Why in the ‘new normal’ roboadvisors are no longer an option

For everyone (except perhaps the older ones who lived through World War II), Covid-19 was a meteorite that crashed into our lives: a fast, drastic and unprecedentedly ferocious impact lightning. And, like a meteorite, Covid-19 is bringing big changes.

In the financial services sector, it is widely believed that digitalization has received a major boost: forced isolation has changed the way we interact with the outside world.

Almost everything is done digitally, banking transactions, chatting, investing, consulting portfolios, signing new contracts, and so on. The access numbers to bank and insurance websites have changed the order of magnitude, as well as the requests to call centres and help desks support. Because even the most unwilling person has entered the digital universe – and learned.

Indeed, well before the Covid-19 crisis, many financial intermediaries had started a digital transformation journey, but at a lethargic innovation pace that generally leads to less than impressive results. Now, however, digital transformation has become an urgency matter: for not losing market share, we need to keep up with the customers of the post-virus world, individuals who have experienced the effectiveness and convenience of doing everything online. And they are unlikely to retrace their steps.

In wealth management, those who have been left behind are in a race to get into the digital channel, with the aim of serving clients remotely. This has triggered the hunt for a roboadvisory system to build product portfolios. The watchword is: hurry up. The only thing is that in contingent situations, error is just around the corner, with important consequences. For those interested, please refer to this post.

How to do roboadvisory in a smart way?

This is the question we asked ourselves at Virtual B, in developing a roboadvisory engine that is truly useful to intermediaries in creating a personalised solution, using the products available to meet each individual’s life needs.

In the real world, consumers are interested in financial services that help them with their specific problems and needs, such as accumulating capital for their children, getting a supplementary income, protecting their own and their family’s health, getting a mortgage to set up their home, protecting their property. Things like that. In order to do this, we need to do things differently than in the “old school” roboadvisory.

You need to combine data, data analytics, robust asset liability management/portfolio construction techniques and the advisory process knowledge.

Three steps for an evolved roboadvisor

 1. Identifying the client’s life-cycle point

It is necessary to identify at what life point the client is, and consequently their needs, objectives and risks. We are in the middle of “Know Your Client”: if you want to create a tailor-made service for someone, you must first take their measurements. That is, profile the client. But not like Cambridge Analytica in order to manipulate them, but to understand what life problems they have to solve.

To do this, at Virtual B we adopt a “romantic” customer vision: we consider the customer as a vector, whose elements are its distinctive characteristics (needs, preferences, habits, behavioural traits) that allow us to tailor a specific solution with the available products. The KYC process is not the result of a mystical revelation but comes from the continuous mashing up of data with Data Analytics tools, among which Machine Learning is at the top.

And if data are limited, data enrichment can be used: you give me a handful of basic data, such as address, age, gender, profession and marital status and I give you back the most plausible needs and objectives, using clustering algorithms and “look-alike modelling” (this is how our service works).

2. Mapping needs: products

Just like cooking, the line needs to be prepared. This means identifying financial and insurance products that meet the particular needs of that particular client. Funds, unit-linked, GPs, health policies, home policies, long-term care policies, mortgages, temporary mortgages, personal loans. Each product has its own specificities, to be considered together with the compliance constraints linked to the market target and the regulatory client profile: an algorithm is needed to find the ‘best fit’ between the products and the client, obtaining the list of ingredients for the last step.

 3. Assembling the solution

Here we need a portfolio construction engine that combines investment, insurance and financing products (real world products, not asset classes), balancing opportunities and risks, considering both the assets and the potential liabilities of the respective client. This consists of Asset Liability Management applied on an individual basis. The portfolio corresponding to the optimal risk balance, the one that maximises the client’s financial well-being, is thus identified. The strategy then follows the client’s life cycle. It rebalances itself when, due to precise life events, market events, or simply time, something will change significantly: then those data will detect a change in needs and environmental conditions, and the product portfolio will change. It is a ‘standard tailor-made solution’: personalised advice covering the client’s entire wealth sphere but implemented with standard financial and insurance products and an industrial, scalable process.

Digital transformation is no longer optional, but necessary to survive on the market in a world dominated by social distancing. Also, in financial services. For an intermediary, the choice of an evolved roboadvisory system, which makes the client’s experience unique, tailoring it to his specific needs in every moment of his life, can really make the difference.

The Virtual B solution

The Virtual B team has developed a robadvisory solution that follows precisely these lines and uses three of our calculation engines:

• il NeeedsMapper®, to learn about clients’ needs and objectives;
• il FinancialFitnessTracker®, to identify the most suitable products for a given client;
• il LifeCycle Portfolio Builder®, to compose, thanks to individual Asset Liability Management techniques, personalised and dynamic portfolios that can include investment, insurance and financing products.

If you would like to discuss about this with us, or you are just curious, do not hesitate to contact us clicking the link below.