Digital technologies, AI, and data analytics could provide a more multifaceted view of clients' risk tolerance
While investors and consumers initially might not be interested in companies owning their data, studies have shown that they’re willing to share their information with financial companies in exchange for access to better offerings. And according to one of the leaders of Capco Canada, a global technology and management consultancy, that same logic can be extended to the world of wealth management.
“As they stand, know-your-client standards are ill-conceived in the current world,” says Gary Teelucksingh, CEO, Capco Canada. “They no longer fit the original purpose, which was to classify a client's risk so that it can then be matched to financial products or solutions that are commensurate with that risk.”
While know-your-client (KYC) information should be updated regularly, Teelucksingh says the reality is that it doesn’t happen as often as it could. KYC as we know it today also tends to be rigid, constraining clients into one of several defined categories along a single dimension of risk. The fact that it depends so much on a client’s self-assessment of their own tolerance also leads to a slew of potential human errors.
By taking more information about a client’s life into account, advisors and firms can potentially create a richer portrait of a person. Having permissioned access to their clients’ social media accounts, for example, could potentially open a window into their activities and offer insight into their standard of living.
“Having that ability as an advisor will also help you keep up with the one thing the industry is most delinquent on today, which is monitoring your risk tolerance as you get older and your life circumstances change,” Teelucksingh says.
Advisors can also get more lines of sight into KYC by having access to their clients’ financial data. Credit card transactions, for example, can help advisors gain a better understanding of their clients’ spending and saving habits, as well as the types of risks they’re comfortable taking. Advisors can then take that profile and present it to their client, which can serve as a springboard for dialogue about the elements of their risk.
If done right, digital technology could also potentially help advisors not just see their clients’ financial profile as it pertains to their investment risk tolerance, but also anticipate where they need to be from a broader planning perspective. According to Robert Madej, founder and CEO of Toronto-based wealth-industry focused tech service provider PureFacts Financial Solutions, that’s one of the main types of problems AI technology is built to address.
“AI can be thought of in two main areas. One area is really around looking for errors and aberrations in data, which can help enterprises understand when and where they need to take corrective action,” Madej says. “The other area is around insight. By looking at millions of rows of data, we can make some educated inferences about whether an end-client is going to be getting married in the next year, for example. From there, we can have a rough projection of how many kids they could have in the next five years, at which point their advisor could start raising the possibility of setting up an RESP or college fund for their children.”
While that type of next-level KYC hasn’t been implemented yet, Teelucksingh thinks it’s only a matter of time before artificial intelligence, machine learning, and data analytics technology intersect to make that achievable. However, he believes there will be a much greater challenge when it comes to getting regulators in the financial industry to accept those enhanced profiles.
“The question becomes, how do you do it when after all that, the regulators will ask whether a client is within category four or five?” he says. “More challenges will present themselves when you’re stuck boiling it down into that format because of how you must approach compliance and prove suitability to the regulators. This is something our team is considering as we work through what the future of KYC could be.”