Financial advisors live in a disrupted world. Some may go the way of the dinosaurs, but others may prosper and thrive. It all depends on how advisors react to two major developments.
Financial technology has become so good, it can handle tasks like choosing investments, allocating assets, and tracking the performance of securities in ways that a person never could.
So-called "robo advising" can create a portfolio, periodically rebalance it, and manage it for tax savings. Not only can it do these things, it does a good job of it. In fact, it is so good that advisors are struggling to keep up. With thousands of mutual funds, stocks, ETFs, alternative investments and advanced trading techniques today, it is nearly impossible for a human being to consider all the possibilities that could help an individual meet investment objectives.
In addition, investors are flocking to fintech. Some 33% of the U.S. population has adopted fintech, and that percentage is growing every year.
And with the advent of artificial intelligence, there is a possibility that a bot could get to know customers' tastes. This could encompass investment objectives, tolerance for risk, age-appropriate asset allocation, retirement planning, lifestyle changes, and life events such as getting married, having a baby, and getting a new job. In short, much of the personalized service advisors consider their best advantage against the takeover by fintech could actually be handled by bots.
Then there is this foreboding twist: about 30% of fintech adopters are banks and insurance companies. With major players in the financial industry automating their investments, it is highly likely the public will follow. This is basically an endorsement of the safety and accuracy of fintech.
By the way, the adoption rate by the public in China is 69%, followed by India at 52% and the U.K. at 42%. The U.S. is playing catchup, but if history is any indicator, Americans will embrace the new technology quickly and perhaps even surpass the adoption rates of the current top countries.
Financial advisors have been fighting against the new technology for years, but this hasn't slowed down the onslaught of robo investing.
However, those who embrace it have the opportunity to prosper. The emergence of the technology-savvy advisor is helping some firms not only survive but succeed. Such an advisor utilizes technology to help select securities and build portfolios, and then takes on a role something like a coach.
Coaching remains necessary to keep investors from making emotional decisions. After all, no one claims that securities chosen by a robo advisor never decline in value. And when they do, it is human nature to want to bail out, abandon the investment plan, and hoard cash.
But wise advisors know a long-term view tends to win out over short-term panic. By staying the course, with minor adjustments, investors are more likely to meet their objectives and overcome bumps in the road.
The advisor's role going forward may be to keep the client from making emotional decisions. Their main function may be teaching discipline. They can keep clients from chasing stocks that have risen too high, help them avoid extreme exposure to risky investments like Bitcoin, and help then evaluate the investment style that is best for them (for example growth vs. income). A good advisor can also help create a comprehensive plan that includes college tuition, retirement, and having money for medical expenses. In short, the advisor can help reduce anxiety in a way that a robo investor never could.
However, another function is possible. If advisors become adept at financial technology, they could become guides in how to use it. Setting parameters for searches and making selection based on multiple factors could mean that not all investors understand the full capabilities of financial software. The advisor who masters such programs can become the financial tech advisor who knows all of the ins and outs of a program and how to get the most out of it.
A robo advisor can only work with the data it is given, and there is a possibility that the investor may not enter every important nuance into an investing program. The human advisor has the opportunity to discuss specific financial moves and how they fit with the individual's tastes. For example, when choosing among five similar stocks, it may come to light that one of the companies does a lot of charity work. This could be something the investor never thought to enter as a preference, but upon finding the company, might decide this fits best with his or her values.
Expenses for trading stocks, along with management fees for mutual funds and exchange-traded funds (ETFs) have dropped so far that investors don't accept high expenses any longer. Many advisors are in the position of being their client's greatest cost.
This is especially true for advisors who charge commissions on trades. Fees for advising and managing portfolios can tack on more charges.
Fintech comes at a very low cost, and management is automated, meaning it is basically no cost. The one-size-fits-all approach makes fintech extremely attractive to the average investor.
In addition, very small investors can invest as little as $1 per day and have their money put into ETFs automatically. This is the specialty of Acorns. It rounds up each purchase that appears in a bank account and invests the spare change. For example, a purchase of $5.55 would be rounded up to $6.00, with Acorns taking the extra $.45 and investing it.
Costs for such services are as little as $1 per month.
The combination of low fees and low entrance requirements means investors no longer feel the need to qualify for investment services. Vanguard, for example, uses robo advisors for clients with under $50,000 to invest, and only when an investor has above that amount do they assign a human advisor to the account.
Small is the name of the game, both in terms of the size of investors' accounts and the fees they are willing to pay.
Financial advisors who understand the new investment mentality realize that vague charges for vague services will scare off many a client.
This is actually an opportunity. Many advisors are turning to wrap accounts. These accounts can include an entire portfolio of investments with only one fee. The client doesn't have to worry about hidden charges, unexpected fees, and accumulated transaction charges.
When advisors present an array of fees such as percentage of assets, commissions, hourly rates, flat fees per project, and so forth, they will definitely scare off millennials, who have become suspicious of experts to the point that they don't want to pay them. Other investors may feel the same way in light of the low-cost trading and portfolio-building services available.
Add to that the fact that the client isn't interested in whether the advisor is advising, managing, trading, researching or taking care of administrative duties. They certainly aren't interested in paying separately for those functions.
The wrap account reduces all of the possible functions and charges for them down to one simple fee, often based on a percentage of assets. It is up to each advisor to determine what percentage will cover all of the possible duties carried out, but one thing is certain: the single-fee era is here.
There is one more strategy that has not been talked about much. Many people simply assume that machines are going to take over human functions and that there is nothing you can do about it.
But what if you are better than a robo advisor? A lot of people accept digital portfolio management without really comparing results to what they could get with a human advisor. If you have insights and skills that can beat the recommendations of a robo advisor, you can be a disruptor yourself.
This means that instead of resisting the new technology, you might want to master it. Then pit your skills against the advice your bot gives you.
You might be better at anticipating trends, recognizing market inefficiencies, and making financial moves all the bots overlook. For example, you might anticipate the Fed raising interest rates aggressively, and advise your client to reduce bond exposure for a while.
Bots are extremely likely to follow a consensus, an average approach that has high likelihood of working. A human advisor can assess the long-term value and ignore a lot of the market noise that comprises the data bots use.
Also, if bots become pervasive, then they will all end up with the same investment strategy and cancel out each other's approach.
Beating a bot may be a challenge, but if you can come up with insights that are outside of the inevitable average recommendations that result from multiple robo advisors, investors will be knocking down your door to get you to manage their portfolios.
Adapting to technology does not mean capitulating to it. Instead of fearing it will take over, you can take over. By embracing the technology and combining it with your own insights, you can make yourself a better wealth manager. Add to that the fact that you can get to know your clients in ways that bots simply can't, and you could still have an edge.
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