With all the buzz about tech companies such as Google teeing up to enter wealth management and threatening to replace financial advisors, it is important to consider what the advisor brings to the table. Is it enough?
First let’s review what advisors actually do.
Advisory firms provide services that vary widely from advisor to advisor. Most financial advisors only offer investment management with basic retirement advice and call that financial planning. Many provide sales or advice on insurance products. A smaller number of advisors will touch on budgeting, estate planning, college planning and tax planning. A few get in the weeds of the client’s entire financial picture, making sure that their client’s financial resources and habits are truly aligned with their life goals.
The rare advisor is willing to address non-numerical financial issues — the psychology behind spending/saving challenges, next-generation financial education, family dynamics around money, health events, aging and end of life.
Now let’s consider what technology can actually do and not do in the realm of each of these services.
Basic investment management is a no-brainer win for technology. Like it or not, the public is learning that active stock picking and funds designed to beat the market are crap shoots. Passive funds are ruling the day and technology has made it easy to parse out underlying investment costs and come up with an appropriate asset allocation. An advisor trying to sell just basic investment management services will have a tough time in the future.
The optimal portfolio is low cost and diversified both in asset selection and tax location. It takes ongoing education to create client comfort with the behavior of their portfolio. Robo advisors may push information, but when will they touch and mitigate the underlying emotions of greed, fear and exuberance that frequently cause a client to upend their investment policy?
Where else can an advisor add value in investment management? Tax efficiency. Sure, there are tools that do automatic tax loss harvesting but those tools are very insular — unless using an aggregator, they look at the account and not the client’s entire tax picture. More importantly, these tools don’t look at a client’s tax life: For example, is the client in a 12% or lower tax bracket where they would benefit from taking capital gains at zero tax?
Would artificial intelligence know that a client is getting ready to quit their job before age 65 and that extended year tax and cash flow planning is needed to qualify the client for low-cost insurance through the Affordable Care Act? We just had a client quit work to take a one-year sabbatical. She planned to go on COBRA for the year at the cost of $660 a month. Imagine her joy when we got her on a great ACA plan with zero deductible at the cost of $54 per month by managing her cash flow and tax picture correctly.
Will the computer planner know when the client has a health event that generates huge medical deductions and be prepared to help the client create income through retirement plan distributions or capital gains to utilize those deductions so they don’t disappear in the ether?
In retirement, the tax planning opportunities are sweeter. The golden decade between age 60 and 70 allows opportunities to optimize IRA withdrawals or Roth conversions or take tax-free capital gains. Will robo planners help clients over age 70 optimize their IRA charitable giving, being careful to help clients stay in more advantageous tax brackets and avoid Medicare premium traps? That is highly unlikely in the short term.
Will “Google Planner” listen to the client’s concerns about their adult child’s inability to handle money?
On the estate planning side, will “Google Planner” listen to the client’s concerns about their adult child’s inability to handle money, the son married to a bipolar wife or the desire to help a cousin’s child with Down’s Syndrome? Will titling and beneficiary designations be verified by the computer to make sure they are congruent with the client’s wishes? I don’t see that on the horizon anytime soon.
Will artificial intelligence recognize when a client needs to adjust their insurance coverage, including getting rid of unneeded policies before the policies expire? Considering that most of the algorithms will be geared toward making money for some large conglomerate, this cost savings for the client will likely go unnoticed.
When a client wants to change careers, is considering a divorce, is diagnosed with a life threatening illness or starts to have age-related cognitive issues, will the machine counsel them through complex financial decision-making, assist in arranging help, and basically tell the client, “I’ve got your back.”?
Will a computer share the pain, compassion and tears in those upheavals? Or the celebration and joy when success has won the day? The investment management and financial planning landscape is changing quickly. If you are an advisor doing basic investment management and cookie-cutter financial plans, Google is going to eat your lunch.
The job of the successful advisor will involve using technology to easily provide basic financial planning and investment management services. But that will be a tiny part of what you do. To thrive as an advisor in the new world,
As technology sneaks its tentacles into our every financial move — often in misguided ways — the successful advisor will step in and protect clients from algorithms that have gone awry.
Most of all, your passion must be helping people. When it comes down to it, people know the machines are not their friend. Maybe one day technology will be more human, but do we ever really want to see that day?
