Sunday Email - WM 2035 Keynote / Cognitive Defaults

Read time: ~ 5.30 minutes

Happy Sunday!

Every Sunday I offer strategies for the week ahead and a thought to fuel your action.

Technology will not render wealth managers obsolete.

Artificial intelligence (AI) is not the harbinger of the end for human involvement.

The world has indeed transformed around us. Yet, despite these seismic shifts, certain truths have steadfastly endured through decades.

Change, however, harbors discomfort and breeds fear for many. This often skews our perspective towards the extreme negatives of evolution, overshadowing the realities and the multitude of opportunities it presents. It's a fundamental aspect of human nature.

Behavioral psychology introduces us to a concept known as loss aversion, which suggests that the sting of a loss is felt twice as acutely as the joy of a gain.

While not extensively researched in the context of innovation, I propose a parallel: we magnify the potential drawbacks of innovation twice as much as its benefits.

This predisposition feeds our cognitive focus on potential losses.

Consider July 16, 1995: a day that marked the dawn of a new era of disruption. And this was the picture that was causing the disruption: 

This was the launch date of Amazon.com, heralding what many predicted would be the demise of brick-and-mortar retail.

The narrative was dominated by forecasts of the end for strip malls and shopping malls, overtaken by the digital wave of e-commerce.

Walmart, a retail giant, found itself at the epicenter of this predicted upheaval.

Nearly three decades later, the outcome reveals a different story.

Contrary to the doomsday predictions, brick-and-mortar establishments have not vanished. Strip malls and shopping malls persist.

Walmart welcomes over 200 million visitors to its stores each week and has opened nearly 1,000 new locations in the US since 2010.

Despite the e-commerce explosion and Amazon's rise, Walmart remains the global retail leader in revenue, outpacing Amazon by more than double as of 2021, with over $572 billion in sales. And over 80% of their revenue is generated in their stores!

Walmart's journey underscores that innovation does not spell eradication but requires adaptation. It's not a binary choice between extinction and survival; it's an opportunity for evolution.

This evolution also opened new avenues for Walmart, notably in e-commerce (duh!), which now represents a significant portion of its sales in markets like India (98% of sales in India are via ecommerce), showcasing the adaptability and resilience of traditional retail in the face of digital transformation.

Turning to the financial sector, this was supposedly the end of the bank branch: 

The introduction of ATMs in 1967 was believed to herald the end of bank branches and teller jobs. Yet, decades later, the reality is starkly different. The number of bank branches and teller positions has not only sustained but, in some cases, grown.

Digging into the details of ATMs and bank branches is highly insightful. 

• For instance, in 1973 there were 2,000 ATMs and nearly 27,000 bank branches. In 1992 the amount of ATMs had soared to nearly 90,000. Yet, bank branches nearly doubled as there were now 52,400 branches. 

• In 1970 there were 300,000 bank teller jobs. In 2022 there was predicted to be 364,000 bank teller jobs. 

• After the launch of the smartphone we saw bank teller jobs peak in 2010 with 600,000 bank teller jobs. And looking at bank branches, we saw that the total number of branches from 2005 (pre-smartphone) to 2023 was unchanged. Over the same period 60% of banking matters have transitioned to mobile.

This misalignment between prediction and outcome illustrates that innovations like ATMs and mobile banking have not diminished the banking sector but rather enhanced its efficiency and reach.

The narrative of ATMs and mobile banking enriching rather than eclipsing traditional banking models is a testament to the transformative power of technology, creating a more accessible and efficient banking experience while maintaining the value of human touch and trust in financial services.

In the realm of wealth management, the advent of robo-advisors, online trading platforms, and now AI, has sparked similar fears of obsolescence. Yet, history teaches us that such innovations more often lead to evolution rather than extinction.

The journey of AI in transforming industries, specifically wealth management, underscores the need for adaptability. Unlike previous innovations, the pace at which AI is advancing & the time AI has been around suggests a narrower window for adaptation, making it imperative for wealth managers to embrace and integrate these technologies proactively.

AI and technology, rather than usurping the role of wealth managers, present an opportunity to enhance efficiency, evolve service models, and explore new markets.

• Enhance efficiencies: Serve more families and offer new services without having to add additional staff. 

• Evolve service models: What we have been executing on to get to this point, may not be the core of our job as we head to the next horizon. 

• Explore new markets: Identify and exploit new revenue streams via new services or more profitably serving new client segments. 

The challenge, however, lies not in recognizing these opportunities but in the strategic execution to leverage them effectively.

To harness the potential of AI and technology in wealth management, a multifaceted approach focusing on mindset, professional development, and training is essential.

• Mindset: Embrace change, foster a culture of experimentation, and maintain patience and openness to new technologies will be critical for wealth managers to navigate the evolving landscape.

• Professional development: Standardizing processes and clearly and fully documenting workflows, while having a robust organization system for all of these. 

• Training: Embracing continuous education within current roles independent of years of experience and staying curious. 

While the core business of wealth management will endure, the methods and models through which services are delivered will evolve. Just as banks have remained integral to financial systems and retailers like Walmart have continued to thrive by embracing e-commerce, wealth managers too can seize the opportunities presented by technological advancements to enhance their services and client relationships.

The path forward requires acknowledging the inevitability of change, adopting a proactive mindset towards innovation, and remaining committed to continuous learning and adaptation. In doing so, wealth managers can ensure that they not only survive but thrive in the face of technological evolution.

A Thought To Ponder This Week

It’s happened to all of us. 

We walk into a grocery store, hungry. 

We walk out with bags full of snacks. For me, Oreos, ice cream, chips and more. 

At the moment we know we are hungry. And past experiences inform us that going to the grocery store hungry is a bad idea. Yet we do it anyway. 

Why? 

Our brains are complicated. When emotions become elevated, our brains begin to diminish the value of facts and data. 

So, in this situation… we know the facts, we know not to buy these snacks. But our emotion of hunger is elevated, overtaking rational thinking. Thus, we become emotional and fill our carts with delicious, yet unhealthy snacks. 

The role of psychology has become more prevalent in our industry. Rightfully so, we are dealing with humans, that is our business. 

Yet, we continue to struggle at motivating our clients, our team and ourselves in overcoming some of these known defaults. 

But, as with many things… awareness and acceptance is the beginning of change. 

As we head into the week ahead, what are other areas we see ourselves and clients falling prey to psychological traps? 

The best is ahead!

-Matt