Technology has brought us a long way in the field of investments over the past 35 years. We've come from the era of fixed rate brokerage commissions, exclusivity of information and limited market access to today's instant access at low costs. But, financial advice is still highly people-oriented, personalized and expensive -- even as more people are required to make more decisions about investing their way to retirement.
Mutual fund companies, like Fidelity and Vanguard, have gained a huge share of the investment dollars in 401(k) plans, and relatively recently they were allowed to offer some investment direction to plan participants. The creation of target-date retirement funds as a "safe harbor" made portfolio decisions easy for those who didn't want to study the market and/or adjust (rebalance) portfolios along the way.
However, except for the advice provided by plan sponsors, individuals have mostly been left to seek investment direction from an investment adviser or stock broker. And choosing between the two is difficult, especially as the lines between them have become blurred. Most novice investors are unaware that investment advisers have a "fiduciary duty" to their clients, whereas the brokerage community has steadfastly refused to accept that responsibility.
And there's more to it than performance records. The role of a good investment adviser is not only asset allocation or stock picking or market timing -- although many perform those jobs admirably. Perhaps the most important role of a financial adviser is to be there for you during the tough times, helping you stick to a sensible plan and avoid the emotional decisions that destroy most investors.
Today's big question is: Can a computer do that job for you?
The Rise of the Robo-Adviser
Technology has dis-intermediated aspects of many occupations, from travel agent to cab driver. Lucrative careers have been changed or lost as technology enabled jobs to be done more quickly and efficiently at a lower price.
Now, there's a sense that the role of the traditional investment adviser may be threatened by new technologies and algorithms that bring advice and discipline to the investor who never had access to an investment adviser. In fact, some of the leading proponents of this type of computerized "robo-advice" are the large mutual fund companies, like Fidelity, which has already partnered with one of those robo-advisers -- a company called Betterment.
Schwab, too, has announced plans to offer its own robo-advice -- quite an adjustment for a firm that does a huge business with the individual investment advisers who may be dis-intermediated by the new technologies. Then again, many investment advisory firms are incorporating robo-advice into their platforms, making it easier to accommodate smaller accounts and additional clients at a low cost.
The new robo-adviser firms -- with names like Betterment, LearnVest and PersonalCapital -- are rushing to offer apps to individuals, automated services with a very user-friendly interface that help with matters such as investment choices, asset allocation, rebalancing and even selling advice. Fees are minimal. At Betterment, you pay just 0.15 percent in annual advisory fees if you have over $100,000 -- and a still-miniscule 0.25 percent with a $10,000 balance, or 0.35 percent annually if you agree to automatically invest at least $100 per month. The fees on the underlying ETF investments typically range from 0.04 percent to 0.17 percent, depending on the funds used.
The Next Steps
Offering advice during the time when people are accumulating assets and savings, typically through retirement plans at work or in Individual Retirement Accounts, is the easy part. It's much more challenging to offer retirement planning advice: investments vs. withdrawals, and strategic planning for making a client's accumulated investment portfolio last their entire lifetime and beyond for heirs.
Financial planners and mutual fund companies already offer individualized Monte Carlo modeling strategies for retirement withdrawals -- but can that advice be applied broadly and robotically, or will it always need the personal touch?
Given that very few people have the time, inclination or temerity to tackle the challenge of investment planning on their own, robo-advice is becoming a buzz-word. It is scalable yet individualized -- and it lowers the cost of advice so it can be made available to those who might otherwise be intimidated.
But the real challenge is whether these apps can and will replace emotions. Clients will have at their fingertips an advice service that will not duck their calls when the market is crashing. But will they have the self-discipline to take that advice and stick to their plan?
It's a huge question that will only be answered with time. And that's The Savage Truth.