create new insights which broker-dealers and their registered reps/RIAs can use, in concert with technology-based capabilities, to produce better advice. In the end, the quality of the advice becomes one of the key differentiators.
Novarica’s Broker-Dealer Research Group is open to insurance-carrier-owned broker-dealers. We are already looking forward to our next session, scheduled for January 21, 2021.
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