How the best advisors use technology to grow
Advisors whose practices are deeply integrated with technology are more efficient, reaching more clients and earning more than those who are not, according to Envestnet.
But the technology is only helping the advisor manage the practice better, says Envestnet CEO Jud Bergman, and can't be a sole solution for advice.
Speaking with Financial Planning, Bergman shared his thoughts on how advisors should approach adding technology to their practices, the impact of the Department of Labor fiduciary rule, and the future of advice delivered by call centers.
An edited transcript of the conversation follows.
How should advisors enhance their practice with automation technology?
We view that advice is best rendered to high-net-worth and affluent individuals around an advisor that is supported by the best technology. There is tremendous power in leveraging the kind of calculations and raw power that computers have.
Let’s leave artificial intelligence aside for the moment. There are simple activities that an advisor should not be doing on their own. One example is systematic rebalancing. We have the benefit of millions of investment accounts that advisors have entrusted to us, and being able to see performance over time from different practice patterns.
We measured the value of systematic rebalancing in 2007, 2008 and 2009, and for those accounts that were continuous accounts by the end of 2015. We found that in most markets it adds between 40 and 50 basis points per year in value. It’s by the way also a risk mitigator, so the alpha has been created with lower volatility.
By the end of 2015, those accounts that had benefitted from systematic rebalancing had a 1,550-basis point advantage over those that did not. That’s remarkable, but what is troubling is that in that same period, less than 35% of advisors systematically balanced accounts. Some didn’t have the tools. Some did it, but didn’t do it systematically.
When I was an advisor, I used to shut my practice down for the month of August and I did household rebalancing across all accounts. It took me weeks. Now instead of doing it once a year I do it twice a year, some do it four times a year, and now it takes several hours instead of several weeks.
There's no argument that there are obvious benefits to leveraging technology.
Experts plus machines deliver better outcomes than experts or machines alone. This is a framework from which advisors, we think, ought to look at how they render advice, how they manage portfolios and manage client relationships going forward.
What are the areas that computer software can do better and what are the areas that the human expert can do better? This is what Gary Kasparov understood and what the best advisors understand. There are some things that humans do better than computers and vice versa.
There are many considerations now — tech upgrades, regulatory demands, new competition. Would you say a practice is challenged on multiple levels?
It’s a challenge that is self-navigated with the thoughtful and intentional deployment of technology.
Fee-only advisors have been acting as fiduciaries exclusively for many years. Even so, they now have a regulatory challenge for certain IRA accounts, and even more so are the challenges for hybrid advisors.
The practice most challenged now is the commission-based. In the post-DoL environment, the importance of technology and productivity leverage becomes mission critical. How is it that a commission-based advisor or even a hybrid advisor can know their clients in a way that enables them to render best interest advice?
Take something that is just the simple process of understanding your client in the context of a financial plan — technology is just about to take the onboarding process and know-your-client process from the period of weeks or months to just moments or hours. It is warp speed acceleration and a quantitative enhancement.
The advisor can use aggregation technology, personal financial management apps and rules-based financial planning that presents a picture of a client where all of their assets, liabilities and spending is presented in analytics that not only the client can fully understand, but enables the advisor to present appropriate strategies — portfolio construction, asset allocation — that leads with the goals, objectives and the risk tolerances of that client. It is disruptive technology and it requires a change in the practice.
Are you looking at any firms at this time to bring into Envestnet?
We don’t expect to do any major strategic transactions for the foreseeable future, but there may be modest additional investments that we would look to make.
How has competition evolved over the last year?
It’s the most exciting time that I’ve ever seen in the business. All these firms understand the power of technology. There are more solutions and more choices at the hands of savvy and successful advisors than there ever have been.
A recent FINRA report actually bolsters arguments against investors using automated advice, according to the author of an agenda-setting study on digital advice and investment law.April 21
Regulators should step up their inspections of digital advisers as these tools surge in popularity, the firm said.September 12
I think there are some challenges that are posed by the DoL rule, but those advisors that successfully navigate those challenges over the next couple of years, and who make the right technology choices, I think are going to find that this is a very good business for many years to come.
The hybrid robo model is gaining currency and has spurred discussion about the future of advisor practice. Would Envestnet ever consider providing support for advice over the phone?
We have no present plans, but we have a number of advisors who have asked, “As I extend my firm and brand into this area on smaller accounts, could you be of some help in terms of servicing those accounts?” We have said yes on a number of fronts, but we have not yet made any decisions or commitments to go further, although we have been asked by several firms to provide more services for those advisory practices in the context of the digital offering.
When an advisor adopts the data aggregation and PFM apps that then flow into a financial planning app, there are questions that their investors have that are application-oriented — simple questions about how it works or how to interpret information. Our support would be right up to the question about advice, but there’s a blurry line that advisors are looking for some help in supporting.
What's the potential for call center advice in the future?
Our digital solution is adopted for firms that want to serve small IRA accounts. By taking our digital solution there, we will be able to take accounts that advisors won’t find cost effective and they can turn those accounts into advisory accounts. I don’t believe that business model can be expanded into something that works for sophisticated large accounts. I think those accounts are best serviced in an advisor-centric model that leverages technology and that doesn’t rely only on technology.