Last Updated on July 20, 2020 by John Prendergast
The robots are coming, the robots are coming!
The financial planning industry is shaken up once again, but in a completely new way.
This isn’t like 2008 when the entire world was glaring at investment managers, blaming them for all the world’s problems. This time around it’s an all-out crackdown on high priced products and services.
Technology isn’t a new player in the investment business. In fact, technology has transformed the way we interact with markets and clients for the better. In most cases, new technology has supported advisor growth. However, we now find ourselves face to face with “robo-advisors” and they’re threatening the future of the human role in financial planning. Or are they?
New companies, such as Betterment and Wealthfront, are now providing their customers with low cost access to computerized investment management tools. It’s all made possible using algorithms, basically removing the need for a “human touch”. Clients simply upload their personal information and investment assets, and… viola…investment strategy in a box; and all for a price that’s 75% less than the typical human investment manager.
So, is that the end? Is it only a matter of time before these robots take over the investment management space, and leave us longing for the days of top hats and paper systems? I think not.
It’s actually a new opportunity for us; an opportunity to tighten up our spending, sharpen our communication skills and let the world know how valuable the human financial advisor really is. And the great news is that it doesn’t have to be an either/or situation. Clients don’t have to choose a robot or human. We can actually blend the two and become the cyborgs of the financial world.
Here’s What We’re Up Against
Plenty of articles have been written about the robo-advisor landscape. These companies are receiving millions of dollars in funding. It’s pretty obvious that they aren’t going anywhere anytime soon.
Most of these firms offer similar features, including:
1. Investment selection and implementation
2. Account monitoring and rebalancing
3. Account aggregation
4. Tax-loss harvesting
5. Some even offer basic financial planning (think Vanguard’s Personal Advisor Services)
The kicker is that they do it at a very low price, fees ranging from 0.15%-0.50%. And that’s the gap we need to close, but not by trading blows. Even if we morph ourselves into this so-called cyborg advisor, the truth is we still can’t compete with these price points. What we need to do is bring to the forefront the benefits of working with a truly independent, human financial planner.
How Do We Stand Apart?
So, rather than fight an uphill fee battle, why not showcase the value of independent financial planners?
It’s called comprehensive financial planning. And I’m not talking about simply helping clients project out how much money they need at retirement and then backing into an asset allocation and savings strategy. These robo-advisors will dominate here (unless of course you are one of the very few active money managers that has a chance at beating the market over long periods of time… not sure I buy that, but people believe stranger things… heck, there have been many bigfoot sightings right here in the US). I’m talking about providing clients with insights and perspectives that they don’t know they don’t know.
Here are just a few…
Buying a home: Sure, clients can work with real estate agents and mortgage brokers to purchase a house, but are these specialists really looking at the big picture? We support our clients as objective consultants, guiding them through the process: How much should they put down? Where should they take the money from? What are the tax ramifications? And then later down the road we help them decide whether or not to refinance, take out a home equity loan, etc. Mr. Robo ain’t doing that.
Investing in assets outside the stock market: Many people look at the stock market as the only place to invest for the future. Yet we know that diversifying your investments goes far beyond that. Who’s going to help clients decide whether it makes sense to invest in a rental property or buy a REIT? How about art, wine or coins? Does it make sense to invest in private equity, hedge funds, managed futures?
Philanthropy: When do you think the robo-rousers are going to be able to support a client’s philanthropic vision? Last time I checked, as humans, we add tremendous value here. Through conversation, we can support this vision, touching on values, legacy, estate planning variables, etc.
Others: What about cash flow management, paying off debt, college planning, and even accountability (holding clients accountable for taking the necessary actions)? No machine is going to beat the personal touch when it comes to these categories. Building personal relationships and becoming a trusted advisor to a family goes much farther than saving a little bit of money on investment management.
Take Advantage of the Momentum
Does this new player in the space mean that many firms may have to streamline their process and see where they can cut costs? And does it mean that advisors who have had their investment strategy on autopilot might have to start proving their worth? It sure does.
Let’s not forget that these new companies are doing all the grunt work of testing various technologies and bringing to market those that work. We can take advantage of this and use it as momentum to catapult ourselves ahead.
Case in point: Betterment is actually looking to provide their technology platform to advisors. Oh, and by the way, they are willing to private label it too. What a gift! Young agile shops and mature dynamic firms can ride this wave, double their efficiency and hone in on their niche.