You may have heard recently that the financial planning profession is under attack. Advisors are in grave danger of being rendered irrelevant, the Cassandras warn, by the online investment advisory platforms: the so-called robo advisors.
What you dont hear is that this is nothing new.
In fact, the short history of the financial planning profession can be viewed as a series of evolutionary responses to different mortal challenges all of which, in one way or another, have sharply questioned the relevance and value of financial planners.
DO-IT-YOURSELF THREATS
The first that I remember came from Money magazine as well as the host of other personal finance magazines that suddenly became mainstream reading material through the raging bull market of the 1980s and 1990s. (Remember, this was a time when it was not uncommon for hairdressers and cab drivers to offer their opinions about the stock market.)
Money started branding itself as Americas Financial Planner, and its articles questioned the value of working with a flesh-and-blood advisor. After all, why should investors pay fees for a financial plan when they could find out everything they needed in the pages of a publication with stories like 10 Funds to Buy Now?
Of course, Money and its peers offered no actual personal or customized advice. Not only did readers get zero planning, but the magazines recommended exactly the same mutual fund products for everyone whether readers were new college graduates or thumbing through its pages in a nursing-home rocking chair. They recommended the same stocks and funds both to the wealthy and to those who were teetering on the edge of bankruptcy, regardless of an investors individual goals and objectives.
Later came the fearful challenge of the discount brokerage firms, whose message was: Why pay all that money for professional advice when even a baby in a crib can buy and sell stocks?
The ubiquitous TV ads invited people to churn through their portfolios strongly suggesting that, in doing so, they would crush the market and make so much money that they could buy their own island and then figure out what to name it.
My response at the time was: Why are we paying all this money to doctors, when we can go online and diagnose ourselves?
I suggested that a do-it-yourself appendectomy might be less painful and damaging than the outcome suffered by a majority of day traders, who managed to lose the entirety of their retirement savings during the greatest bull market in history.
BROKERS SALES PITCH
More recently, weve had brokerage firms describe their brokers as fee-based advisors, operating under sophisticated sales programs (also known as gathering assets) that look a lot like the AUM business model. To my mind, this like having drug sales representatives open up medical offices - dressing up in white coats and trying to figure out which end of the thermometer to insert into you before they recommend whatever drug pays the highest commission on the grid.
And now we have the robo advisors, whose websites imply that flesh-and-blood planners are an expensive rip-off when you can get a perfectly good index portfolio, plus rebalancing, plus tax-loss harvesting, for 15 to 25 basis points a year.
Does any of this sound familiar?
REAL WORRIES
I believe that each of these challenges actually did represent a legitimate threat to the financial planning profession. By reproducing what planners were offering at the time, at a significantly lower cost, they forced the profession to constantly move to higher ground, accelerating the normal evolutionary processes by orders of magnitude.
In response to the personal finance magazines, advisors had to stop selling telephone-book-size planning documents and provide ongoing advice and service to their clients. This led to the birth of the AUM business model, quarterly performance statements and the gradual death of sales as the primary advisor revenue model.
Then, to beat back the challenge of the brokerage firms, advisors have created a new and more personal version of their service, which has come to be known as life planning. Advisors have begun delving deeper into their clients goals and objectives, and expanded their array of services to help clients work with mortgage lenders, negotiate the purchase of homes and automobiles, and plan vacations.
A number of advisors now help clients manage their human capital Others offer Social Security planning and help with end-of-life issues. Some even collect from clients the names of local service providers computer service people, lawn maintenance, home repair, kitchen remodelers who have provided extraordinary service, in order to share those names with other clients.
The advisor thus becomes the nexus for all the clients financially related needs.
So how will advisors respond to the online challenge? First, they should recognize that the online investment platforms have commoditized many of the most labor-intensive rote chores that advisors currently perform and that this actually does advisors a favor.
You can now outsource or delegate the downloading, tax-loss harvesting and tax-aware rebalancing to the various companies whose algorithms can do these things better and more efficiently than humans can. You can eliminate up to 40% of your current internal operating expenses, and more than 40% of your mental oversight.
That frees you up to spend more time in client-facing activities: giving advice on life transitions, holding your clients hands during the next market downturn (and the one after that), coaching clients as they create more satisfying lives and careers that require them to navigate difficult financial obstacles.
Many advisors will also offer more detailed tax planning, recognizing that under the new tax laws, the higher tax brackets are actually much higher than advertised, because they also eliminate valuable exemptions and deductions.
FORCED IMPROVEMENT
Theres an obvious theme to this never-ending story. Advisors have had to improve their model over and over again so that they could deliver better, more-valuable service and advice than the new competitors. In this rapid evolutionary process perhaps the most rapid of any profession in all of history advisors and consumers have both been big winners.
Of course, each time a new challenge had been beaten back, there was a mistaken sense that surely this was the last time advisors would have to relocate to higher ground. Surely this time, the tide of commoditization and nonprofessional competition would finally subside.
As the online competition forces the profession to up its game yet again, perhaps the bigger lesson to be learned is that the tide is always going to be rising at your feet.
You can never get so comfortable that you arent ready at a moments notice to step out of the ankle-deep water, and find creative ways to raise your service standards and the quality of your advice.
I have no idea who or what will present the next challenge. But I can predict with confidence that in the coming years, youll become ever more valuable to your clients lives. Because youll have to.
Bob Veres, a Financial Planning columnist in San Diego, is publisher of Inside Information, an information service for financial advisors. Follow him on Twitter at
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