“To all of those people and firms criticizing the Robo-Advisors…If you think you can do better prove it.”
Ben Carlson nails it in his post The Robo-Advisor Challenge Many advisors fear these insurgents. Advisors charging 1.25% AUM fees (assets under management); packing clients into proprietary or incentive-laden funds; and providing no financial planning services should be terrified. Their days are numbered. Though it may take some time, The Robo-Advisors will eventually eat their lunch. Creative destruction can be delayed, but not stopped. While bad news for the perverse-incentive set, the other side of the trade has a much brighter future. Advisors who work in their clients’ best interests have a unique opportunity ahead of them. This is even better news for the individual investor, who should expect to get many more services while paying less in fees. Not sure what to expect from an advisor in this new world? Here is a good representation of what a forward-thinking, fiduciary advisor should be offering you:
1. An accurate understanding of your risk tolerance – After calculating an investor’s risk tolerance using technology from a disruptive company, like Riskalyze, advisors can create low-cost, globally-diversified portfolios that take investment time-frame into account. Once investors fully understand the process and give the go-ahead, collaborative Robo-Advisors can take over. Robo-Advisors are moving into the institutional space and are looking to partner with RIA firms. Many of these firms, like UPSIDE, allow the advisor to create their own portfolios and hand them off for implementation, which can be done at the advisor’s custodian. If an advisor believes in creating as little friction as possible in trading costs, these accounts can be rebalanced once a year. The Robo-Advisor can do this for a small fee. This makes your interactions with your advisor more about your individual needs and goals, and less about short-term transactions.
2. Control over what can be controlled – Focusing on things that can be controlled (risks, allocation, diversification strategy, costs, time frame, etc.) instead of the unpredictable, is a more efficient use of time. This collaboration between you and your advisor will enable a personalized plan that liberates advisors from futile exercises, such as trying to accurately predict the market’s movement and picking the best-performing fund.
3. A robust, broad-based financial plan – After defining the relationship and gathering data, a comprehensive goal-based financial plan can be constructed. This should include “what-if” scenarios and a specific retirement income component. This is the foundation that all the advisor’s other services should build upon, and where the true value of the advisor is most apparent.
4. A strategy for Social Security and Medicare – A thorough advisor will educate investors about choices and pitfalls of all aspects of these entitlement programs. There are many misconceptions about both programs. An advisor could save a client hundreds of thousands of dollars by guiding them through these mazes. This conversation will be a much better use of everyone’s time and certainly trumps discussions about future levels of interest rates or currency values.
5. A strategy to finance college costs – This is the number one concern among many investors, and a good advisor knows this and is prepared to address the options for saving and borrowing.
6. Advice on budgeting and managing debt – Credit Cards and mortgages are often huge components of an investor’s overall financial picture. Advisors can help investors navigate their budgets and debt and find ways to put away the funds needed to grow wealth.
7. Guidance on insurance – Everything falls apart if assets are not protected from the unknown. Often investors are vastly underinsured and have very little knowledge of what coverage they really need. Often they own whole life policies, that can be very expensive, and the coverage still may be inadequate. By making sure they have enough term insurance to cover the early parts of their life, along with long-term care to protect the back end, an advisor can truly help protect his clients.
8. Education for heirs – When investors have amassed wealth they never dreamed of having, they are often conflicted. There is always great concern that their children will fritter it all away. An advisor can step in the role of teacher. This action will not only help preserve generational wealth transfer, but will also help investors have difficult conversations with their children before it’s too late.
9. Guide charitable giving and estate planning – Many wealthy people want to give to charity but don’t know the best way, and are suspicious of scams and other fraudulent behavior. An advisor can help fulfill some of the strongest wishes of their clients by educating them about instruments like Donor Advised Funds. Great opportunities will also be created for tax savings. An advisor should also encourage investors to have wills, health care proxies, and durable powers of attorney in place. Though boring and depressing to discuss, these actions reinforce to clients that an advisor has their best interests at heart.
10. Modify financial behavior – Investors will do bizarre and irrational things with their money because of behavioral bias. An advisor can point these out and train clients how to respond to all the financial noise they hear each day in the media. This alone will make their fee a bargain. Teaching people to avoid doing stupid stuff is priceless.
11. Maximize human capital – The amount of skills people acquire during a lifetime will have the largest impact on their salaries. A concerned advisor will encourage clients to continuously upgrade their skill set and will align their clients’ portfolios to the cyclical nature of their clients’ professions.
12. Provide emotional support during trouble times – The death of a loved one, the onset of a chronic illness, or going through a divorce create trying times. The pressure of managing finances can add to the stress. A compassionate advisor will help manage the affairs of clients going through these major life adjustments. A concerned advisor will welcome the chance to attend meetings with their clients’ accountants and lawyers, to make sure that all parties are on the same page.
For savvy investors who know now what is available to them, it is a buyer’s market. There is no need to settle for skimpy (one-note) service, when true wealth management and planning is at the ready, and for substantially less than the heavy loaded products the dinosaur brokers are selling.