Originally published in Advisor Perspectives, October, 24th 2016
There will always be investors who need traditional advisors. The question is whether your firm will be among the survivors.
There’s a quote attributed to Sean Lennon (the son of John Lennon) that reflects my current thinking about the future of the advisory business: “We live in a pretty bleak time. I feel that in the air. Everything is uncertain. Everything feels like it’s on the precipice of some major transformation, whether we like it or not.”
Several events in the past week caused me to focus on where our industry is headed. I wanted to share them with you.
A reader contacted me with an interesting story. He’s using an advisory firm that charges him 0.9% a year. He told them he was considering going with a robo-advisor or investing on his own. Their initial response was to lower his fee to 0.6% to entice him to stay.
He wanted to know if he should remain with the firm. I gave him the pros and cons of doing so, but didn’t provide any specific recommendation.
The firm he was using is large, well known and highly regarded. I was struck by how rapidly they offered him a significant fee reduction. It validates my view that there will be increased pressure on advisors to lower fees in order to compete with robo-advisors.
A recent article discussed the future of medicine. It quoted Vinod Khosla, at Singularity University’s Exponential Medicine conference, Mr. Khosla was the founding CEO of Sun Microsystems and is currently a venture capitalist. Here’s his prediction for the future of medicine (in the next 10-15 years): “He sees a medical landscape seething with data-hungry, intelligent algorithms like Google's AlphaGo instead of doctors as we know them today.”
Specifically, he noted the impact of the enormous amount of data that will be available in the near future: “Khosla said you can diagnose disease with a single biomarker – the chemical signature of sickness – or you can diagnose disease by looking at 300 biomarkers. You can look at the patient in front of you and compare them to the last few you’ve seen, or you can scan a database of 100 million patients for the last hundred or thousand with the same condition.”
Since no human can possibly analyze this data, Khosla sees the role of machines handling this task, relegating doctors to “comforting patients and translating the technical stuff.”
I was struck by the similarity of the medical profession he described to the advisory business. I can envision a future where all the data related to investing and financial planning is relegated to computerized algorithms, leaving advisors with the limited function of providing emotional comfort to their clients. However, unlike the situation Khosla posits with the medical profession, investors may not be willing to pay significant fees for this reduced level of service.
As part of an upcoming interview, I was asked to respond to a series of written questions. Here are two of them, with my response:
How much of a threat is robo-advice to traditional, face-to-face advice, and how should traditional advisers respond to it?
“I disagree with those who are trivializing the impact of robo-advisors. I believe it’s a seismic threat to traditional advisors. They will have to invest significantly in technology and reevaluate their fee model.”
What do you think the advice profession will look like, say, 10 years from now?
“Everyone agrees it will be radically different. None of us can predict the specifics. My personal view is that the current business model of traditional advisors will not survive. It’s also my view that the preference of investors for robo solutions will accelerate at a more rapid pace than many believe.”
While the future is uncertain, the technology of robo-advisors is evolving rapidly. The trend of fund families (like Vanguard and Charles Schwab) competing directly with both robo advisors and traditional advisors for the business of investors is likely to continue, broadening the availability of low fee advice.
Nevertheless, Turbo-Tax didn’t replace accountants. Discount brokers didn’t cause full-service brokers to exit the business. There will always be investors who need traditional advisors. The question is whether your firm will be among the survivors.