What is the real point of a financial adviser?
To educate clients in the ways of finance - even if the adviser's raking in commission? Or get the best investment products at the lowest cost?
Because if the answer is the low-cost route, another question arises.
Do advisers have a future when robo advisers can do the job at a rock-bottom price?
Academics Tom Baker (University of Pennsylvania) and Benedict Dellaert (Erasmus University of Rotterdam) decided to take a look in a new essay.
As anyone who can spell RDR knows, regulators here and around the world have focused on investment advisers’ incentive structures as they apply to product sales. Everybody has to be squeaky clean.
But as the two academics note: ‘planning and coaching can be more important than matching customers to products.
‘For example, a financial adviser who exclusively recommends financial products that spin off high fees and commissions, but is good at getting her clients to adopt routines that allow them to live within their means and save and, consequently, to feel financially secure, may be helping her clients more than the financial adviser who scrupulously recommends optimal investments but is hopeless at helping clients to save and live within their means.’
Robos vs guides
Baker and Dellaert’s interest is not in refighting battles over RDR. Rather, they apply the implications of this line of thinking – that holistic financial guidance is more valuable to clients than automated and low-cost fund selection – to the burgeoning robo advice industry.
Any given robo adviser may be cheaper than all its competitors or have a more sophisticated ETF-selection algorithm than its peers, but that meets only a relatively minor part of an investor’s needs.
Baker and Dellaert associate this observation with the decisions by groups such as Vanguard and BlackRock to launch hybrid instead of fully robo services.
The future of robo advice may also see it compete more vigorously with DFMs for IFAs’ business, rather than with IFAs for end-clients’ business.
‘As robo advisers gradually replace the product-matching function and other functions that are easily automated, it is possible that in the retail consumer market, financial advisers will … increasingly compete on the basis of their ability to do more of the planning and coaching aspects of their job,’ argue Baker and Dellaert.
Your financial nurse awaits
‘We would applaud such a result, and we are sufficiently confident that it will take place that we have begun advising undergraduates who express an interest in helping professions such as nursing and social work to also consider careers in financial planning.’
A final element of Baker and Dellaert’s paper addresses a more familiar worry.
‘The potential solvency and systemic risks posed by hundreds of thousands, or even millions, of consumers choosing their financial products based on the same or similar models are sufficiently large and different in kind from those traditionally posed by consumer financial product intermediaries that some regulatory attention is justified on those grounds alone,’ they claim.
For if it is possible to optimise an investment portfolio, there should only be very few rational choices – the MSCI World tracker with the lowest tracking error, for example, or even simply the cheapest multi-asset ETF.
Of course, it still seems more likely that each robo service will arrive at a different allocation for individuals with equivalent investment horizons and risk tolerances, so both financial advice and fund selection should remain more art than science for a while yet.