Morningstar CEO describes future of adviser tech

Novel investing tools and techniques to help generate more value for clients

Sep 30, 2017 @ 12:01 am

By Jeff Benjamin

Morningstar chief executive Kunal Kapoor is embracing the technological changes that are flooding the financial services industry, and he believes financial advisers will need to do the same if they plan to keep pace and add value to client relationships.

Speaking to InvestmentNews Editor Fred Gabriel in Chicago last month at an InvestmentNews "Innovators in Investing" event sponsored by FS Investments and FlexShares, Mr. Kapoor downplayed the general threat of robos, put passive-investing trends in context, and urged advisers to get on board with big data and artificial intelligence.

FRED GABRIEL: How have digital-advice platforms evolved in the marketplace?

KUNAL KAPOOR: When we first heard of the notion that the robo-adviser was going to step in and take charge of someone's portfolio, the immediate reaction was, this is really bad news for financial advisers. Some of the firms that launched these services essentially said things to the tune of, they were out to put advisers out of business. Fast forward to where we are today, and so much has changed of that initial hypothesis. First, the winners are not the firms that are often thought of as premier in the robo-advice space. The winners, if you look at where assets have gone, are traditional brokerage firms and asset managers. You have firms such as Vanguard and Charles Schwab tapping into the audiences that they have.

For me it's a great reminder of what happened in the 1990s with online trading firms. They were supposed to put everybody out of business as well. But really what happened is they were absorbed into the mainstream by traditional brokerage firms. You are seeing that happen here as well.

Another more important thing is that everyone is coming to see that the audience for automated advice is much like the audience for traditional advice and it's actually good news for advisers. For a long time, advisers have had the issue of whether they can scale their businesses, and this is a great way for them to start scaling their businesses.

FG: What about how the robo-advisers themselves are evolving and offering more sophisticated services?

KK: I believe the next frontier in automation is around financial planning. I believe that it is going to become significantly more automated than it is today. As an adviser, you can use digital tools now to advise on that entire portfolio, so you are not just advising on the sleeve.

FG: More digital platforms are adding a human component. Is there still a place for an entirely digital platform?

KK: The greater someone's assets and the greater complexity of their financial life, the more importance of having an adviser involved at some stage. If you look at the way people save and invest and plan, you find they start seeking out an adviser just as soon as they have some modicum of assets, as soon as they start planning for things, such as how are they going to pass those assets on to their heirs.

It's possible in 20 to 25 years … you could have a completely digital solution. Today the 40-, 50- and 60-year-olds, the core of the group our advisers need to serve, are not going to be ready for a fully digital solution anytime soon.

• Advisers will be able to anticipate how their clients will need help, as opposed to just reacting to client demands.
• Better investment outcomes will be achieved through personal indexes and portfolios the adviser creates based on information about the client.
• Advisers will tap into clients' health profiles to know their medical risks, and plan their financial lives accordingly.
• Artificial intelligence will help advisers better understand clients, including their investment biases.
• Advisers will receive leads to prospective clients who actually need their services and are more likely to respond to an offer.
• Forward-thinking factors will be baked into investment ratings.
Source: Kunal Kapoor, CEO, Morningstar

FG: So advisers shouldn't worry that they'll be put out of business by robos?

KK: The thing that will put advisers out of business is if they can't prove their value. That is the fundamental thing that advisers need to grapple with. How do you show value? Technology can be hugely helpful with that.

FG: How are things like big data and machine learning going to reshape the way advisers build portfolios?

KK: The possibilities are immense. Even something like the star rating, which has been backward looking. In the future, I can envision a world where perhaps machines help us think the way analysts are thinking and incorporate forward-thinking factors.

My advice to advisers is to be thoughtful about where they let their clients' portfolios end up. We think it's very powerful through aggregation to essentially be able to look through to your clients' portfolios, but you also want to be thoughtful that the firms you're making it available to are being responsible with the data that you're providing them.

InvestmentNews is airing a one-hour webcast of its Innovators in Investing event on Wednesday, Oct. 4 at 4:00 pm ET. Go to to hear firsthand from investing leaders.

FG: What's the next big technology that is going to disrupt the financial advice business?

KK: The next several innovations that will be most useful for advisers will be around big data and some degree of artificial intelligence because they will help advisers do two things. One, they will help advisers better understand who their clients are and what their biases are. And two, through AI they should be able to anticipate how to help them, versus where we are today, where most advisers feel they need to be reactive to what their clients' needs are.

FG: Paint us the picture of how the adviser in five to 10 years will use big data.

KK: The typical adviser still prospects in a way that most advisers started doing 10 or 20 years ago. They're still operating on word of mouth and still taking people to dinners and getting name cards and following up with people. The work can be tedious and you don't know what your chances of success are. In the future, if we get this right, we should be able to direct advisers to clients who actually need them and are most likely to respond to them, so they are prospecting to the right places.

In the adviser's interaction with a wholesaler, you're not going to have every wholesaler knocking on your door. Asset managers will get more sophisticated in knowing what kind of wholesaler they should be sending to you. The efficiency gains right at the outset of the process will be pretty great.

In interactions with clients, today you are reactive, you are reacting based on data they give you … In the future, as more and more data is aggregated, systems should be smart enough that based on what we know about your other clients, that this client is likely to have an event that you should be preparing for or aware of. Or you might be able to link in to a client's health profile in the future and know they are at risk for certain things and as a financial adviser plan accordingly.

FG: What innovation and promise do you see in the environmental, social and governance space?

KK: In the U.S., the assets tied to ESG are growing exponentially. The second thing is that advisers talk more and more about working with more women and the next generation of savers and investors. Guess what the Morgan Stanley study showed? Advisers are more likely to be successful if they bring up ESG with women and millennials, because it's a topic that matters to them.

FG: What can you tell us about multi-asset investing?

KK: It's a fancy way of saying the world has moved beyond just stocks, bonds and cash. That doesn't get you very far anymore because bond funds don't own bonds anymore. If you look at the positions, they all have swaps and futures and whatnot. The world is changing, there are more sophisticated instruments, there's greater use of alternatives.​

FG: Where are you seeing pockets of innovation in investments?

KK: Historically, if you wanted to put a small client into a prepackaged portfolio, you might use a target-date fund. You can essentially now build a more customized version of a target-date portfolio. For an adviser, building a portfolio to that personal index that's based on all that data you know about a client can result in outcomes that are likely to be a lot better.


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