How Tech is Changing Financial Advice
This article first appeared on Forbes and is re-published here with permission.
The investment world as we know it today is bifurcated.
What do I mean by that? The democratization of online financial tools has opened the floodgates for people to manage their money in ways they couldn’t before. As a result, you have those who utilize this technology to manage their own personal investments, make online trades and build their own financial strategies. They do their research, maybe consult with friends and use low-cost online tools to track and manage? their short- and long-term goals. We call these investors the “do-it-yourself “crowd.
What’s at the other end of the spectrum? They’re the folks who rely on their financial advisor to do everything for them, sometimes blindly. This may involve investing in expensive products, such as excessively high-priced mutual funds and other more expensive investment vehicles that provide large commissions for advisors but little overall value to the investor himself. Throw in the quarterly or annual meeting, when a client meets with their advisor and spends 30 minutes to an hour discussing investment strategy. At the very most, that’s 2 to 4 hours spent per year on financial planning. You might call these investors the “do-nothing-at-all” or “delegating” crowd.
I believe, and research has indicated, that most investors want the best of both worlds.
A recent study by Harris Interactive for the National Foundation for Credit Counseling found that out of 1,000 American adults surveyed, 80% say they could benefit from additional advice and answers to everyday financial questions from a professional. While the financial services industry is mostly black and white, the American investor is a varying shade of gray. The do-it-yourself method allows for total control, visibility, transparency and knowledge. But who really has the time to build and maintain a complex and successful financial strategy on their own? Why can’t there be an element of control, visibility, transparency and knowledge in a client’s relationship with their financial advisor?
The client’s job is to understand their personal goals — what they want for themselves and their family. They may also have an idea of what they may need for retirement. The financial advisor’s job is to understand good financial practices and assist their clients in an unbiased, objective manner, providing guidance as needed. Another big advantage? A financial advisor serves as a non-emotionally-attached resource – when markets are booming, they will encourage you to rebalance. When markets are plummeting, they will help you keep an eye on your long-term goals, preventing you from panicking and making rash investment judgments. This is a huge value-add: most investors know what to do, but in times of turmoil or uncertainty, doing the right thing is difficult. This is the basis of behavioral finance. The optimal relationship between and advisor and their client allows the client to know, understand and be in charge of what’s going on in their financial lives through a comprehensive, online resource and also have the added benefit of help and guidance from a practiced professional. Ideally, this relationship ultimately provides great financial results and emotional comfort. This is the hybrid model I wholeheartedly support.
For all the DIY’ers out there who are wondering whether they need an advisor at all, think of it this way. If you have a health question, you may go online and do some research. The world we live in today is full of great resources, websites and apps designed to inform and guide. But what happens when that research indicates you may need medical help? You see a doctor or an expert who can give you the advice or treatment you need.
If you have a legal question, you may do some reading, ask your friends or use one of the many reliable online resources. But if your research leads you to determine that you need professional legal help, you go see a lawyer.
Why not then, if you have complex financial questions, see a financial advisor?
While technology continues to simplify everyday tasks, allowing for a better-equipped do-it-yourself crowd, there are some things that technology cannot entirely replace. A financial advisor is most certainly one of them. And today, instead of having to choose between two extremes, do-it-yourself or “I’ll do it” versus do-nothing or “you do it”, investors may now say to a financial advisor: “do this with me”.