FX and Tech: Tools for Wealth Management

Wealth Management Tools

As the financial services industry becomes more automated, sophisticated analytics and forecasting tools are being offered directly to consumers to help them make more informed financial decisions. Exchange rate functionality is often a critical component of these platforms. We take a look at how the wealth management industry is building FX features into the solutions that it offers clients. 

As a new generation of technology takes hold, financial services companies are empowering their customers with an array of technologies once only available to professional and institutional audiences. From credit scoring to personal banking and budgeting, individuals now have an unprecedented number of high-tech options to help them manage their finances.

The same is true for the investment business. Automated advisory and wealth management programs, or “robo-advisors”, are giving investors the ability to track and manage their investments with an unprecedented degree of sophistication. The vast majority have built-in analytics and forecasting functions to assist users in estimating investment performance under various market conditions.

This is especially useful in calculating foreign exchange exposure, an important issue given that most investors today have globally diversified portfolios (the Investment Company Institute estimates net cash into world equity funds grew more than 10% in 2015).

To be sure, FX considerations occur at all stages the wealth management process. As the industry embraces automation, there are a number of instances where exchange rate functionality helps improve the client experience:

1. Portfolio Construction – Whether an individual account or 401(k), the exchange rate impact of any investment must be taken into account when building any multi-asset portfolio. A desired 10% allocation to say, Canadian stocks, could change if there is an unexpected fluctuation in the Canadian dollar. A sudden plunge might cause the investor to rethink that exposure. Analytics that help investors determine portfolio weightings need to be able to source FX data instantaneously, ideally via an exchange rate API built directly into the platform.

2. Investment Analysis – Tools that help investors understand the performance of specific portfolio assets at a given point in time are another important feature of many wealth management platforms. Since the value of an asset can fluctuate based on the underlying exchange rate, many of these programs rely on automated data feeds sourced directly from the markets. The value of $10,000 in gold bullion, for example, is affected day-to-day by currency movements. In order to determine the value of an investment, exchange rate data must be available on the spot.

3. Prediction and Forecasting – One of the most valuable components of today’s automated advisory platforms is the ability to help investors make informed buy and sell decisions. An investor mulling the sale of US Treasury bonds, for example, might consider the future value of the US dollar. Algorithms that can map the value of those bonds against the likely trajectory of the dollar are seeing more widespread use. These technologies rely not only on current exchange rate data but also take into account historical data to find patterns and make predictions about the future.

The industry is likely to invest more in these data-leveraging platforms in the years ahead, as robo-advisors offer a scalable, efficient, and lower-cost alternative to the more traditional model of phoning up a flesh-and-blood stockbroker. According to a recent Cisco study, the algorithmic technology could displace nearly 40% of incumbents over the next five years. Clearly, technology platforms are becoming increasingly sophisticated as FX functionality is playing a critical part in helping them serve investors.