When you hear the words “Robo-Advisor,” what do you think of…? The Matrix?
And does “Financial Advisor” conjure up a swaggering DiCaprio in The Wolf of Wall Street? Or maybe someone in a Brooks Brothers suit, describing products you barely understand?
If you said yes to either, you’re not alone.
One common fear about the new wave of robo-advisory firms is that, once you take the “red pill” and dive in, you’re no longer in control. You’ve turned your money over to a mysterious series of algorithms with no human in sight to help you guide it.
Many investors – particularly younger ones – are also put off by the idea of bespoke-suited advisors from traditional firms who are trying to up-sell them investments and insurance products with hefty fees and commissions. And even if they were to opt for the more conservative “blue pill,” traditional advisories are often not interested in speaking with them because they can’t make the hefty minimum investment.
While there is some truth to both stereotypes, there are also big shifts going on in the financial industry that make this a great time to take advantage of both a new breed of independent financial advisor and the efficiencies that targeted robo-platforms can provide.
Here are the differences – as well as drawbacks and benefits – in a nutshell:
- Inexpensive compared to full-service portfolio management
- Lower barrier to entry: lower initial investment requirements
- Democratic: all clients benefit equally from algorithmic decisions, not just the big investors
- Data-driven: driven by numbers, trends, and deep data – not emotions
- Limited scope: robo-advisor only handle investment management, not comprehensive financial planning
- Generic: they categorize you using broad-stroke demographic – not individualized- goal and risk-tolerance profiling to build your portfolio
- Automatic: selling or “rebalancing” can be triggered by pre-set formulas at times that you might be wiser to stay put
- Limited opportunities: many robo-firms currently have a limited or “preferred” set of funds and options you can invest in
- Impersonal: no human interaction for questions regarding your individual investment portfolio
Traditional Financial Advisory Firms
- Someone who picks up the phone when you call or will see you when you make an appointment.
- Flexible: can make real-time decisions about what’s right for you or when to buy or sell not rather than being locked into formulas.
- Multi-layers of expertise to call on
- Barrier to entry: many traditional advisories have high minimums and confusing requirements and may only offer enhanced services to “premium” clients
- Conflict of interest: many advisories have a “corporate agenda” to promote certain products, or they follow a [Suitability Standard] that doesn’t necessarily put the clients’ interests above their own
- Change resistant: larger organizations can be “too big for their own good,” and slow to incorporate new tech or new processes that add value for their clients or address clients’ individual needs.
- Limited customization: established firms frequently use old-school models of demographics, risk allocation, and target dates without factoring in what makes each client unique
- Impersonal: while customer service is available, traditional firms often don’t truly “meet you where you are” and customize services and portfolios for you unless you have a large portfolio
Enter the New Breed
A growing number of independent financial advisors are disrupting the traditional model and starting to create a “third way,” hybrid advisories that strive to offer all the pros and – hopefully – none of the cons. They offer clients customized fee-only services – unhindered by corporate agendas – and with a lower minimum investment. At the same time they are able to incorporate the newest tech tools that not only make it easy for new clients to get started, but also offer fast, best-in-class investment management modeling to make faster decisions about managing investments.
Or, as Josh Brown so eloquently put it in a recent blog post, “…innovation and creative spirit is fleeing from the Old World to the new one.”
So why haven’t all advisors embraced the new technology to offer enhanced services to their clients? The three biggest reasons are inertia, inertia, and inertia. It’s not easy to change entrenched business models, culture, and processes. Remember how Netflix caught the video rental business napping?
Why Not Just Go with a Robo-advisor?
Robo-advisors generally only offer investment management, not comprehensive, goal-oriented financial planning. While both investment advisors and robo-advisors can recommend investment direction, strategy, and allocation, a good financial advisor can help you identify goals, customize budgets and cash flow planning, and help you with insurance, credit, and debt management, things a robo-platform can’t do.
The most important thing about the integration of new tech with personal attention and a customized plan is that a user-friendly tech interface can allow clients to manage all the pieces of their financial plans, from cash flow to 401Ks, while allowing an experienced advisor to monitor it and give clients a call when that advisor sees an opportunity, a red flag, or wants to check in about goals and direction.
These days, clients can see through the bespoke suits; what they’re looking for is bespoke service. By embracing selected and appropriate technology, this new breed of independent financial advisors are able to offer all the “pros,” while creating a new model of more transparent, conflict-free financial management that’s available to everyone who wants to set – an achieve – financial goals.
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