The average sized account has received an average experience for many years from financial advisors—the survival of middle-class millionaires and human financial advisors will rely on the personal touch.
For the last few years broker/dealers have convinced financial advisors to send their smallest accounts, those unsophisticated accounts, or those fee conscious accounts to a robo-advisor.
They did this in the name of “achieving scale” by asking them to focus on more profitable opportunities. Most financial advisors have thrown their hands up in surrender to the rise of the machines. Others laughed at the machines when they went offline during a 4% market drop in February 2018.
However, the newest test for the robo-advisor was the steep decline driven by fears over the coronavirus. How did they do? They saw massive inflows of new assets from new investors. They saw aggressive tax-loss harvesting. They saw a lot of their clients buying on the dips. These aren’t the actions of dumb people who have no experience with stock market investing. These investors are enjoying the very low cost (all in costs are between .25% and .40%) benefits of robo-advisors.
The moral of the story is that these people are not unsophisticated, nor should they be viewed as insignificant. They trusted an innovative piece of software to execute bold trades and smart tax strategies during one of the most volatile weeks we have seen in a very long time, and the most challenging environment a robo-advisor has ever seen! The “do-it-yourself” crowd has also jumped onto these platforms, like Betterment and WealthFront, which total almost $30 billion in assets under management.
Will these platforms inevitably replace humans?
Is this the Netflix/Blockbuster moment?
Is Geoffrey the Giraffe from Toy R Us warning all of us that the robots are here to stay and humans had better find another vocation?
The average sized account has received an average experience for many years from financial advisors. That experience included an annual review and emails from them either monthly or quarterly.
Here are the challenges for the humans moving forward:
- Smaller investors will no longer tolerate paying outrageous fees just because they are small accounts. Many advisors currently charge 1.50% to these clients and service them less!
- Larger investors will demand a client service model that encourages strategic conversations around a customized financial plan. Most financial planning output from software driven programs is confusing and “canned.”
- Generation Xer’s and Millennials are demanding a life altering experience from the client service model, not just a smiling face.
- Retirees need to see how they are doing towards funding their lifestyle. This requires a system of matching purpose-based assets to their corresponding liabilities. This type of financial planning is called Dynamic Mapping.
In order to justify paying three or four times as much as a robo-advisor, the human financial advisor has to be able to connect with the investor on a human level, with human-centered financial planning tools. This is their only way of avoiding extinction during what might be a Blockbuster/Netflix moment. There has to be an acknowledgement that these robo-advisors will continue to improve through the technology of artificial intelligence and the trend supports the smaller investor in a way that is equal or better than what a human financial advisor would offer at this level.
Over the decades, many smaller investors have sought low-cost investment options because they knew they didn’t have enough capital at risk to worry about. They knew their savings wasn’t enough to retire on. It wasn’t enough to put their children through college.
However, at some point, the capital becomes large enough to apply serious risk management to their program. This is where humans have a real opportunity, but it will require behavioral change. I call these investors “middle-class millionaires.” They typically have around $750,000 set aside for retirement (or are projected to) and at least “significantly assist” their children with college costs. Although they don’t feel like super-wealthy people, they know they have to seek assistance from experts who can help with financial planning.
Unfortunately, the financial planning software that most advisors use is confusing, at best. Advisors show them the spreadsheet output of Present Value/Future Value calculations in an effort to have them follow the cash flow. Without fail, these investors look up afterwards and say, “What do I do now?” Some advisors even brag about “monte carlo” simulations. These graphs look like Andy Warhol’s hair through the eyes of an acid trip. There is no comprehension of that sight!
Dynamic Mapping lays out those calculations graphically—that supports the calculations of all of a family’s financial obligations. This kind of visual output supports strategic thinking in the face of emotional reactions to the family’s journey. Whether a family is in accumulation mode or retirement income mode, this method adds clarity to anyone’s concerns about personal benchmarking.
Lastly, the demands of Generation Xer’s and Millennials are unique from generations in the past. They seek assistance in improving their lifestyle. This requires that financial advisors focus on spearheading teams that:
- Preserve wealth in multiple ways (minimize pain during market downturns, enact tax minimization strategies for capital gains taxes, unearned income taxes, wealth transfer taxes, and limit liabilities from frivolous and/or fraudulent lawsuits).
- Restore their time to focus on their profession and family.
- Maintain a high degree of privacy and discretion.
If the humans are going to hold back the machines, they will need to add these personal touches today.
Jeff Mount is president of Real Intelligence LLC. Jeff has been active in the financial services business for the last 25 years.
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