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In early February, the launch of Altruist’s artificial intelligence tax planning tool sparked a selloff in wealth management stocks, erasing more than $100 billion in market value. The incident had investors questioning the valuing of traditional, legacy wealth management models and whether AI-enabled advisory tools could disrupt the industry.
A new McKinsey report says the selloff was part of a broader “revaluation” of software-as-a-service (SaaS), with investors discounting future cash flows and questioning whether the business model can maintain margins.
“Wealth management is now experiencing its version of SaaSpocalypse,” the consulting firm wrote, in The signal in the sell-off: Wealth management’s value in the AI era. “Industry leaders are worried whether the rapid commoditization of technical expertise will erode the barriers to entry that have historically protected high-margin advisory fees. Investors have moved from viewing AI as a productivity enhancer to a structural threat to traditional business models.”
McKinsey argues that AI will replace certain tasks, including preparation, data extraction and document drafting, but it will not take over the entire job of a financial advisor. The ultra-high-net-worth and high-net-worth individuals demand accountable judgment and behavioral coaching that a human advisor brings.
However, the consultant predicts that AI is likely to take over for standardized, lower-touch advice models and for younger clients, but not for core advice segments, McKinsey states.
“While we anticipate a repricing of those services where clients perceive no differentiation, such as basic tax projections, the fear of an immediate, industry-wide fee freefall is likely overstated,” the report states.
That AI efficiency will provide some cost relief and capacity expansion for the advisor, not necessarily an automatic discount for the client.
“We believe fee pressure will be uneven, manifesting as demands for transparency and unbundled pricing rather than a blanket reduction in basis points,” according to the report.
Wealth managers are most vulnerable to AI’s impact in the client interface, which could shift from traditional systems to an automated operating system. If that happens, the stickiness of those client relationships from the traditional back-office and workflow goes away.
“We have already seen digital-first innovators close the gap in account opening and funding speeds, proving that the primary theater of competition has moved from the ledger to the experience. While incumbents can defend their turf through partnerships or acquisitions, the signal they should monitor is the emergence of a dominant, independent interface that successfully relegates the legacy business system to a background utility,” McKinsey states.
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