By Simon Constable
This article originally appeared in the Wall Street Journal
One of the most persistent problems for individual investors is that they do things to mess up their finances even when they should know better.
But don’t worry. Robots are coming to the rescue.
Some financial firms are using behavioral prompts—automated in some cases and fueled by analysis performed by artificial intelligence—to help nudge individual investors to make better financial decisions. That includes a multitude of things from sticking to a budget to picking investments.
“We are already seeing that doing this the right way can help improve people’s financial lives,” says David Eckerly, senior director of product marketing at Personal Capital, a financial adviser and wealth-management firm.
The Personal Capital approach includes breaking down a financial plan into easily digestible parts. That idea is similar to the notion that it is hard to stick with a grand New Year’s resolution. Instead, short and straightforward tasks will likely see more success. “Most people won’t carry through with a yearlong plan,” Mr. Eckerly says.
Instead, the company analyzes information from customers’ accounts to identify spending patterns and how their savings and investments are allocated. It then uses the findings to make suggestions to the individuals that could help improve their finances. “This is all data-driven and specific to the people based specifically on their situation,” Mr. Eckerly says.
Suggestions might include pointing individuals to mutual funds and exchange-traded funds that have lower costs than the ones they already own. The company also sends messages based on an individual’s monthly cash flow. People who aren’t spending their whole paycheck and have their extra cash stashed in a low-yield account are prompted to invest the cash in ways that will earn them more.
Personal Capital says it discovered that low-yield deposit accounts were costing people up to $500 million in lost interest income annually. The company pointed those customers to higher-yielding bank accounts, including its own offerings, showing them “what that could look like in 20 to 30 years,” says Mr. Eckerly.
Buy high, sell low avoided
Some firms are tackling a longstanding behavioral problem of many individual investors: They tend to buy stocks when prices are high and then sell them when prices fall. Such market drops often happen during times of political upset, economic distress or the prospect of war. Frequently, individuals dump their stocks in fear that things will get even worse, only to then buy back into the market when prices are higher once again. Inevitably, that buy-high, sell-low approach results in losses.
Financial advisory firm Betterment is combating this behavior by delivering messages to customers if they attempt to take action during such periods of market stress.
“We don’t proactively reach out to clients, only those logging in” are offered advice, says Dan Egan, director of behavioral finance and investing at Betterment. The company refrains from sending messages to every client with an investment account because doing so might cause more anxiety than it relieves, he says.
Instead, Betterment advises investors who want to sell their holdings or reallocate them by informing them of the costs involved. Notably, the message will include the potential tax liability of a trade and the potential cost in terms of lost retirement income from reducing their holdings.
Investors who have been informed that the tax cost was $5 or more have been 62% less likely to complete the change they initiated than if they weren’t told, Betterment says.
Data drives the process
Some of the insights offered to investors come from technology companies such as Envestnet Yodlee. It sells its services to most major banks.
The company’s work includes analyzing billions of credit-card transactions and other data points. That analysis helps provide customers and banks with insights into spending patterns and customer behavior. “We can look at trends and how you spend relative to peers,” says Brandon Rembe, senior vice president of products at Envestnet Yodlee.
The company also provides insights into whether banking customers are likely to quit their bank soon. That way a financial institution can take action to maintain the relationship.
Hybrid approach
Some financial advisers are taking a hybrid approach that combines hands-on contact with customers for all transactions but also uses artificial intelligence to help the process.
“The artificial intelligence is our power assist,” says Julia Carlson, founder and chief executive of Financial Freedom Wealth Management Group, a wealth-management firm based in Oregon and Washington state.
For instance, the company says it is informed immediately if multiple clients suddenly start logging into their accounts. “That guides us to see what is happening,” she says. The response might be a broad email message or a blog that addresses what’s going on.
Ms. Carlson says a personal touch can help avoid missteps. In late 2018, when the market fell and spooked some of the firm’s clients into wanting to sell, the company was able to personally advise each client on what to do. “We like that a client has to come through us and not make those emotional decisions” without human interaction, she says.
