A trend is occurring in the financial services industry that revolves around the automation of the service provided by a financial advisor. Technology is finally catching up to a service that was a perfect example of non-personalized services being sold as personalized services. Demystifying a process has serious repercussions when the bulk of what your selling is a repackaged gift.
The financial services industry has for years been able to take advantage of a poorly educated group of clients. The bulk of the Baby Boomer population, and certainly generations before them, were very new to the idea of investing stocks, bonds and other non-bank investments. This caused a natural pairing to develop between advisor and would be investor. Just as inexperienced hikers usually seek out a guide, financial advisors were sought in order to put Mr./Ms. investor on the proper path.
Today the environment has radically changed. New clients have more exposure to the area of stock and bond investing in the sense that they may have had parents that invested in a retirement plan or other account and they have received some form of exposure from the huge growth in the financial entertainment and information sector (CNBC, Fox Business for TV and a plethora of websites). This doesn’t mean they’re skilled, but it means they have some working knowledge of a process that previously was largely unknown.
Old and new investors both have a working memory of the market downturns that happened in 2000 and 2008. In general they all realized that their advisor did not magically save them from the wrath of the market. Comparing our current envi0nment to what existed prior to 2000, we see a stark contrast. Prior to 2000, an unprecedented period of consistent growth with minor corrections characterized the market. When things are good, it’s less likely that your guide is going to going to be scrutinized for his/her performance. In short, you don’t know what you don’t know. If risk is in hiding, then we are more likely to forget about him all together or cause ourselves to believe he really isn’t as bad as what we had historically thought.
When the investing process is demystified and we realize that our advisor can’t shield us from the wrath of the market, then what value is the advisor? For your basic investor that doesn’t require complex investing or financial planning services, the value proposition falls apart. Technological advances in financial customer service provide an alternative that fulfills the basic functions that the advisor provided with lesser costs and fewer chances for smoke and mirrors selling schemes.
The rise of the robo-advisors has been brought in part because of the standard of service financial advisors have set throughout their history. Repackaging financial products and selling them as your own unique product creates no value, except for the person selling the ‘new’ product. The average investor doesn’t need an ‘advisor’ to con them out of a fraction of their money.
To be clear, if a management fee exists to get instant diversification or access to a specific segment of the market, so be it. That’s fair. A value is actually being provided. Creating pseudo funds that house multiple other funds is a joke and are leach vehicles for the people and institutions pushing them.
Financial advisors that are providing sub-par services will feel the wrath of robo-advisors. It’s a warranted repercussion to years of an easy ride.