Recently, I overheard a friend of mine having a phone conversation. He said, “I heard Schwab is rolling out their version of a Robo-Advisor….yeah and it’s gonna be free if you have $50 thousand with them.”Once I got over my feelings about the prospect that my career was going to be taken over by robots, I got to thinking. “How will advisors like myself compete with the proliferation of online robo advisors? How can I add enough value for my clients over online services to justify them keeping me around?” Thankfully, noted financial planning author/speaker Michael Kitces has already written a thorough explanation of how financial advisors must change to coexist with “robo advisors." Kitces notes that robo-advisors like Wealthfront, Betterment and FutureAdvisor can effectively replace “commoditized” functions of investment management such as: utilizing low-cost, tax efficient investment vehicles, setting up an “optimal” asset allocation, auto-rebalancing and tax-aware asset location. However, Kitces also points out that these tools that robo-advisors leverage “have already been available to and implemented by advisors in the form of ‘intellegent’ rebalancing software for nearly a decade now!” Therefore, if the same “commoditized” aspects of investment management are available to investors and financial advisors alike, how do financial advisors, specifically, “real advisors” continue to add value to their clients above and beyond what a software program can do? For purposes of this post, I define a “real advisor” as a human being, and in this case, one with the skills, knowledge, tools necessary to give competent advice. Furthermore, I define a “real advisor” as a fiduciary, obligated to always do what they reasonably believe to be in the best interest of their client and who uses peer-reviewed academic research as the basis for their investment advice, not the latest prognosticator from Wall Street.I believe there are three main ways that real advisors can add value over robo-advisors:1. Coordination of the financial plan: While many robo-advisors do provide a good service of offering tax-efficient, low cost passive investments, they cannot replace the value that a real advisor can add by coordinating all areas of an individual’s financial plan. For instance, many couples I meet with for the first time either don’t have life insurance, don’t have enough life insurance, or are paying way too much for the insurance they have. If a client is insufficiently insured and suffers a disability or premature death, even the most high-powered investment software in the world won’t be able to help that client’s family reach their financial goals. In a different circumstance, if the clients are spending too much on unnecessary insurance, this can hinder their ability to save for retirement, rendering the sophisticated software virtually useless with no money to plug in.Furthermore, a real advisor will be able to communicate with a client’s CPA to make sure the investment plan is coordinated with their tax plan. Similarly, real advisors can communicate with the client’s estate planning attorney to make sure the client has proper wills/powers of attorney, investment accounts have the proper titling, beneficiary designations, as well as coordinate gifting strategies. In addition, real advisors can help their clients choose which retirement accounts to fund and in what order as well as help them decide which 529 best fits their college savings goals and on and on and on.When it comes to investments, a real advisor is able to help their clients discern how changes in their investment portfolio affect the overall financial plan, not just the investment portfolio itself.2. Behavior coaching: Possibly the most value a human advisor can add is by helping investors avoid costly behavioral mistakes such as buying high, selling low, and relying on their neighbors or financial media for investment advice. When it comes to investment planning, the job of an advisor is to help clients develop a well-thought out plan based on their own unique goals, time horizon and risk tolerance. To be fair, most of the investment software is created with the expectation that individuals will stick to the plan. The problem is, the individual investor can simply turn off the software and override even the best laid plans without having a conversation with anyone. Real advisors can reinforce that knee-jerk investment decisions based on emotions can be hazardous to their clients’ long-term goals. A recent study from Dalbar showed that the average mutual fund investor trailed the S&P 500 Index by nearly 4 percent over the 20 year period ending 2013. A real advisor will help clients avoid timing the market by developing a plan ahead of time that they can stick with through the inevitable ups and downs of the market. Robo-advisor software on the other hand is unable to perceive the behavioral weaknesses of its users. According to this Dalbar study, the benefits of behavior coaching alone by a real advisor would have more than paid for the costs of hiring a real advisor.3. Personal relationships: Truly the best part of being a financial advisor is the wonderful relationships that can be developed with clients. Obviously, this long-term relationship is not possible if your only advisor is software. To some, the fact that they don’t have to talk with anyone about their money is a good thing. To others, the value of a personal, human relationship between client and advisor goes beyond just a friendship. If an advisor knows a client well, meaning they know their family, goals, values and aspirations, the client will be much more likely to listen to the advisor and avoid those behavioral mistakes listed earlier. An advisor who knows the family, will be able help the client make better decisions about retirement income, lifestyle choices and family issues that cannot be quantified on a software program.Even given all of those advantages for real-advisors, there will still be some sophisticated “do-it-yourselfers” who prefer to go the robo-advisor route to ostensibly “save money.” They must know however, that as it is with most professions, the cheapest guy doesn’t always deliver the best value.
Philip joined DHG Wealth Advisors in 2013 and launched the firm’s Memphis, TN Practice. As a financial advisor, Philip provides financial planning and investment advice to individuals and specializes in working with physicians and healthcare professionals.
Philip also works with the Retirement Plan Services Team to provide investment advice for both corporate and non-profit organizations’ retirement plans.
Philip is a Certified Financial Planner™ professional and holds a Certificate in Financial Planning from Southern Methodist University and a B.A. in Business from Principia College. He enjoys helping his clients create a values-based plan that allows them to spend time on things they are passionate about.