Can ro­bots ever re­place fi­nan­cial ad­vi­sors?

Plan­ners need to an­swer the ma­chine threat

Accounting Today - - Contents - BY JOHN P. NAPOLITANO

Over the past year we have seen an aw­ful lot of pub­lic­ity and news about the ad­vent of the robo ad­vi­sor. These robo ad­vi­sors are not like the ro­bots that can clean your house or per­form sur­gi­cal pro­ce­dures. To­day, the robo ad­vi­sors are ba­si­cally a com­puter pro­gram to help in­vestors in­vest their nest eggs.

That’s not what they will ul­ti­mately be­come, but as of now they are ba­si­cally a low-cost as­set al­lo­ca­tion pro­gram to com­pete against fi­nan­cial ad­vi­sors who charge full re­tail rates for es­sen­tially do­ing the same thing.

A robo ad­vi­sor is a pro­gram that de­liv­ers an as­set al­lo­ca­tion and then trades the port­fo­lio ac­cord­ingly. This is not a new tool for in­vestors. For years there have been on­line pro­grams to as­sess one’s tol­er­ance for risk and then sug­gest a port­fo­lio of in­vest­ments to meet that level of risk.

Most robo plat­forms will then re­bal­ance the port­fo­lio as needed to main­tain the level of ex­po­sure or risk to that which it is pro­grammed to meet.

What is wrong with the words and the con­cept of a robo ad­vi­sor is the use of the word “ad­vi­sor.” There is no ad­vi­sor — no hu­man ad­vi­sor, at least. And to me, the use of the term “ad­vi­sor” is out of con­text. If it were re­ferred to as a “robo in­vestor” or “robo al­lo­ca­tor,” it would be less mis­lead­ing, and truer to its ca­pa­bil­i­ties.

Many con­sumers fre­quently only re­ceive ad­vice about in­vest­ments or in­sur­ance when they hire a fi­nan­cial ad­vi­sor, and these prac­ti­tion­ers are par­tic­u­larly vul­ner­a­ble to new tech­nolo­gies that may emerge. Specif­i­cally, the ad­vice fre­quently cen­ters on the ar­eas where an ad­vi­sor can ring the reg­is­ter with prod­ucts or fees for man­ag­ing money.

This nar­row be­hav­ior from ad­vi­sors has many con­sumers think­ing that an ad­vi­sor is only about in­vest­ments. This type of nar­row, self-cen­tered ad­vi­sor should be re­placed by a ro­bot.

What a real ad­vi­sor does

When I use or hear the term “ad­vi­sor,” I in­ter­pret is as a fiduciary would. To me, the use of the word ad­vi­sor when it comes to mat­ters fi­nan­cial should in­clude all fi­nan­cial is­sues that may im­pact a client’s life, fam­ily or busi­ness.

The doc­u­mented process for a fi­nan­cial plan should in­clude an anal­y­sis of cash flow and spend­ing, risk man­age­ment, in­come tax plan­ning, in­vest­ment plan­ning, re­tire­ment plan­ning, es­tate plan­ning, fam­ily gov­er­nance and ba­si­cally any other fi­nan­cial or fam­ily busi­ness is­sue that the fam­ily is fac­ing or may be ex­pected to face in the fu­ture.

A robo can’t re­place a per­son when it comes to dis­cussing the prenup­tial agree­ment that you may need for your sec­ond mar­riage, or the terms of a trust that will guide your heirs through the use and uti­liza­tion pe­riod of their ul­ti­mate in­her­i­tance. The robo ad­vi­sor also can’t help you as­sess the risk that you may be tak­ing when you de­cide what type of home­own­ers or auto in­sur­ance to pur­chase.

It may also be dif­fi­cult to have a con­ver­sa­tion with a robo ad­vi­sor about the suc­ces­sion plan for your busi­ness. A real per­son who un­der­stands the busi­ness, your cus­tomers or clients, and the tal­ent that you’ve got avail­able to han­dle the triage if you don’t wake up for break­fast to­mor­row has a much greater chance of help­ing you make the right de­ci­sions to­day.

Many ad­vi­sors utilize on­line as­set­man­age­ment tools or third-party ser­vices. If this is the only ser­vice that you pro­vide for your clients from your fi­nan­cial ser­vices prac­tice, you might want to con­sider broad­en­ing your ser­vice of­fer­ing be­cause the robo has a tar­get on your back. And in most cases, why shouldn’t they?

I haven’t met many ad­vi­sors who are truly the next com­ing of the best in­vestor alive with blis­ter­ing re­turns over a long-term, con­sis­tent ba­sis. In fact, I’ve never met any­one like that. But what I do meet day in and day out are pro­fes­sion­als who charge full re­tail prices, rang­ing from 75 ba­sis points to as high as 1.75 per­cent for an as­set-man­age­ment ser­vice that is not nec­es­sar­ily bet­ter than an on­line pro­gram. Re­mem­ber that your clients can buy a robo ser­vice for as low as 15 bps, with the av­er­age cost prob­a­bly around 25 bps.

How long will it be be­fore your best clients ask what you are do­ing for them be­sides man­ag­ing or over­see­ing the man­age­ment of a port­fo­lio? How will you an­swer the ques­tion about your fees com­pared to an on­line ser­vice that is 75 per­cent lower in cost? And how will your an­swer hold up when the robo ad­vi­sor is an of­fer­ing from an es­tab­lished brand name in the in­vest­ment world like Morn­ingstar or Sch­wab?

My per­sonal ex­pe­ri­ence with clients tells me that when you are able to ar­tic­u­late your value over the en­tire spec­trum of sub­ject mat­ters present in a com­pre­hen­sive fi­nan­cial plan and the lives of your clients, that your ser­vices will be em­braced and your fees jus­ti­fied. But re­mem­ber, it is more than lip ser­vice. You will be ex­pected to de­liver the ser­vices that are so eas­ily pitched.

The in­vest­ment you have to make

De­liv­er­ing on a com­pre­hen­sive per­sonal fi­nan­cial plan takes time. Pric­ing the plan­ning ser­vices is a com­bi­na­tion of art and sci­ence.

The sci­ence part can be as easy as hours mul­ti­plied by your bill­able rate. This method never ap­pealed to me be­cause it may bring on other is­sues.

The first is­sue with hourly billing is cal­cu­lat­ing and send­ing out the bills. You also know that a bill based on hours and


rates in­vites the ques­tion: “It took you how long to do that?”

The sec­ond is­sue with hourly billing is even big­ger: It some­times de­vel­ops a nat­u­ral re­luc­tance among your clients to call. If they know that the reg­is­ter is ring­ing ev­ery time they get on the phone, they may not call for is­sues that they re­ally should talk to you about be­fore act­ing on them.

Flat fees have some risk also. The first risk is that you may do a hor­ri­ble job fore­cast­ing your in­vest­ment of time. It is com­mon to think that you can blast through a plan quickly, only to find that you ac­tu­ally spent 30 hours in­stead of the 10 to 15 you bud­geted for.

A sec­ond risk may be sticker shock. A client used to pay­ing you $1,000 for a tax prepa­ra­tion fee may gasp when you toss out a plan­ning fee that is sig­nif­i­cantly higher. In my ex­pe­ri­ence, it can take any­where from 10 to 20 hours for a sim­ple fi­nan­cial plan in­clud­ing client meet­ings. A com­pli­cated plan can eas­ily stretch out over the course of a year and take more than 100 hours.

In to­day’s CPA firm, many skilled prac­ti­tion­ers are able to jus­tify their hourly or flat-rate fees for core ac­count­ing or tax ser­vices. But I be­lieve that the fu­ture of what has been a great fran­chise for decades is also in jeop­ardy.

Yes, the Tax Code is com­pli­cated and tough to un­der­stand for CPAS, let alone your clients. But that ser­vice has a use­ful life only for as long as the tech­nol­ogy takes to catch up. Book­keep­ing ser­vices may work out at the low end for clients who do not have any ac­count­ing staff on site, but these ser­vices are al­ready be­ing suc­cess­fully de­liv­ered by non-cpas at a frac­tion of the cost that a tra­di­tional firm may charge.

The same could be said for the au­dit. I am not a blockchain ex­pert and it’s been a while since I car­ried an au­dit bag, but it is my un­der­stand­ing from the in­sid­ers of the CPA pro­fes­sion that proper uti­liza­tion of blockchain tech­nol­ogy could ren­der the au­dit as we know it much less com­pli­cated, or even un­nec­es­sary.

With all of these threats alive and grow­ing, many CPA firms are fi­nally look­ing to take their fi­nan­cial ser­vices divi­sion a lit­tle more se­ri­ously. Older prac­ti­tion­ers are find­ing out first­hand when they try to exit.

The re­al­ity is that a small ac­count­ing prac­tice has very lit­tle value in the mar­ket­place. But a small ac­count­ing firm with a vi­brant wealth man­age­ment prac­tice is quite mar­ketable, and at a much higher price than a Cpa-only prac­tice.

The con­cept of the robo ad­vi­sor will ma­ture as the tech­nol­ogy gets more de­vel­oped, but in the mean­time it is ba­si­cally a sub­sti­tute for pick­ing in­vest­ments on your own.

These ser­vices are not free, and just like hir­ing a hu­man ad­vi­sor, there is no guar­an­tee that the cost will be worth­while in the short or long term. As the tech­nol­ogy im­proves, it is widely be­lieved that tech­nol­ogy will also be bet­ter at more so­phis­ti­cated fi­nan­cial plan­ning is­sues. But I be­lieve at that level it will be able to as­sist pro­fes­sion­als who un­der­stand the in­put and the vari­ables, yet it will still not be able to re­place a proac­tive and holis­tic hu­man ad­vi­sor. AT

John P. Napolitano, CFP, CPA, PFS, MST, is CEO of U.S. Wealth Man­age­ment (www.uswealth­napoli­ in Brain­tree, Mass. Reach him at Johnpnapoli­tano on Linkedin or (781) 849-9200.

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