Disruptive Impact: AI Predicted to Close 1 in 6 Wealth Management Firms

0:00Today on the podcast, we are going to be talking about the financial landscape, wealth management, specifically, and how this is going to be impacted by AI. There was recently a wealth manager who said some pretty audacious, he made some pretty audacious claims about what he thinks is going to happen. So today on the podcast, we're going to be diving into all of that. So without further ado, let's jump into it. I believe the wealth management landscape is really bracing for a seismic shift as AI kind of ascends to the forefront and is really transforming a very fiercely competitive industry. A lot of people don't know this, but the industry is embroiled in a battle of fees and inflows.

0:35And now we have a whole new kind of interesting element, which is kind of these robo money managers. So according to a recent PWC survey, I would say the writing is kind of on the wall. One out of every six asset and wealth management firms could either be acquired or shut down within the next five years. And a lot of this is just due to AI and the impact that it is currently having on the market and how we are seeing it proliferate. So Paul Meeks, who is a portfolio manager at Independent Solutions Wealth Management, he put it, he wasn't really, he wasn't too optimistic. He said, the tech carnage should be significant.

1:14He said this because he's been navigating, you know, he's essentially been working in the financial industry since the late 80s. And he foresees that the smaller players are going to be, quote, forced to consolidate. and he believes that channels, that they're essentially gonna have to channel considerable resources into quote, game-changing technology that will replace existing firms if they don't circle the wagons. I think that this whole concept of having AI manage your money, I think this is more than just a buzzword. I think it's something that's actually picking up a lot of steam. Sophisticated AI-driven models are preparing investors for not only wealth building today, but also for retirement planning for tomorrow.

1:52and it seems that this innovation is definitely making its mark as more people are starting to adopt a lot of technology as a lot of this is being integrated into current solutions this is having I think a pretty profound impact consumers don't seem to care right like if you know you and here's like a really easy way to think about this if I were to come to you and say hey I got you I could get your wealth manager you know they are averaging a nine percent return on the stock market that's great I also have this AI and you know we've trained it off of a model and we retroactively ran what its strategy was, and we're forecasting this thing's gonna do 12%, like what would you do?

2:28The average Joe that doesn't know anything would probably go with the 12 % AI. Now, is there gonna be some black swan event and maybe a real-time money manager could react faster and save you money? There's a potential case for that. There's also a potential case that the money manager is asleep when a black swan event happens and the AI is awake monitoring the situation 24-7 five milliseconds after, you know, a missile hits a grain silo in the Ukraine that's going to skyrocket grain prices, that AI knows about it and can make some sort of movement. So there's all sorts of really complex arguments.

3:08There's a lot of ethical questions around this. But I really do believe that AI is going to be able to essentially do a much better job, potentially, right? but I think it's definitely going to be giving what money managers a run for their money and this is not something that is I would say that people should take lightly I think this is going to have a significant impact on the industry big names like Vanguard Schwab Fidelity Betterment and Acorns are already in the game they're investing in and offering robo advising services and Meeks believes that the strong will get stronger not only because they have the technology division, but because they have a tremendous resources to kind of execute this.

3:47So he also says that there is a lingering question. He said, quote, Schwab and its big peers should have the edge here, but will they deliver? And I think that's always the big question. The big companies should have an edge, but lots of times we'll see them stall. And I hate to, you know, point fingers at, you know, a company like Apple, for example, who is obviously one of the largest companies in the world. But it would appear that in this, you know, kind of AI boom we're seeing right now, they've been very slow to roll out any products. And arguably, Microsoft is taking a lot of wind out of their sails and getting quite far, right?

4:21We're seeing like Microsoft make serious improvements in their financials because of this whole AI boom. And then because they were able to really strike while the iron was hot and be at the forefront of the, you know, invested in the number one company coming out of this open AI. And so I think we're going to see the same thing in the financial services, you know, you really need these big financial firms to invest heavily in AI or they will be left behind. I think the tidal wave of tech is already kind of reshaping the financial landscape. PwC anticipates that robo advisors will manage around$6 trillion by 2027.

4:57Absolutely incredible. And this emerging demand for digital investment advice is translating into strategic moves across the industry. With 341 M &A deals in the wealth management sector last year, that's an 11 % increase from 2021, which was a decade high. But according to Echelon Partners, firms are feeling the heat in pool investments in tech to weather the impending storm. So high-profile transactions such as Royal Bank of Canada's acquisition of Brewden, Bruin, Dolphin, HUB International's purchase of Wealth Plan Advisors, and Alera Group's Wealth Services bio of Johnson Brunetti underscores a definite trend that we're seeing in the space.

5:39I think the pace of consolidation continues this year with some notable deals like JP Morgan's acquisition of First Republic Bank, which of course was bankrupt, and so that makes sense, but also First Citizens Bank, Rescued Silicon Valley Bank, and UBS's kind of emergency takeover of Credit Swift. We're seeing a lot of different banks see some serious issues, right? There's consolidation, you know, and a lot of that too has external factors, interest rates, and you know, there's all sorts of complaints, but we're seeing banks go insolvent, we're seeing consolidation in the market, this is only going to accelerate, in my opinion, and because of the fee structures and the incentives at these companies, I think AI is definitely going to get implemented, right?

6:22Like, I know this is hindsight 2020, whatever, this is probably not the greatest example in the world, but you can imagine a world where where Silicon Valley Bank says, hey, our financials aren't looking too great. We're spending a lot of money on our managers. If we swapped all of our humans for an AI, we could cut costs by 30 % and maybe not get to such a dangerous place where the whole company goes insolvent. If that offer and that option was on the table in front of them, I guarantee they'll take it. And we're seeing a lot of banks go insolvent. So it's kind of like whose shoe will fall next, right?

6:55Essentially, you can predict which banks are going to go insolvent because their stock prices will absolutely get hammered. That's the market saying, we believe you're the weakest link in the chain. You're the next one to go. And so, of course, the Fed is trying to stop contagion. There's a lot going on there. But when these companies feel like, hey, we are being looked at as weak, they know their stock price is going to tumble. For example, with like First Republic Bank, they were biding their time. They knew when they had to report their quarterly results, they knew that that was kind of the nail in the coffin for them.

7:23And it was, right? They inevitably had to be acquired. but they were trying to kind of hold on for dear life. Now, let's say they had to report their quarterly results and they laid off, you know, 50 % of their wealth managers, replaced them with AI, saw massive gains in profit. That could have been what, you know, maybe was able to keep them independent and afloat because it looks great to investors, blah, blah, blah. So, I mean, you got to think about some of these next banks that might be in these same situations, they're going to be making the same move. So I just think this is going to be whether you like it or not, whether people like it or not, whether consumers like it or not, this is probably going to be the direction that the industry goes because it's cheaper and this industry is one that is, you know, suffering right at the moment.

8:04So, Stefan Dover, he's the head of Franklin Templeton Institute, and he suggests that the industry is kind of morphing into a barbell approach where large players escalate their scale and smaller specialized groups must become creative and to really serve to really thrive so survival in this new era is clear-cut you pretty much have to embrace robots or become obsolete that's what some people are saying so Paul Meeks reminds us of a historical parallel he says quote remember what happened when investors threw in the towel and started to invest entirely through ETFs it killed many actively managed funds and those who ran and supported them those players were forced to consolidate to survive by scaling their expenses I think the message is unambiguous.

8:44The rise of these robo-advisors, these AI advisors, is more than just a trend. I think it's a really fundamental shift in the world of wealth management. I think the futures now and the industry has to adopt or risk being left behind. The rise of AI in finance isn't this dystopian prediction, I think is a current reality, but I think the question remains, who will ride the wave and who is going to be swept away by it? This is what we'll be following.