Independents lag on AI. Here's how they can catch up

• Key insight: In the employee advisors vs. independent advisors and AI race, employee advisors remain the winners, but as structural efforts improve, independent advisors can gain ground.
• What's at stake: proper access to the right tools means independent advisors can enjoy the same benefits as their larger counterparts.
• Forward look: Independents doubled their use of AI in a year according to JD Power

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Financial advisors who use AI have reported being more satisfied in their jobs, but the happiness is not spread evenly. Nearly three-quarters of employee advisors [employed by large firms] actively use AI, but only 42% of independent advisors do the same.

While in theory the tools are available to everyone, larger firms are better equipped to roll out AI to employees, meaning that smaller and independent firms need to accelerate their governance procedures, vetting processes and training to catch up.

The AI gap between large and small wealth firms

The gap isn't due to a lack of access to technology across the industry. Smaller firms are taking big steps, according to the JD Power study that measured advisor satisfaction and AI usage. The number of independent advisors who reported using AI jumped from 19% to 42 % in just one year, according to that study.

Rather, it all comes down to structure.

Wirehouses "have the ability to really build out this technology, integrate it into their platform, establish the rules and train the advisors," said Joe McQuaid, COO of Tampa, Florida-based Concurrent Investment Advisors, in an interview. 

James Spinelli, founder and CEO of Great Valley Advisor Group in Berwyn, Pennsylvania, grew his firm from a couple of advisors over 12 years ago to a 215-advisor firm that now manages just under $15 billion. He also developed a compensation tool called Advisor BB (Advisor Book of Business) that he deployed to about 80 RIAs before selling this past year to Bozeman, Montana-based AdvicePay. 

In the case of RIAs versus wirehouses, it is a matter of dollars and cents, he said. Bigger firms also have "the governance and they've got everything in place for that tool that they want to roll out," he said. 

For firms that want an overhaul, Spinelli believes deployment has to be strategic. 

"If I rolled out a CRM and was like 'everybody has to use Wealthbox, there's no Salesforce [or] Redtail,'" he said, adoption would rise faster, "but that's not necessarily a good thing because you take away choice [and] flexibility."

Addressing the cost and integration factors

One challenge smaller firms grapple with around AI is cost. Basic systems that meet the criteria advisors need, including proper safekeeping of client information, can run into the thousands of dollars per month. 

Dan Eyre is COO of the software company DeepVest, which recently launched Day One. Day One is the company's answer to the financial dilemma that offers smaller firms a suite of its AI tools and solutions for a low-entry price point for the first year. 

"If they have the time and the tools, they're able to better serve a client than a larger firm, where they don't get quite as much mind share from the advisor or the wealth team," he said. 

By targeting smaller firms, Eyre said, the services are a win-win for both DeepVest and its clients. 

"We know they're going to win that business," Eyre said. "They're going to use those tools and put them to better use because they don't have all the red tape."

One potential pitfall firms face without a streamlined system, according to McQuaid, is integration. Firms might not want to invest in an entire suite and opt to instead take what is known as the "bolt-on" route. When firms choose to bolt-on by adding AI features to their existing legacy software, the integration problem surfaces. 

"If AI is added to every one of the tools that we use, it still doesn't solve the problem," said McQuaid. "In the independent world… one of the issues with using all of this different fintech is [it] doesn't integrate well. The data doesn't flow back and forth between one system and another system."

For instance, an advisor using a financial planning tool and CRM that are not fully integrated with one another requires duplicate data. "If you have an integrated layer that's on top of your system that's utilizing AI, I think the experience is going to be far superior," said McQuaid.

Governance as the unlock

As governance catches up, Spinelli expects AI adoption will "skyrocket," with independents eventually surpassing their larger firm counterparts. Firms without clear governance policies risk having their advisors "skating on this fine line," he said, "of, 'oh, can I put a client's name in here? And is that going to be an issue with this tool that we're using?'"

Getting ahead on policies includes clarity around what governance should cover. 

"I think governance is extremely critical, and making sure that you have governance in place," said McQuaid, adding that governance can outline which AI tools firms use and the data they allow those tools to employ. 

"If you're not using an enterprise model, I would never put personal identifiable information (PII) in any AI model," he said. "Those governance rules are important." 

Larger firms, McQuaid said, can fold strong governance and compliance policies directly into operations. 

"Independent firms, I believe, have a lot of work that needs to be done ahead of time," he said.

Other governance measures could include:

• Running AI tools through vendor due diligence, similarly to the process used with CRM or planning tools.
• Asking the vendor if it trains its models on the firm's data.
• Checking the vendor's history with client data, including around breaches or data leaks.
• Limiting data exposure with new vendors that lack a track record rather than ruling them out.

For firms that don't have it in their budget to deploy an entire AI infrastructure from scratch, McQuaid suggests buying off-the-shelf tools as a more realistic approach. 

"The barrier of entry into building out an AI infrastructure is not low," he said. "It's a high barrier."

That barrier is why he believes more firms will move toward what he referred to as "consumption versus moving towards creation."

Another way to thoughtfully choose tools to deploy comes courtesy of firmwide pain points. A simple review of where the issues lie can result in a better understanding of the collective issues an AI tool could solve. 

"Build a plan around solving that pain," said McQuaid. "Then you can choose the tool that fits your platform."

Once tools are in place, McQuaid suggests tracking and measuring results. 

"What I found with a lot of smaller independent advisors is they're actually spending more time on the technology. So instead of it actually doing what it's supposed to do … they're spending less time with their clients and more time on the AI."