Physical Address
304 North Cardinal St.
Dorchester Center, MA 02124
The Importance of the Traditional Financial Advisor
The rapid adoption of digital technologies with more Americans staying home has accelerated during the pandemic in an unprecedented way. Most wealth management firms are conducting virtually all of their client meetings via Zoom, Google Meet or other video communication services, and people age 60 or older are now very comfortable using this technology.
Traditional Advisors Provide a Human Touch
While many retirees will increasingly become more comfortable with using technology, services – especially those with a human touch – are needed now more than ever before. The unique nature of some businesses, which cannot be scaled the way a Netflix (ticker: NFLX), Facebook (FB) or Alphabet (GOOGL) can, demonstrates how human relationships and trust continue to outweigh some technological advancements.
The human element is needed for advising a married couple who may be concerned about the financial welfare of the surviving spouse after the death of the other. Ensuring a loved one has their financial needs attended to after your death is a sensitive matter that technology usually can’t fulfill. The reason is simple: Money is a personal matter of psychological security. Coordinating income streams, life insurance policies, estate documents, re-titling accounts and reallocating investments are immense undertakings for anyone, let alone someone not well-versed in financial affairs. A trusted advisor can provide comfort and clarity during these emotional times.
A financial advisor also adds differentiated value to the client relationship by providing comprehensive advice, rather than solely focusing on asset allocation and investment management. Money touches a person’s life in so many more ways than just investments. The robo-advisor platform charges a lower percentage fee to the client, but its value proposition is usually not an apples-to-apples comparison.
A financial advisor offers services that touch on everything from the purchase of a home to ensuring that beneficiary designations are up to date and consistent with legacy wishes. The majority of client conversations center on the client’s long-term goals and creating a plan to reach those goals. Investment management is a part of that plan, but it is not the whole plan. The plan may factor in taxes, cash-flow, debt management, Social Security, or Medicare and is personalized to that client, not to an investment algorithm.
Robo-Advisors Changing the Landscape
Over the past seven years or so, the technology revolution has disrupted the financial services industry in material ways. Fintech firms and robo-advisors manage money for people based on a series of “risk tolerance” questions and algorithms at lower management fees than traditional advisors. Some large discount brokerage firms have added a human element to their robo offering, where you can call and receive advice from a credentialed advisor.
The human element offering on top of a robo platform is moving more in the direction of what a traditional financial advisor offers, but there are key differences. For example, Schwab offers a $300 upfront and $30/month subscription service for access to a CFP if you are utilizing its robo platform (Intelligent Portfolios also uses all Schwab funds and holds a hefty cash balance). The biggest differentiator with this offering versus a traditional advisor is that you do not have a dedicated relationship; it is more of a call center. When it comes to heeding financial advice, the continuity and trust developed from a dedicated advisor can be an important factor. Personal Capital offers a robo-advisor with a dedicated advisor, but the fee is 0.89% up to $1 million and looks a lot more like a traditional advisor model.
Firms are attempting to offer wealth management services to people using automation, and this evolution has made many wealth management advisors reevaluate the viability of their business models. But over the past eight years, despite some progress, robo-advisors will have about a 3% penetration rate by the end of 2020, according to Statista. As more Gen Zers enter the workforce, it is likely that this percentage will grow.
There still will be a cohort of people who prefer the relationship with a trusted advisor, but financial advisors who focus only on investment advice will face increased competition from robo-advisors, rather than from advisors who are offering comprehensive financial advice that incorporates technology.
The wealth management industry recognizes that technological advancements should be embraced to enhance the service offering financial advisors provide.
The continued persistence of the advisor-client relationship owes itself to the unique nature of providing financial advice. Some professional service businesses are extremely difficult, if not impossible, to scale; customized financial advice is one those businesses. Just as it is impossible to have thousands of genuine friends, the relationship between advisor and client involves intangible elements like trust, vulnerability, rapport and compassion.
When a client decides to work with a financial advisory firm based on the support and needs of the surviving spouse, so much more than numbers and returns enters the equation. Neither a robot nor an algorithm can replace that relationship.
