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Rise of the Machines: Disruptive Technology and Advice

In the season 1 finale of Big Picture in Practice, Julie Willoughby and Syl Flood interview Sandy Kaul about how disruptive technology like digital assets and AI will impact the future of the investment and wealth management industry. Sandy is the senior vice president of Franklin Templeton.

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In This Episode, You’ll Hear...

0:39 – Unpacking Three Major Technological Trends

According to Sandy, three major waves of technological innovation have shaped the financial services industry.

In the 1960s, the amount of trading overwhelmed the industry’s ability to move physical stock and bond certificates, leading to a paper crisis. With computing technology, the industry was able to largely replace paper certificates, which opened investing to far more people.

Digitization led to electronic filing and small-order execution systems, an automated computer network that made it easier for smaller investors to participate in the marketplace. With the emergence of the internet came in-line trading options for individuals, as well as the birth of ETFs and passive investing.

We’re currently in the virtualization wave, which has allowed the market to become more personalized and develop new offerings like direct indexing. Investor needs change throughout their lifetimes, and virtualization offers technologies that lead to new capabilities tailored to each new generation.

These trends benefit advisors, who would struggle to personalize portfolios for each client without modern technology. Advisors who take advantage of technological innovation can tailor their advice to individual aspects of their clients throughout their life cycles.

5:52 – Is Decentralization a Benefit?

While Sandy agrees that decentralized services can be disorienting, she also thinks that there’s exciting potential in the space as well.

One benefit is the potential to embed self-executing contracts with digital assets. For example, digital asset rights and royalty pools generate steady income but are difficult for individuals to invest in because of operational challenges.

Decentralization and smart contracts solve that problem. With new technologies as part of the Web3 paradigm, someone who buys into a royalty pool of a band they like will receive royalties automatically without the need for human intervention.

This is exciting for investors, who can produce income in a new way. Another exciting aspect is the potential for utilization rights, such as exclusive access to concerts for a band that an investor has bought a royalty pool for. This process connects what investors enjoy with how they can generate investment returns.

9:11 – What Should Advisors Know About Web3?

Sandy cautions advisors against conflating Web3 and Bitcoin. While Bitcoin solved some key technology problems as the first type of digital asset, Web3 further developed the ecosystem by combining public blockchains and smart contracts.

Big Layer 1 public blockchains combine software development, an app hosting platform, and a payment network, all in one offering. Sandy believes that these technologies will become the distribution hubs of the next decade.

11:31 – Sandy’s Journey to Franklin Templeton

At Franklin Templeton, Sandy provides thought leadership and digital asset strategies. As an avid science fiction fan, she’s excited about seeing the concepts she’s read about come to life through technological innovation.

She’s passionate about helping people understand the digital assets space and believes that this space can improve society by addressing wealth inequality.

14:25 – How Are Advisors Responding to Digital Disruption?

Advisors are excited by the diversification benefits. Sandy has run model portfolios that demonstrate that even with just a 1% allocation during the past three years, which included high volatility, overall portfolio returns increased by about 200 basis points, while risk exposure only increased by about 50 basis points, significantly improving the Sharpe ratio. New technologies also offer exciting opportunities beyond the mature equity and bond markets.

However, the digital assets space is difficult to understand. The educational hurdle and the fear of volatility keep advisors cautious.

Sandy believes that with the crash of FTX, the cryptocurrency industry will invite in regulation and transparency, so that it becomes easier to identify the credible players in the space. So even though FTX has made some advisors nervous, in the long run it will bring more clarity and understanding to the space and how to professionalize it, just like how the regulations that came out of the global financial crisis made the hedge fund space a much safer place to invest.

20:18 – Artificial Intelligence and Investment Management

With AI, advisors can efficiently evaluate their client networks and how their clients move money. Artificial intelligence can even recommend how much cash to keep liquid at what intervals, and how much to invest in assets that mature at different periods. It provides deep analytics that allow advisors to offer nuanced and highly personalized plans for their clients.

AI can also provide opportunities for passive income. For example, Helium is a decentralized network for the internet. Those who get selected as a helium node can make $300 a month by deploying software on their computer. Whenever they’re not using their router, Helium will use it as a processing hub.

26:05 – The Future of Investing

Network effects are an important determinant of value for recent platforms. However, when Sandy thinks about the future of investing, whether it's in digital or traditional assets, she thinks the transition into Web3 and public blockchains will make data publicly available, and thus take away the data edge.

Her team is exploring models that replace network effects with crowd effects, asking, “What can you do to incentivize a crowd of people to remain committed to a platform?”

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