While the financial industry as a whole is rather quick to adapt to the digital age, not all segments of the industry are equally modernized. Financial planning in particular is notoriously slow at implementing new technologies. Research shows that technology adoption can significantly boost AUM growth. And yet, most firms aren’t even using basic technology solutions such as digital portfolio management or financial planning software. Here are some of the underlying reasons why firms are so resistant to modernization.
1. Lack of Urgency
Baby Boomers don’t expect tech solutions as often as their Millennial counterparts, but as the wealthiest generation, their preferences heavily influence the industry. However, this will soon change. Experts predict that over the course of the next 25 years, a total of $68 trillion will be inherited from older to younger generations, with Gen X and Millennials being the primary beneficiaries. Not only are these younger generations more partial to technology, they also demonstrate different investing preferences with lower allocations to stocks and higher allocations to alternatives than their parents. Advisors will have to adapt or risk losing relevance to a large group of potential clients.
2. Widening Generation Gap
Even as the client base gets younger, the workforce remains older. Only 10% of financial advisors are under the age of 35, with most advisors exceeding 50 years of age. When it comes to leadership the gap becomes even wider. The average CEO in financial services is 60 years old, the oldest of any industry measured in a study by the Korn Ferry Institute. And thanks to the lengthy bull market we've been experiencing, these CEOs are keeping their jobs longer before retiring. Leadership of this age may be less willing to push for a risky technological change that could completely alter the way they have been doing business for decades.
3. Legacy Technology
Before the advent of cloud computing, IT systems were far more difficult to upgrade. As a result, many companies still use out-of-date systems that are incompatible with emerging technologies. Upgrading to a newer system would require a complete overhaul, which is time consuming and very expensive. However, this type of upgrade is necessary and can save money in the future. Cloud computing systems can be upgraded remotely, without an expensive overhaul.
4. Speed of Innovation
If it seems like technology is changing faster than it used to, that’s because it is. The oft-quoted “Moore’s Law” suggests that computing power doubles every 2 years, leading to exponential growth. It is completely reasonable to fear adopting a new technology, only to have it become obsolete by the time it is implemented. However, waiting for the industry to settle on a longer-term solution can be detrimental to growing your client base. In other words, you can’t afford to wait.
5. Cybersecurity Concerns
One issue that is inextricably linked to technology, is cybersecurity. This is more than just having anti-virus software on advisors' computers - it involves storing and protecting investor data. As technology gets more complex, so too do the systems required to secure it. However, avoiding technology adoption does not negate security issues. Sending sensitive information via unsecured email or using exclusively paper documents both have myriad security risks that could be mitigated with proper cybersecurity frameworks and training.