If there’s one thing you can count on in a fairy tale, it’s consistency. There’s right and wrong, good and evil, wicked and wise. Come what may, justice prevails.
Back in the real world, what should financial advisors make of robo-advisors? Are they a big, bad wolf threatening to blow your financial house down? Or are they a fairy godmother, here to enlighten your clients and lighten your load? I would suggest robo-advisors can be neither and both. Either way, they aren’t as ‘new and improved’ as supposed.
If you look past the catchy, media-fabricated name, robo-advisors have essentially existed for a while under plainer wrap. It’s called technology. Integrate it with human advice, and you’ve got the same thing most advisors have been leveraging in some form or fashion for as long as computers have been around to remove programmable chores off our plates.
Before all the hoopla about robo-advisors, there were already service providers with similar job descriptions. For example, do you remember Altamira Investment Services? In the 1990s, they were offering investors direct access to turnkey, periodically rebalanced portfolios aimed at capturing particular market segments. Fees were low and, at least in theory, no advisor intervention was required. Altamira’s offering wasn’t called a robo-advisor back then, but it sure quacked a lot like one.
Where is the firm today? As described in a Globe and Mail piece: “The aggressive fund firm that shook up the industry in the 1990s now appears to be a pale shadow of its former self, slowly bleeding assets in a quiet corner of National Bank of Canada.”
Speaking of bleeding, I believe the rumoured demise of the flesh-and-blood advisor is premature. I can point to my own practice to illustrate. I’ve been using passively managed, factor-based investing for the past decade. An investor doesn’t necessarily need me to adopt this same approach. There are robo-advisors out there that offer ‘close enough’ solutions, or an investor could build it themselves using low-cost ETFs or index funds.
For some people, this may suffice – as long as they’re good at it and they enjoy spending a lot of their free time sitting at a computer, watching their investments, planning their insurance coverage, revisiting their estate plans and ensuring all the moving parts are synchronized. They may delegate the portfolio management to a robo-advisor, but that still leaves the rest.
Many families would just as soon work with a professional to guide their financial journey. I liken it to travel. Say you’re planning a two-week, multi-country trip to Europe. You could map it all out yourself by perusing TripAdvisor instead of using a travel agent. But you’ll certainly spend a lot more of your own time doing so, and heaven help you if anything goes wrong along the way.
Similarly, I find that plenty of people value having a real financial advisor to meet with face-to-face. While we can and should automate the tasks that a computer can do faster and better, people still like to talk about their dreams and what’s going on in their life. They want to bounce ideas off of you and hear your advice. They want a relationship.
This essential advisor role has not changed, especially when the markets are moving fast and people are tempted to do all the wrong things. Even if some of the latest robo-advisors offer a safety net, if an investor starts peering over the edge anyway, there’s nobody there to provide that critical mix of empathy and tough love that only a seasoned advisor can give.
Earlier in my career, I used to think my job was to make my clients happy. It’s not. It’s to make them successful. I have clients who say that visiting me is like going to the dentist; I take that as a compliment. It means that afterward, they can go back and worry about their own careers and families, with their financial responsibilities already completed.
So let the robo-advisors come. You may even welcome one into your range of offerings. But if you ask me, real relationships still offer our clients the best odds for living happily ever after in the real world.
Rob McClelland has been a financial advisor for the last 26 years and is founder, vicepresident and senior financial planning advisor at the McClelland Financial Group.