How high-tech advisory models can help provide more opportunities to more investors
by Ken Thompson And Alyson KlugMr. Thompson is head of U.S. Wealth Shared Services and Alyson Klug is head of U.S. Wealth National Services at TD Wealth. Visit td.com.
It’s no secret that the COVID-19 pandemic accelerated the pace of digital adoption across all industries as businesses were thrust into a full-time, remote working environment. The financial advice business is no exception. Customers who traditionally interacted with their advisors on the phone or in-person now routinely use digital tools, like web-based meetings, to make contact as in-person meetings were not an option over the past 18 months.
As clients become accustomed to a high-tech environment, many are also seeking an increased control of their investment portfolios and want a greater say in when they invest and how they invest. Thus, clients now more than ever are adopting “robo advisors” – a fully-automated digital solution for those clients who prefer a more hands on approach.
However, the days of the financial advisor are not over as many investors seek third-party advice, especially in a continued period of market volatility. Many financial advisors offer a hybrid solution, giving clients the ability to invest while seeking that third-party advice.
As financial advisors think about the evolution of their business – from stock-picking to holistic financial advice, it’s important to understand the benefits of robo advisors, how they work and the benefits of continuing to be a client’s sounding board.
Robo-Advisors: The New Age of Investing
With a robo-advisor, all interactions are digital. With many platforms, a customer fills out an online questionnaire aimed at finding out his or her investment goals and tolerance for risks. With that information in hand, a portfolio is created that matches the client’s needs. Typically, the portfolios consist of low-cost exchange traded funds or index mutual funds. The firm will monitor the portfolios and periodically rebalance them, allowing investors to freely invest on their own without connecting with a financial advisor.
Robo-solutions are a low-cost investing solution, with fees well below the traditional 1 percent charged for advice. They can also be started with small minimum contributions, creating a cost-effective investment solution.
While investing is not a “one size fits all,” robos have grown in popularity among younger investors as retail trading applications have become increasingly more accessible. Robos, however, can complement investment portfolios of all generations and create a long-term solution for those who want to invest more independently in a digital fashion.
While robos may be a good first foray into investing, it may not be the solution to accommodate investors long-term as they move through multiple stages of their financial journey, which is where a hybrid advisor could be considered.
Hybrid Advisors: Another Low-Cost Solution with Long-Term Benefits
While many investors shy away from financial advisors given their higher fees, a hybrid advice solution can be another low-cost way to have a say in a portfolio while also benefitting from third-party advice.
For many investors, their financial situation will evolve over time as they may get married, have children, inherit assets and plan to save for a child’s college. As an investor’s financial journey evolves, a financial advisor can be there at every step of the way, providing valuable benefits to help their clients create a successful financial future.
Advisors can provide valuable help in dealing with more complex financial questions. For those just starting out, who have only a modest amount of money, financial life is simple, and a simple investment strategy may suffice. But as people mature, their lives get more complicated and so do their finances. They buy houses, they have children, they save for college, they think ahead toward retirement. All these events have financial implications and raise questions.
Is a 529 plan the best way to save for college? Is a fixed-rate mortgage a better choice than one with a floating rate? How much life insurance is the right amount to hold? Does it make sense to have an IRA in addition to a workplace 401(K) plan and if so, which is better, a traditional IRA or a Roth. Are there strategies available that may ease the tax burden, both today and in the future? An advisor available through a hybrid solution can answer these questions.
That same advisor can help clients put all the separate pieces of their financial puzzle together and build a financial plan that is flexible enough to change with changing circumstances. Finally, an advisor can be there for periodic checkups to make sure the plan still makes sense. Ultimately some of those customers will decide they are ready for a traditional advice relationship with a trusted dedicated advisor.
Advisors can provide reassurance in stressful times. American investors have generally been fortunate. Since the Great Financial Crisis of 2008, the stock market has moved steadily higher. But even in this benign period, there have been scary episodes. When fears about the economic implications of COVID-19 first hit in March 2020, the Dow Jones Industrial Average lost almost 10 percent on one day and nearly 13 percent four days later. Investors with longer memories may recall that other bear markets were worse. The S&P 500 lost more than half its value from its peak in 2007 to its trough in 2009; the Nasdaq fell 75 percent in the technology selloff that began in 2000 and ended in 2002.
During unnerving market episodes, it can be very helpful to hear the soothing voice of an experienced advisor—and not just for emotional support. A good advisor will remind clients that bear markets come with the territory and that they don’t last forever. Investors who don’t panic and stick with their plans—even if that means continuing to invest in the throes of a bear market– nearly always come out ahead in the long run. History has proven that time and again. It has also shown the opposite: that investors who dump their holdings at market lows come to regret their decisions. Studies have shown that investors who try to time the market by going in and out of stocks nearly always underperform. Advisors can reinforce that lesson at the most critical times.
Better Technology = Better Solutions
Sometimes when a new technology comes along it displaces what came before. However, the financial advice industry is constantly evolving and digital tools will only serve to complement financial advisors – not replace them.
Digital tools will remain popular because they are fast, accurate and easy to use. They have enhanced the consumer experience in shopping and banking, and along the way, raised consumer expectations. There is every reason to think they are already doing the same for advice. The genie is not going back in the bottle.
That is a good thing; so is the fact that new technology offerings—the robos and the hybrids—are making advice available to more people. The investing landscape is becoming increasingly democratized with new solutions for investors at every segment. Low-cost options can also help people start their investing journey earlier than they may have if they sought out a traditional financial advisor, getting a head start on saving for retirement, college or whatever goals they may have.
And, as an investor’s financial situation becomes more complicate, they can still benefit from the advice that financial advisors bring to the equation. They will have digital and human resources at their disposal. In short, they will have the best of both worlds.