The rise of robo advisors has thrown down the gauntlet to their human counterparts, a welcome challenge that has enabled the “cream of the crop” to take centre stage.
That’s the view of Ahmad Soleiman-Panah, a Vancouver-based financial advisor with Nicola Wealth, who believes active managers have had to ask themselves some hard questions about the value they are providing clients.
Robos and passive funds, coupled with the increased resources at clients’ fingertips via the internet, mean expectations have increased and questions about their role have got tougher.
Soleiman-Panah traced a lot of the skepticism back to the 2008 financial crisis, when active managers failed to prove their moxie when it mattered most. The result has been a migration to index funds and robo advisors, which are cheaper and, in many investors’ eyes, do the same thing their portfolio manager was doing or, more pertinently, was not.
To counter this, and prove their expertise, he told WP that advisors either have to come up with alternative investment solutions or additional financial planning services. Then, if they fail to outperform, they are still able to provide value and display their skill.
For retirees and business owners looking for security and yield, it represents a dilemma and an opportunity for advisors. Where do they go? Simply heading to a robo or a bond ETF is not really going to cut it right now – although even if it suits the client to do so, they don’t need the help of a professional to do that.
Soleiman-Panah said: “Some advisors were making a living creating an active portfolio that really mirrored a passive fund – and they are not able to do that anymore.
“At my firm, Nicola realized some years ago that this is not the best model in terms of diversification. Plus, I have friends who text me more complicated strategies than a 60-40 mix – they’re talking about options trading and derivative strategies; people have so many resources they can use now.
“We introduced alternative asset classes like private debt and commercial mortgage funds for our clients, and we just introduced a new infrastructure fund. These are the kind of examples of what the investment industry will need to do as the prominence of robo advisors become larger.”
The other side of the value proposition is on the financial planning side and whether you are actually solving problems for clients to justify your fee. A robo advisor or passive fund only attempts to solve the investment side of the portion, so there is a gap for advisors to seize when it comes to business or retirement planning, for example.
Nicola Wealth has introduced a business transition event for clients, giving them access to experts like tax partners and a top M&A lawyer, providing a level of care and attention a robo can’t provide.
He said: “Whenever you have a challenge or whenever you have some competition, it's good for our industry. It's good for us to need to justify our fees whenever possible. The really good advisors should look forward to the conversation about justifying their fees because they'll have a good case and they'll be able to win business. The ones who don't have a good case, their clients will rightfully look at alternative investment and planning options.”