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Advisors are becoming 'mini asset managers': Q&A with Morningstar’s Dermot O’Mahony

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CHICAGO — Morningstar announced its latest software platform, which helps advisors better plan for client goals, at its annual investment conference. Financial Planning sat down with the firm's Dermot O'Mahony on the sidelines of show to talk about asset management, fee compression and the need for better financial planning.

Q. What are advisors looking for with new technology?

O’MAHONY: Advisors are looking for simplified planning experiences that can be integrated as part of their conversations with clients. It really started around the DoL rule. At the time we did a lot of work with the advisor workstation.

We’re also seeing firms moving to create their own advisor experiences with more integrations from third-party tools. Firms are interested in the itemized consumption of data. They are trying to differentiate themselves based on their own advisor experience. Not every firm wants to write its own portfolio analysis algorithms. They want to use data but wrap it up in their own workstations.

What investing trends are you seeing in the industry at large?

When you look at where the money flows are at the macro level, there are some interesting trends from institutional investors. Endowment funds and pension funds are generally not investing in mutual funds and other investment vehicles. What they are doing is screening for asset managers that have a particular strategy that they are interested in utilizing. Then they’re using that strategy as the investment vehicle. It gets very specialized very quickly.

That trend is moving into the retail space as well, demonstrated through the move to a model marketplace. Traditionally, retail investments were wrapped up in mutual funds or ETFs. There was no easy way for retail clients or their advisors to execute on underlying strategies without the vehicles. Technology is now in a position to enable the advisors to rebalance portfolios and begin to execute on the strategies themselves.

Advisors have become mini asset managers. They’re taking the asset management on themselves. There’s a push toward disintermediation.

How is the asset management industry handling pressure on fees?

We see it in the headlines: fees are going down. But even with zero-fee ETFs, there is money being made in other ways associated with cross-selling capabilities or by holding a lot of cash as part of the ETF and investing that cash at differing interest rates than what is being paid to the investor. Overall, it’s a good thing for the investors. Sure, it puts pressure on certain players in the space and people are going to have to adapt.

Rather than paying a third party in the value chain, advisors are now able to manage a portion of this themselves. Doing some of the asset management on their own passes on savings to the end client. Fees are a very big driver of value. The less fees you pay the more value you get and the more money you have at the end of the day.

How has fee compression on investment vehicles affected wealth management?

The reality is that fees are lower on the investment side of things and generally advisors need to provide more value through other means. Financial planning is part of that offer of broader services to clients. Obviously if you’re an advisor and your entire value proposition is offering off-the-shelf mutual funds to clients, the move toward planning could be detrimental. But, I don’t think we’re seeing a huge amount of those advisors out there. Today, it’s possible to basically grab something off the shelf, which saves time and effort and lets advisors use their time more effectively.

Will a push toward planning lead to changing fee structures?

There are behavioral folks who have done a lot of work on a conundrum around subscription fees for the financial services industry. If you ask someone to take money out of their pocket and put it on the table and pay for a financial plan — say a few thousand dollars — it’s going to seem like a lot more money than paying an ongoing fee. Whether that’s right, wrong or indifferent, isn’t really up to me.

You can argue there is a cost for ongoing management of the underlying assets. There is a difference between doing a financial plan, handing the plan over to the client and the client walking out the door and actively tracking those assets. More likely, advisors are continuing the engagement with clients and helping them make important decisions. It’s almost financial counseling. There is a lot of value to that client, especially ones with more complex and sophisticated needs.

We know technology has helped advisors. What about end clients?

The move to hybrid advisors has given the client more options. Digital offerings can lower the cost for clients, while the human advisors are freed up to address financial wellness and other behavioral aspects.

There’s a lot of applicability for technology to help advisors, like keeping track of spending and helping with budgeting. If there is money coming in, technology can find the best way to put that money to work. Advisors are then able to focus on financial counseling.

The machines are helping with investments and providing that service in a cheap, efficient way that leaves the advisors open to provide empathy. That’s what we’re seeing. A pivot toward financial planning — not a singular meeting but iterations and management over time. Advisors are providing ongoing financial guidance.

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