The prospect who sat down with Pamela Capalad in a Brooklyn, N.Y., restaurant had almost nothing in her bank account, and a question: Was it possible to get financial help?
Capalad, a 30-year-old adviser with the XY Planning Network, was unfazed. She questioned the woman about her financial goals, keeping in mind lessons learned from behavioral finance literature.
Among the prospect’s obvious challenges: mental accounting was getting in the way of proper budgeting. The woman was keeping a budget in her head rather than writing anything down. That meant she always came up short at the end of the month.
After a long discussion, Capalad used the spending analysis tool eMoney for a holistic view of the client’s financial details, and to illustrate where her money was going. Capalad then used MyPlanMap to create a checklist for the woman, setting spending targets for food and shopping, and determining how much she could save each month.
The woman now seeks Capalad out regularly for budgetary motivation and has managed to save $2,000 over three months.
MAKING FINANCES PERSONAL
The goal, Capalad says, was simple: Make the client’s finances personal.
Advisers like Capalad are wielding data-aggregation tools, along with human observation, to identify not only why their clients spend and invest money, but also how, where and when.
“This data tells you everything about how someone deals with finances and how their relationship is with it,” says Capalad, who founded planning practice Brunch & Budget in 2014.
This combination is helping advisers to allay client fears and overcome their emotional biases about investing. Clients are also learning how to better manage their money.
If this sounds like advice you’d expect a fiduciary to provide, you’re not wrong.
PREDICTING ACTIONS
Mashing up data and behavioral finance approaches isn’t about altering advice as a practice. Instead, advisers say data tools and behavioral science are finally available to allow for precise, real-time analysis that can help predict client actions and demonstrate trends.
“The fact that account aggregation is becoming more prevalent in financial circles is a very good thing,” — Joel Bruckenstein, a Financial Planning columnist and co-creator of the Technology Tools for Today conference series. Bruckenstein
Capalad and other advisers cite how they have dramatically changed their clients’ attitudes and financial behavior with data insights and counseling in ways that were not affordable even a decade ago.
New, even-more-advanced big data applications for advisers are entering the market. IBM, for instance, is now offering wealth management tools it says can provide personality insights and even predict upcoming life events.
The industry doesn’t yet track how many advisers are specifically using aggregated data analysis combined with behavioral finance techniques.
At best, it’s a fraction of advisers in the industry overall, says Joel Bruckenstein, a Financial Planning columnist and co-creator of the Technology Tools for Today conference series. However, he sees the trend growing.
“The fact that account aggregation is becoming more prevalent in financial circles is a very good thing,” Bruckenstein says.
SIGNIFICANT GROWTH
Still, the amount of financial data is clearly mushrooming.
For instance, eMoney says the number of client accounts in its aggregation tool has grown an average of 27% per year since the feature was introduced in 2008.
Since the tool’s inception, the number of aggregated accounts has increased over 1,000%, according to a spokesman.
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The benefit of marrying data insight with a behavioral finance approach is that it can produce powerful, positive results for clients.
At the same time, it arms advisers with value in a landscape of increasingly commoditized advice and digitized service.
“This is our real value-add — we are trained to look at data and know and understand how to apply financial concepts to clients’ lives. This is why people pay you,” Capalad says. “The more advice gets automated, the more we have to prove our value in a different way, and this is the way to do it. You have to figure out how to humanize finances and really help clients relate to the money they are spending.”
INTERVENE AND CHANGE
The industry at large is moving to add big-data capabilities, as evidenced by Envestnet’s $590 million deal for the aggregation firm Yodlee in 2015. Data integration and account analysis features are now standard in all new planning software and CRM offerings, automating the process of gathering and analyzing a client’s financial account information.
It’s also an exciting time for behavioral finance, as it shifts focus to individual behavior; big-data tools now exist for advisers to distill concepts into actual practice, says Steve Wendel, head of behavioral science at Morningstar, which offers its own suite of data-aggregation tools to advisers.
“Big data is helping us understand where problems lie,” Wendel says. “When an adviser is fully instrumented with software, they can see where an investor is struggling. It’s always been anecdotal. Now we can dig in and see who’s having trouble, what that person’s profile is and why that is occurring. Data can tell us where to intervene and make changes.”
“Big data is helping us understand where problems lie.” — Steve Wendel, head of behavioral science at Morningstar.
Intervention is the operative word for advisers, who talk about using the data-behavioral combo to step in and rescue clients from their own biases and fears.
Jason Gordo, managing director of United Capital’s office in Modesto, Calif., recalls a session with a wealthy couple who had sold their business but continued to work, driven by concerns that they would run out of money.
Gordo, 41, categorized their personality profile toward finances using United Capital’s Money Mind Analyzer approach. He then used data-aggregation tools to present them with all their financials, from their holdings to their cash flows.
IDENTIFYING FEARS
He identified the husband’s key fear — not earning enough annual return on his portfolio — and used a variety of data-driven presentations to show that the couple would not likely derail their financial plan, no matter what happened in the markets, or even if they spent twice what they assumed they would need to spend in retirement. He told the husband he could thereby reduce the amount of risk in the investments he needed to take.
“He permanently retired the next morning,” Gordo says.
Gordo calls this overlap of hard data and soft behavioral approach the “art and science of financial planning.”
“We learn how you feel about money and then we use actual data to prove results,” he says. “You’re using the lens of data to simply lay it out in front of the client. You can show them what to do to have the life they want. The data gets them ready mentally to accept it.”
For advisers interested in bringing big data and behavioral finance together in their practice, a structured effort is required, says J.D. Bruce, president of Abacus Wealth Partners, which has six offices in California and one in Philadelphia.
Similar to United Capital, Abacus attempts to categorize its clients’ personalities into financial archetypes, Bruce says, acknowledging that individuals have different approaches to finances, and even competing self-interests and desires.
With the personality profile complete, Bruce says, he then digs deep into his clients’ financial picture, a task that has become much easier with the advent of cost-effective data-aggregation tools.
“Ten years ago, net worth reporting meant manually getting a copy of every statement,” he says. “We can now provide the same service that multimillionaires received in 2006 for $200 a month.”
It also requires a change in mindset on the part of advisers, Bruce adds.
“Financial planning historically has been very aspirational and goals-based,” he says. “We want to move away from the aspirational model and instead define where you want to go and how to make that happen.
“It’s a subtle shift in philosophy, but vastly different when trying to execute for the client,” he says. “You’re no longer looking to the future; you’re looking at the present. If you keep behaving the way you do today, what will your life look like in 20 years? Now is when you can make changes.”
STRENGTH IN DATA
That’s where data shows its strengths, Bruce says. “You can actually use aggregation to track spending today, in real time, and it is auto categorized. You can see what you are spending and see it in detail. That’s probably the biggest change in financial planning; you don’t have to rely on client self-reporting. The data doesn’t lie. Maybe a client is self-delusional, but their Mint account isn’t.”
But the ease of data gathering enabled by modern tools must be complemented by a constant conversation with clients, says Sheryl Rowling, principal at San Diego-based Rowling & Associates.
Every firm's focus is on capturing a share of the predicted $7 trillion market by 2020.
“The subjective information is often more important than the objective information,” she says. “Emotions are really a huge part of how people invest. And if we don’t consider that, the plan is not going to work.”
Rowling provides questionnaires to score risk tolerance, and relies on CRM and aggregation tools to pull in data about client financials.
“You have to look at the aggregate of all of their investments, expenses, their risk tolerance and retirement goals, and understand what they are trying to accomplish in life,” she says.
“The more information you have, the better off you are with the client,” Rowling says. “Once you have all that information, then it is up to you to boil it down in a way that the client understands. When you can back up what you are saying with good data, it gives clients a level of comfort.”
Acknowledging bias
Rowling acknowledges the behavioral finance concepts of herd behavior and biases that blind clients or make them overconfident.
“The subjective information is often more important than the objective information.” — Sheryl Rowling, principal at San Diego-based Rowling & Associates.
Data applications give her the information, she says, to challenge overly emotional clients.
She recalls counseling a couple in their 50s, who were worried about the future and unsure if they could ever retire.
Once Rowling accessed their accounts and aggregated their financials using Morningstar’s ByAllAccounts software, she discovered the wife had $700,000 in a 401(k) that she was unaware of because she did not understood the statements mailed to her by the plan.
“She started crying,” Rowling says. “Being aware of those outside accounts is so critical.”
‘TREMENDOUS POWER’
Bruce sees a future where data applications will actually allow an adviser to monitor and intervene in a client’s life to steer their finances.
“The ultimate thing would be a Fitbit for finance,” he says. “Every time a certain client goes into Tiffany’s, you get a message and catch them before they spend money and blow their budget.”
He already has one client who, so impressed by his data-driven advice, asked Bruce to monitor her spending in real time and give her approval for large purchases.
Such constant oversight into a client’s life and the ability to affect outcomes demands an extraordinary amount of trust in the relationship, Morningstar’s Wendel says.
“It goes beyond advice; it is tremendous power,” Wendel says. “As we use these very powerful tools together, we have to ask ourselves, are we keeping investors first?”
In addition to enabling safeguards to ensure client data is never compromised, Wendel says data testing is essential for any adviser to become adept at using it correctly.
IT’S NOT MAGIC
“See what works for your own clients, try out different things, and share that with the community. I think we’ll be appropriately humbled on both sides,” Wendel says. “We’ve seen in our own experiments that human behavior is very complex and, if it were easy, behavioral finance problems would have been solved long ago.”
Wendel hastens to add it’s wrong to assume big data and behavioral finance tools, while powerful, “are magic,” and that advisers should understand, too, that “we have to keep on testing and learning.”
The idea of performing data tests on clients to observe behavioral patterns may sound like an academic task. Also, the real-time capabilities of data mean that there is more involvement and monitoring of clients as a result, says Capalad.
“There are ways to make it efficient, and it doesn’t take that much time,” Capalad says. “Data is data. Everyone is different, but how you analyze data can be the same. It’s not as much work as people think, as much as it’s different work.”
“Gone are days of, ‘I’m a great money manager, I generate alpha.’ Robos have done a good job disrupting that segment of the industry.” — Jason Gordo, managing director of United Capital’s office in Modesto, Calif.
Advisers should focus on how a data-driven, behavioral finance-supported approach can rejuvenate their practices, United Capital’s Gordo says.
He offers his own office as an example: After 18 months of implementing big-data strategies, he says, the practice has grown revenue by 42%.
Gordo raises the possibility that robo advisers will become more intelligent and popular. Unlike many advisers, he doesn’t try to chip away at concerns that such technology will disintermediate some advisers.
“If we don’t make a fundamental change in how we serve clients — data is a big part of that, digital engagement is a big part of that — we will rapidly become obsolete,” he says. “Gone are days of, ‘I’m a great money manager, I generate alpha.’ Robos have done a good job disrupting that segment of the industry.”
Gordo expects advisers of the future will require an immediate and constant understanding of where a client’s assets and liabilities are, and finding agreement on what that client truly wants in life.
“A machine can generate data, aggregate data and analyze data, but only a human can provide empathy, a heart and wisdom.
“The client of the future is already living today and wants a collaborative relationship,” Gordo adds. “They expect their adviser to have full access to all their data, and customize their plan to what they want their life to look like. They want advisers to do that and use their wisdom to answer, ‘Am I OK?’ ”
