Michael Lewis' 2003 book
Moneyball chronicled how the 2002 Oakland A's built a baseball team using data and advanced analytics instead of traditional methods of evaluating players. In doing so, Oakland used
sabermetrics to identify undervalued players and successfully compete against teams with substantially larger budgets.
The explosion of data in the Internet age has inspired all industries to deploy their own version of Moneyball, and financial technology companies are developing new ways to let advisers take advantage.
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Few companies sit on as much data as Envestnet Yodlee, one of the largest providers of financial data aggregation. The data powers
Yodlee's new AI tools, but it's also unearthing new insights about client behavior and financial health.
"I think the metric of the future for high-net-worth investors and their advisers is going to be spending rate," said Frank Coates, executive managing director of Envestnet Yodlee.
Though institutional investors think a lot about "sustainable spending," the data hasn't traditionally been available on retail investors, he said.
With Yodlee's technology giving advisers access to every transaction a client makes, Mr. Coates believes advisers who pay attention to spending can provide significant added value to clients, just as the As found an advantage by considering on-base percentage and slugging in addition to traditional numbers like batting average.
The biggest concern people have is whether they will run out of money before they die. While few advisers want to be the bearer of bad news for clients spending too much, it's a conversation they need to have if they are fiduciaries, Mr. Coates said.
There's also an opportunity to deliver good news to families who have over-corrected and are saving too much, Mr. Coates added. And it helps advisers answer other questions that come with aging, such as those related to medical costs or assisted living.
"Advisers who are picking up on this saving rate are having a totally different kind of conversation," Mr. Coates said. "I think we're going to see a lot more people want to engage in financial planning."
Data is even helping advisers making internal decisions, Mr. Coates said. Aggregation is giving business owners a better understanding of what their firm is worth, and predictive analytics can pinpoint which clients are most likely to leave an adviser.
Despite the availability of new data, many firms haven't yet embraced how new age analytics can improve a firm's success. Many still rely on rules of thumb and old wives' tales to make portfolio decisions, said Aaron Klein, chief executive of
Riskalyze.
Some still adhere to the traditional wisdom to "invest your age in bonds," meaning a 20-year-old should have 80% equities and 20% bonds, while a 40-year-old would have a 60/40 mix.
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"It's a one-size-fits-all, cookie-cutter approach that doesn't match the reality of who people are; doesn't match the reality of what these funds actually do," Mr. Klein said. "The level of data that we have is unprecedented … When I look out there, I don't see a lot of new metrics that have grabbed ahold of advisers."
This was part of the philosophy behind Riskalyze — delivering an objective, mathematical approach to determining client risk that removes adviser bias from the equation. It's also driving Riskalyze's latest product, Stats, a dashboard of analytics and graphics to help advisers find new insights about client portfolios.
For example, advisers can use Stats to assess which funds in a portfolio are correlated and depressing diversification. Instead of displaying the numbers in a giant table, Stats has what Mr. Klein calls a chord diagram to make it easier for the adviser to get useful information from the data.
It's a "next-generation way to visualize correlation," he said, and developing these new tools will help advisers make better decisions.
While there hasn't been the same kind of push back to analytics in finance as there was by baseball traditionalists, there are still those resistant to change.
"The greatest resistance we see is among what I would call the old-mind brokers, the transactional advisers who really don't want their clients to understand the amount of risk they have in portfolios," Mr. Klein said.
There also are people who reject the data when it doesn't align with their gut instincts.
"We always say, 'trust your feelings' is only for Jedis," he added.
But neither Mr. Klein nor Mr. Coates think data should completely replace an adviser's intuition. For one, markets are too dynamic and there are too many variables to remove human decision making.
There's also a human element of being sensitive to clients' feelings and the enormous impact financial decisions have on their life that a computer can't replicate, at least not yet.
"Unlike a professional sport that may not care about a player's feelings, the pushback from advisers is worry about clients being willing to take the risk the data says they need to," Mr. Coates said. "It's a more touchy-feely relationship that overrides the way they make recommendations to clients."
Advisers shouldn't go full blown sabermetrics, but the use of data is only going to expand and improve with time.
"We're still early. There's a lot of hype, a lot of excitement around incorporating it and understanding it," Mr. Coates said. "It's a nine-inning game, but we're in inning one."
