Given the rapid pace of advancement in our ever-evolving digital world, many people are understandably asking whether or not human financial advisors will be relevant in the future. My reply to this question is always an emphatic “yes!” which often surprises those who ask the question. The reason they are surprised is because the meaning of good advice—and an understanding of why people seek it and why they need it—is usually missing from the national conversation about advisors’ relevance.
Since the need for advice is deeply rooted in the human condition, the best advice helps investors take the emotion out of sensitive situations so they can make the most well-informed, objective decisions. This key element underlies the value propositions of good financial advisors because it helps investors understand why they should seek out professional advice. (For related reading, see: Robo-Advisors and a Human Touch: Better Together?)
Quantifying the Value of Good Advice
In the end, a good financial advisor provides two vital services: investment management and goals-based financial planning. In the investment management area, advisors provide asset allocation for client portfolios, investment selection based on that asset allocation, and consistent portfolio monitoring. On the planning side, good advisors understand the unique needs of each client and utilize their familiarity to build and monitor customized financial plans based on every client’s individual short-term and longer-term goals.
Many industry studies have attempted to quantify the value of good financial advice that incorporates both investment management and goals-based financial planning. Of course, at the risk of tooting my firm’s own horn, my favorite is Envestnet’s Capital Sigma: The Return on Advice™ study, which finds that advisors can add up to 3% in value per year to end investors’ portfolios.
I could go on and on about the financial advisor’s value in quantifiable, black-and-white statistics. But I believe investors need professional advice for so much more than annual portfolio value increases. Stop and think about it for a second. Why do you need a financial advisor? Of course, you need one because you want him or her to manage your money. But in the end, you want an advisor because they alleviate the emotional burden you experience lying in bed at night worrying about money and fretting that you don’t have enough life insurance to cover the needs of your family—or, better yet, because an advisor alleviates your spouse’s anxiety about these issues. (For related reading, see: 6 Life Events That Call for Professional Financial Advice.)
We all experience times in our lives when emotions cloud our good judgment, and many of these events also have a financial component to them. Good financial advice makes a big difference in situations when emotional and financial decisions intersect. For example, the financial crisis of 2008 and the Brexit earlier this year were scary events that adversely affected the markets. It’s also frightening when a spouse is diagnosed with cancer or is forced to move into a long-term care facility. During times like these, it’s easy to let our emotions get the best of us, and make snap judgments that negatively impact the longer-term attainment of our goals.
In these types of situations, it’s often impossible to take the long view, and the long view is, in most cases, the perspective needed to win the race—but that’s what an advisor provides. A good advisor steps in when emotions are running high to help clients make the right call instead of the easiest call.
For protection, our instincts often lead us to retreat to inertia during emotionally difficult circumstances. Doing nothing is easier than making tough decisions—and this is precisely why good financial advice, and the advisors who provide it, will always be essential. Advisors serve as a calming, rational influence when stress and fear threaten to cloud investors’ judgment, keeping clients on track and preventing them from making poor choices in the heat of the moment. No human being leads an emotionless existence, so human advisors will never become irrelevant. (For related reading, see: 6 Questions to Ask a Financial Advisor.)
Jay Hummel is Managing Director of Strategic Initiatives and Thought Leadership at Envestnet. He is also the co-author of “The Essential Advisor,” which covers how to build value in the investor-advisor relationship, and “Success and Succession,” which focuses on helping advisory businesses navigate the difficult transition issues arising out of a succession process.