Top 4 Tech Trends Wealth Management Experts Should Watch Right Now

As with almost every other industry, technological innovation has reshaped and changed the wealth management sector. Rapid digital advancements, coupled with the changing needs of clients and volatile global economies, create new challenges and opportunities for professionals in wealth management.

To stay ahead of the curve, it’s important for wealth management specialists to keep abreast of top technology trends that will impact the financial industry.

SMU Associate Professor of Finance (Education) Mandy Tham is an award-winning educator and Academic Director, Master of Science in Wealth Management. Her expertise in the investment finance sector provides deep insights into the relationship between technology and wealth management.

We chat with Associate Prof Tham to learn more about the transformational trends that will shift the financial services landscape, fuelled by developments in tech.

1. Rise of AI and machine learning (ML)

Wealth management specialists offer high-net-worth individuals investment advice to help generate optimal returns on investments in alignment with risk tolerance.

Equipped with AI and machine learning tools designed to complement the services provided by wealth management professionals, wealth managers can delegate some of the more rudimentary tasks of managing client portfolios to the technology. In return, they may dedicate more time to strategic “big picture” decisions and improve the quality of their client services and solutions.

In another use case, AI and machine learning technology can offer a more comprehensive customer experience. For example, AI-powered chatbots incorporate natural language processing (NLP) into their functionalities, enabling customers to have a friendly conversation, in real-time, while interacting with a wealth management website. This is part of a strategic move to offer clients a more engaging customer experience.

Associate Prof Tham says that the greatest benefit of this breakthrough is that customer service is available 24/7; after all, robots never sleep.

“Chatbots that rely on NLP are almost permanent features in many digital platforms and apps these days,” says Associate Prof Tham.

“We have smart chatbots driven by AI/ML algorithms to conduct intelligent conversations with a ‘human touch,’ which attempt to relate to customers' emotions through emojis or personalised greetings. Companies are continuously creating AI-integrated chatbots that are smarter in order to provide excellent virtual customer experiences.”

2. Increased usage of digital currencies

Today, digital currencies are often synonymous with cryptocurrency. However, crypto is just one type of digital currency. In general, digital currencies need not use the distributed ledger technology (DLT) that cryptocurrencies like Bitcoin, Ethereum, and Dogecoin, are built upon. For example, central bank digital currency (CBDC) need not be built on the DLT infrastructure. Simply put, DLT is a digital ledger of transactions that is distributed across a network of computers. This means there is no centralised database that can be hacked or corrupted. Instead, each computer on the network holds a copy of the ledger, and transactions are verified by consensus among the nodes.

The central bank digital currency (CBDC) has become a hot topic after the People’s Bank of China (PBOC) issued e-CNY or digital Yuan. CBDC is digital money issued by a central bank and hence constitutes an official legal tender. Merchants can refuse to adopt digital payment services from commercial providers (e.g. Alipay, Grabpay) but they cannot reject a legal tender like the CBDC.

According to Associate Prof Tham, CBDC have significant potential to change the payment services landscape, as it is convenient, fiat money backed by the government, and cost-effective as merchants can avoid processing fees associated with the current credit card payment system. CBDC has the potential to dis-intermediate the banks, especially if interest rates on saving deposits are negative and during times of crisis. We would have incentives to move our savings from bank deposits to CBDC, as the latter gives 0 per cent interest rate and nothing lower. In addition, during times of crisis when fear rises, we seek a flight to quality, most commonly into government Treasuries. CBDC could become a safe harbour.

“There are tools central banks can use to prevent dis-intermediation of banks. For example, central banks can limit the amount of CBDC each individual can hold. It is interesting to watch the policy-making by the central banks on retail CBDC which could have direct or indirect implications on wealth management through the payment services landscape.”

On the other hand, crypto-currencies have reported significant growth in recent years but remain, to this day, a volatile investment asset class. Investors must understand the type of cryptocurrencies they are trading and the risks involved. Even if the cryptocurrency is touted as a stablecoin with its value pegged to a fiat currency like the U.S. dollar, it does not mean that there is an actual reserve of dollar-denominated assets sitting in a bank account as collateral backing the peg. This is evident from the recent collapse of the TerraUSD – an algorithmic stablecoin backed only by faith in the Terra ecosystem and the algorithm. Indeed, Singapore Deputy Prime Minister Mr Heng Swee Kiat cautioned retail investors against cryptocurrency trading in May 2022.

Nevertheless, Associate Prof Tham remains optimistic about the role of digital tokens in the future of wealth management.

“The space of decentralised finance (DeFi) holds lots of potential when it comes to finance applications such as tokenisation of real assets, digital token payment services, etc,” she says.

“As Defi develops, new investment opportunities will arise for private clients, be it direct or indirect investments through an asset manager into crypto assets, or companies that develop DeFi applications, along with a new regulatory framework to shape the landscape of wealth management.”

3. Growth of robo-advisors

Data-driven decision-making is an umbrella term that describes strategic decision-making based on user-driven data and factual evidence. Advanced algorithms that are powered by machine learning and NLP technology provide more contextual insight into patterns highlighted by real data.

Today, there exists a subset of wealth managers known as robo advisors, which utilise algorithms to construct investment strategies.

However, Associate Prof Tham says that while robo-advisors do have their merits, we shouldn’t discount the importance of human relationships with clients. Despite advancements in machine learning technology, algorithms still lack the ability to consider human emotions in the decision-making process. As robo-advisors become more commonplace, Associate Prof Tham encourages these specialists to “add emotional competence to technical competence.”

“To add value, a human advisor must understand the client to a greater emotional depth,” she says.

“They may display empathy, demonstrate sincerity and build trust. These are emotional traits that differentiate a human from a machine. A client appreciates a human advisor who provides assurance, shows empathy, and puts themselves in the client’s shoes, especially during a roller-coaster market.”

4. Revolutionary capabilities of blockchain technology

Finally, we can’t talk about wealth management technology trends without addressing the impact of blockchain or, more broadly, the DLT. According to Associate Prof Tham, the security features offered by blockchain technology hold promises to many fintech and regulatory technology (RegTech) applications.
“Decentralisation, immutability, and providing an audit trail with time stamps are key features of blockchain,” she explains.

“The decentralised nature made it hard for hackers because there are no centralised servers for them to aim at, and a new transaction at one node of the distributed ledger must be approved by other nodes (i.e. peer-to-peer network of computers) through a verification process such as proof of work or proof of stake, before it is written into a block to form part of the blockchain.”

Detailed audit trails are some of the key advantages of blockchain technology. In light of the global regulatory emphasis against money laundering and financing of terrorism, being able to have an audit trail on money flows would greatly aid the detection of such financial crimes. It’s important not to discount the limitations of blockchain as well; chief among them is its relative inefficiency to process transactions.

For example, in its current state, blockchain can process five transactions per second. However, this is a blip on the radar compared to established processing companies like VISA, which can manage up to 1,700 transactions per second. If blockchain wishes to compete with established firms, there must continue to be new advancements and breakthroughs in the technology to make it more efficient in throughput — the rate at which data can be transmitted over networks.

Associate Prof Tham suggests that, rather than wait on legacy blockchain technologies to catch up, wealth managers could consider leveraging a newer form of the technology.

“The blockchain technology is a form of distributed ledger technology (DLT), but it is slower and less scalable compared to a newer form of DLT called Directed Acyclic Graph (DAG),” elaborates Associate Prof Tham.

“Without going into complex technical specifications, one key difference between the Blockchain and DAG lies in the data structure. New data are written as linear blocks, one after another, using the Blockchain technology. In contrast, in the DAG technology, new data can be written in a web-like manner, one layer on top of the other, in an independent manner. Hence, DAG technology offers greater efficiency in terms of speed and throughput (scalability) compared to the Blockchain technology.”

Contrary to popular belief, technology has its place in the field of wealth management. New advancements and breakthroughs in technology should theoretically contribute to more efficient and effective ways of not just helping clients manage assets and facilitate higher returns on their investments, but also in the account opening and regulatory compliance processes.

Associate Prof Tham encourages all wealth managers to watch new technological developments in their space “with great interest,” while also acknowledging that learning how these breakthroughs impact clients’ bottom lines is all part of the learning process.

“I guess we must remember that ‘even if the roads are perfectly built, it does not mean that there will be no road accidents,’” she warns.