As we're ushered into a new financial planning era with so much web-based software to predict our financial future, we, the financial planners, have an even bigger responsibility to educate, guide, and interpret the results for our clients.
Earlier this year in the Wall Street Journal, we received an alert: “New Study Questions Retirement Planning Calculators’ Accuracy.” Essentially the article stated that the retirement tools proliferating online are hazardous to consumers, which is exactly the opposite of what the financial planning community was hoping to achieve. The more assumptions such tools make about you, the less accurate the results may be. Furthermore, there is no conversation between such digital services—the most notable which is the robo-advisor—and a human client about other aspects of retirement planning, such as Social Security benefits or Medicare planning. (For related reading, see: Embracing a Short-Term Boring Retirement Plan.)
Pros and Cons of Robos
Since their debut around 2008, robo-advisors have become numerous. Undoubtedly, their popularity has to do with automation and low-cost, which appeals to large demographics such as Millennials and people whose assets do not meet the minimum required by many fee-based managers. Furthermore, robo-advisors eliminate the influence of some emotions and the lack of investment discipline, which can hinder efforts to save and invest for the future. To that extent, robo-advisors can become a great tool for both advisors and clients.
On the other hand, as people continue to accumulate wealth, they develop a host of other financial concerns such as how to minimize tax burdens, guidance for planning their children's education, and implementing estate planning and risk management techniques. Simply saving money on asset management fees may no longer be the primary concern of clients; where to get trustworthy and knowledgeable professional opinions often becomes the priority.
Besides the professional counseling, emotional support from a human advisor also makes them indispensable. On many occasions when clients called me, it had nothing to do with finance—they just needed someone to listen. Clients need our sympathy and some common sense direction. Try that with a robo—it may pick up the phone instantly, but there will be a long silence on the other end.
Financial planning is a process, not a product or one-time deal, and it should not stop after advisors input clients’ data or use a robo to build a portfolio model. What differentiates human advisors from any artificial intelligence is their understanding of complex rules and regulations and their ability to find opportunities and solutions for clients’ needs, whether it’s the desperate tax deduction or peace of mind for their retirement outlook. Most importantly, advisors should be able to communicate their thoughts and recommendations to clients, listen to their feedback, and modify the strategies to motivate them for the next most important step—implementation. (For related reading, see: How to Budget and Spend to Maximize Happiness.)
Conceding a Little to Your Digital Competitors
Advisors can't stop the growth of robos, as reported by Business Insider Intelligence on June 9. This year it's forecasted that robo-advisors will manage around 10% of total global assets under management by 2020. So why not welcome them and incorporate them into your business model? The lightning-fast calculations from robo software can create some instant wow factors; they're especially useful for advisors to use to test various recommendations in front of clients for the probability of success in retirement planning.
My personal philosophy always is to have the best of both worlds. This is what one of my clients had to say after we finished their plan using software: “The ability to play with the assumptions and look at different options is cool. But honestly, it was the time you took, using it as a tool to explain the planning process to me rather than simply the tool itself, that was the most 'exciting.' A hammer is a hammer; by itself, it doesn’t build a house. You showed me what the house could look like, using this hammer.”
With that, I hope I have demystified the imminent threat of robo-advisors taking over the world and have opened your eyes to the opportunity they present for financial planning, particularly for advisors who provide the kind of comprehensive financial planning services clients deserve. (For related reading, see: Class of 2016: Start Your Retirement Planning Now.)