Balancing financial robo-technology and personal touch

By Tom Burmeister | 18 March 2016

Are you the right match for your robo-investments? Robo-advice has dominated headlines in the financial industry, with some predicting that the online advice market could reach $500 billion by 2020. These headlines are catching the eye of both FINRA and the SEC as well. The biggest question in light of the controversy around the fiduciary standard has been how well a robot can judge an investor’s tolerance for market risk.

FINRA and the SEC have recently begun a deeper examination of whether the risk profiles created by these robo-advisors have enough safeguards in place to account for sudden changes to a client’s risk profile or inconsistent answers on questionnaires without some sort of human intervention.

In my opinion, fiduciary advocate Ron Rhoades says it best: “Software has not reached anywhere close to the sophistication to be able to judge the needs to take on risk.” While online tools can be a great start to the overall investment conversation and to introduce prospects and clients to the concept of risk tolerance, the new fiduciary standard arguably requires more human involvement in this crucial step of the financial planning process.

Home and away: maintaining plan accuracy through account aggregation

The advice we give as financial advisors can only be as good as the information we receive from our clients. FINRA has recently ramped up enforcement of its own rule regarding the accuracy of held-away account data being used as part of a financial plan. Surprisingly, the DOL’s proposed fiduciary rule has been relatively silent on this issue, but a true fiduciary cannot provide sound advice without relevant and accurate data about their clients’ financial lives.

Account aggregation has emerged as the solution to many of these hurdles to true comprehensive financial planning. Through aggregation, both the advisor and client can feel confident that the financial plan contains both goals and recommendations based on the most up to date information available. For certain financial information that cannot be added to a financial plan through aggregation, firms may need to implement systems and disclaimers to indicate that an account was entered manually with information provided by the client.

Utilising an account aggregation tool in your planning process will allow you to increase your wallet share and gain deeper insights into the financial status of your client. By automating this account aggregation process, advisors will also save a lot of time on each plan because clients will be inputting their own account information (rather than the advisor completing the data entry). This provides the client with personalised advice based on a wider view of all aggregated accounts; therefore, the advice is even more accurate and personalised to each client.

Learn more about Advicent’s partnership with Quovo and the capabilities it provides to accelerate the convergence of PFM and financial planning here.

What is your goal for goals-based planning?

The impending fiduciary rules will certainly place pressure on investment-only advice, variable annuities, and certain active or alternative strategies while encouraging more goals-based financial planning conversations. A staggering 80% of advisors said their 2016 New Year’s resolution is to “implement a goals-based approach to investing for their clients.” These advisors will be adding more work (and potentially more clients) to their current load; however, utilising robo-technology into these workflows will undoubtedly save time and cut costs, while also still providing clients with the personal interaction with a human advisor.

Jumping forward another decade, advisors predict that goals-based investing will be one of the themes that gains the most momentum by 2025. Clearly the regulatory landscape of the future will necessitate financial conversations centered around what a client truly wants to accomplish with their money. We can all agree on that, so what’s the caveat?

Take it from industry analyst Michael Kitces: “the reality is that in practice the goals-based approach doesn’t always go as smoothly as hoped.” Traditional goals-based financial planning software, while lauded for its simplicity and ease of use, has also been plagued by some flaws that have gone largely unpublicised.

As Kitces points out, it is difficult for clients to know what their goals should be without an idea of how their current savings strategies and cash flows project into the future. Additionally, the perceived simplicity of goals-based planning can come to the detriment of the client when you consider how investments are grown, taxed, and spent throughout the life of a financial plan. A true fiduciary approach mandates a certain level of detail when it comes to making predictions 20-50 years into the future while still making these complex concepts simple enough for clients to understand and adopt in the present.

Download our free whitepaper to learn more about how to remain relevant to your customers as these technological advancements continue to change the way clients interact with financial advisors, and what they means for your business moving forward.

By Tom Burmeister, VP, Enterprise Accounts.

Become a bobsguide member to access the following

1. Unrestricted access to bobsguide
2. Send a proposal request
3. Insights delivered daily to your inbox
4. Career development