I like to think I am one of the few writers covering financial planning who can actually see the future. This is a great advantage when predicting trends and issues, but it can be a real hassle when people ask me for next week's stock tables.
My vision for the months and years to come tells me that a number of well-funded, low-cost online portfolio management services - what many in our industry dismissively call "robo advisors" - are going to disrupt the lives of planners who have the grave disadvantage of being made out of flesh and blood. Before long, online asset management firms like Wealthfront and Betterment are going to pour their venture capital dollars into widespread advertising campaigns.
Be ready. They will pointedly question the value of the poor financial planner who is powered by oxygen rather than algorithms. They will tell consumers that you are greedily charging outrageous fees for service that they will provide for a mere 25 basis points. They will say you are gouging your clients' portfolios and villainously preventing honest, hard-working people from reaching retirement security on schedule. They will say you are inefficient and old-fashioned, and may even imply that in your spare time you mistreat helpless animals.
At the same time, these websites are going to finish the job of commoditizing the asset management side of your revenue model. That doesn't mean they'll do a better job of managing assets - although I suspect their returns will be better than many advisors who use active fund managers simply because the index options in the online advisory portfolios have tended to beat most of the active fund managers over five-year time periods.
But that part actually doesn't worry me too much - because no advisor (robo or otherwise) wants to compete based on portfolio performance, claiming that he, she or it can beat the indexes. Smart advisors will compete head-to-head by anchoring their value to clients on their advice, rather than their portfolio management.
Isn't an advisor's value already about the advice? Yes, of course it is. But for many, communicating this will represent new territory. I still hear veteran planners say that consumers won't pay for advice or a financial plan.
In my eyes, sites like Wealthfront and Betterment have done something quite unremarkable: They managed to commoditize a service that was already a commodity to begin with.
The very best answer you can make to their shrill accusations is to say that you, too, charge 25 basis points for what those online services do - although you actually survey a much wider range of potential investments, and are there to talk to when the investment roller coaster hits the occasional free fall.
Then explain that the remainder of your fee is for the other things you do: mapping out a financial course for their lives (what we call financial planning) and checking in to make course corrections when life changes occur. You also do tax management work that combines a client's personal income and expenditures with harvested losses (or, sometimes, gains) from their portfolio.
Many of you offer other services: charitable planning, helping clients negotiate automobile purchases, nagging them to buy insurance coverage that they need, educating them about various financial issues - well, you probably know your service list better than I do.
The best way to stress this split is to formally bifurcate your fees. Many advisors will opt to change their fee model to about 25 basis points for the asset management work, plus a retainer that reflects, in dollars, the equivalent of 70 or so basis points of AUM.
Is that fair? That may be the point. This shift in fee structure will bring to light one of the weakest areas of the planning profession: a certain laziness around determining a fair price for the work you do for clients.
TIME TO REASSESS
Instead of actually deciding how complicated and time-consuming a client will be, the vast majority of advisors have defaulted to charging around 1% of AUM. This fee structure is easy and goes up as portfolio values go up - but it is unfair to many clients who simply don't require a lot of your time. It is a rare bargain for other clients who lead more complex financial lives.
I am expecting, in the light of these advertising campaigns, a profession-wide reassessment of fee structures, with a lot more time, energy and thought put into a fair price to charge for the advice you offer. Defining an appropriate fee requires judgment and experience - and, frankly, may be a challenge for many advisors. The entire profession is going to have to start figuring it out.
I expect that most advisors will continue to bill these bifurcated fees directly out of client portfolios, but as we gain more experience with setting appropriate fees based on complexity, some will start to experiment with other models. Gen X/Y advisors already tell me that their younger clients - which, to be extremely clear, means all of your future clients - are uncomfortable paying a large upfront fee for the planning work. They prefer to pay monthly fees by credit card, as they do with their gym membership, or phone or cable TV bills. For them, it's a more familiar, comfortable model.
This fee discussion could lead to one more profound evolutionary shift: In the next five to 10 years, we'll start to see a bifurcation between planners and asset managers. Planners will increasingly focus on client-facing planning work, and asset managers will work primarily on portfolios.
A lot of the larger advisory firms have already made this split in-house, creating portfolio management departments staffed by CFAs. Smaller advisory firms will start to outsource the asset management work to larger firms like Pinnacle Advisory Group, to an institutional- quality manager like SEI or to specialists like Frontier Asset Management, which can apply advanced factor analysis, computer modeling and stress-testing to portfolios - all at a cost that is pretty close to those online advisory fees and fits right into that bifurcated fee model. Once you have established how much of your fees should be allocated to asset management, it becomes much easier to shop those outsourcing options.
Ultimately, I believe the flesh-and-blood competitors in this gladiatorial arena will prevail, spilling silicon powder and machine oil all over the killing floor. But the online firms will have challenged the profession and ultimately forced it to evolve. Eventually, you'll thank them for it.
I need to update my February column regarding the level of "information-sharing regarding RIA firms" mentioned by Pershing Advisor Solutions CEO Mark Tibergien in an interview. He has asked me to clarify that there is no sharing of specific information on individual advisors, nor discussion of their compliance track records or behaviors with other custodians, unless there is a pertinent legal or regulatory issue and the custodian is obligated to do so.
The custodians discuss, among themselves, issues that impact all RIA firms - including regulatory hot topics, enforcement actions and investor protection. They also attend the same conferences and participate on many industry committees helping to formulate industry comment letters. In these instances, specific firms' actions may come up, but Tibergien asked me to make clear that this is public knowledge being discussed, not privileged information.
"To the point you raise in your article," he says, "all of the custodians understand that the sharing of specific information could raise significant legal questions, and Pershing is well aware of the acceptable boundaries of information sharing. This distinction is an important one, and I wouldn't want anyone to read your article and think otherwise."
Bob Veres, a Financial Planning columnist in San Diego, is publisher of Inside Information, an information service for financial advisors. Visit financial-planning.com to post comments on his columns or email them to firstname.lastname@example.org. Follow him on Twitter at @BobVeres.