Credit: Getty Royalty Free
By Karl Kaufman
The rise of Betterment, Wealthfront and other “robo-advisors” have disrupted the financial advisory business. Many millennials are eschewing traditional financial advisors in favor of algorithmic, low-cost alternatives to managing their money.
As Baby Boomers continue to age, the trillions of dollars in wealth they’ve accumulated will flow down to younger generations. Are financial advisors concerned about losing clients amidst the increased competition from robo-advisors? What advice would they give to a young financial advisor who’s just getting started in the industry? What does the future hold for financial advisors?
I asked these questions to the following group of experts:
- Ed Snyder, Co-Founder of Oaktree Financial Advisors in Carmel, Indiana
- Rosemary Frank, owner of Rosemary Frank Financial in Brentwood, Tennessee
- William D. Lee, Portfolio Manager from Ironwood Investment Counsel in Scottsdale, Arizona
- Joshua Escalante Troesh, owner of Purposeful Strategic Partners in Alta Loma, California and professor at El Camino College
- Marc Lieberman, CEO of Shorepine Wealth Management in Mill Valley, CA
- Jay Shah, CEO of Personal Capital, a wealth management software company
- Tony Drake, CEO & Founder of Drake & Associates in Waukesha, WI
Where do you see the financial advisory service business five years from now?
Marc Lieberman: Thriving! There will always be a need for advice. There are so many facets of the profession of advising individuals and families that get lost in the panoply of trying to get the highest returns. The true value of a great advisor is found in the things they do on the periphery of investing a client’s net worth.
How much do they need to save? How will they plan for Social Security? How will they transfer their estate upon passing? What are the tax implications of different investment strategies? This is not replaceable by an algorithm.
Ed Snyder: I’m hopeful that regulations will be put in to place to help consumers differentiate between who is a real financial advisor and who is a broker or salesperson. I’d like to see the salespeople parading as financial advisors as a thing of the past.
Rosemary Frank: If the last five years is any indication, the industry will still be trying to figure out how to talk to women, even though they are expected to control two-thirds of private wealth in just three years.
The industry claims to want to attract young trainees and women, but then they kill them off with antiquated sales training and forced behaviors that no longer work for the trainees or prospective clients. There is a general lack of understanding of gender and generational differences among the powers at the top of the larger institutions.
Those advisors who have joined the massive migration to the independent IRA model, where they can do it their way, will triumph in the long-run.
Jay Shah: We believe in a fiduciary future. The DOL Fiduciary Rule put this important standard on the map for everyday investors. And while the rule has not been passed, investor demand will continue to push advisors in the right direction — acting purely in their clients’ best interests.
Technology and the prevalence of the fiduciary model will bring unprecedented levels of transparency to the industry. Armed with this new transparency, investors will vote with their wallets and force the financial services sector to move from a profit-centric model to a customer-centric model.
What advice would you offer a financial advisor who’s just getting started?
Ed Snyder: Find a good firm and get started. You can move to another firm later, but get going and get some experience. It’s easier to find good financial planning firms today than it was 10 years ago. You can actually start as a financial advisor at a financial planning firm, not as a broker at a wirehouse or an insurance salesperson.
Rosemary Frank: There is no such thing as a generalist because you cannot do all things well. Choose a specialty you can be passionate about and excel at it. You will naturally repel those clients who were not a good fit anyway, and become a magnet for those who are a perfect fit.
Tony Drake: I have always told the advisors I teach and train that regardless of your license, you have to put the client first. Don’t be driven by commissions. When you put clients first, you will build a successful practice because clients will brag and refer others to you. Whether it’s our industry or others, do the right thing first and the rest will sort itself out.
Even though the fiduciary rule didn’t go through, it’s already created positive change. I’ve noticed when new clients come to our office or we’re holding classes, everyone knows the word “fiduciary.” You couldn’t have said that two years ago. The fiduciary rule raised awareness and brought to light the conversation about putting client’s interests ahead of the advisor’s interest.
Joshua Escalante Troesh: Young advisors entering the profession must develop deep skills in communication and emotional intelligence and must be able to guide clients in clarifying their life goals. The days of the financial advisor recommending investments and then sitting back to collect checks are fast coming to an end.
Jay Shah: It’s vital to act as a fiduciary for your clients, so you have a legal obligation to act in your clients’ best interests. All advisors should do this, but shockingly, many don’t, and investors are starting to notice. Could you imagine your doctor not taking the Hippocratic oath?
Investors deserve to be treated as individuals with personalized financial plans that dynamically update based on changes in circumstances and life events. Technology is inevitably going to play an important role here, so prioritize getting up to speed on digital offerings that allow you to provide clients with greater insight than the advisor next door. Do this and you can help transform your clients’ financial lives and retain your clients forever.
Marc Lieberman: I would say that education and experience are important. Get the CFP or CFA if you can. Avoid the pitfalls of many careers by trying to take shortcuts to success.
Work with people you respect that can and will teach you the right way to provide advice. Learn to listen! Clients want to share their dreams, desires and fears. Understanding the psychology of your clients is just as important as knowing which stock, bond or fund to choose.
How can the traditional financial advisory business compete with low-cost robo-advisors?
Rosemary Frank: There will always be a place for robo-advisors just as there will always be a place for a cheap burger. I do not compete with them.
Financial advisors need to realize that it is more important for them to understand their client’s goals than for the client to understand the advisor’s charts.
Ed Snyder: The person that is going to use a robo-advisor is a do-it-yourself type that wasn’t going to use a traditional financial advisor even before the robos came along.
These robos are asset allocators, not advisors. They aren’t putting together financial plans and following them through a relationship with a client. That part of financial advising — the planning, the relationship — can’t be robo’d away!
William D. Lee: No one has had to live through a bear market while utilizing a robo-advisor. I suspect when one happens, clients won’t be as keen to call an 800 number or simply have online access.
Joshua Escalante Troesh: While robo-advisors can build and rebalance portfolios, they cannot help a client balance competing goals, deal with the financial and emotional impacts of divorce or the death of a spouse, counsel them on too-good-to-be-true investment opportunities, nor advise on any other of the human side of financial advising.
Marc Lieberman: I believe that robo-advisors will find their niche in the traditionally underserved mass investor class. This is a great thing for our industry. Long gone will be the days of the grandmother or young investor being taken advantage of by a system that historically has done a poor job of protecting it’s most vulnerable customers.
On the other end of the spectrum, the mass-affluent and affluent segments will continue to gravitate towards a personal advisor. They just cannot get the flexibility, accountability, emotional detachment and tailored service a traditional advisor can provide.
Taken one step further, I foresee a world where most advisors have a self-branded robo-solution for their smaller clients or the children of their larger clients. The industry is not being bifurcated by this. It is simply another great innovation that can enhance the overall client experience as they move through the life cycle of saving for retirement.
Tony Drake: For millennials who are sticking $50 into an account each month, a robo-advisor is a simple solution. But, as the dollar values grow larger and the clients start to accumulate wealth, robo-advisors are no longer sufficient because they don’t offer advice.
I’m amazed at the number of multi-millionaires who haven’t thought about inflation, longevity and opportunities presented by the new tax code. That kind of financial advice can’t be replicated by a robo-advisor alone.
Jay Shah: There are advocates on both sides of the human vs. robo-advisor debate who neglect to confront the reality that neither, on its own, is sufficient. And some firms are making the mistake of belatedly adding technology tools to humans or vice versa, resulting in a disjointed offering that fails to combine them for the client’s benefit.
The winners will be advisors who seamlessly combine them into tech-powered human insights. That’s when 1+1=3.