Advisor challenges of today
Mark Friedenthal
We are not even halfway through 2017 and there already have been industry shakeups, interesting headlines and consumer trends that are impacting the world of finance. Below, we take a look at three areas of interest and the challenges that advisors may face in the financial space today.
The DOL mystery
Before last June, most consumers wouldn’t know or frankly care about what the term “fiduciary” even means. However, last summer John Oliver, a famous comedian and late night talk show host, spiked the public’s interest in the term when he publicly criticized the American retirement savings system and expressed his interest in the Department of Labor’s (DOL) fiduciary rule. Since then advisors are commonly asked the same question from clients --“Are you a fiduciary? Does it matter? How does it impact me?”
Addressing these questions depends on an advisor’s personal situation. Some are already a fiduciary, which makes their job of educating a client a bit easier. They’re already required to put clients’ needs ahead of the firm’s or their own and already disclose conflicts of interest. However, it is still their job to educate a client on what this all means and why they’re already in good hands. There are fiduciaries that receive third-party compensation, it’s completely legal, but that doesn’t mean that the client is always aware of it. That’s where the proposed rule will really come into play. It’s going to require financial advisors that are not registered investment advisors (RIAs), commonly called brokers or “Financial Advisors”, to be held to fiduciary standards in regards to advice provided on retirement accounts.
While there have been delays to the regulation changes, most in the industry believe some change is inevitable. Regardless, thanks to John Oliver, and the media, clients are now aware of it. Even if it doesn’t officially go through, clients will come to expect the transparency and fairness for which the proposed rule stands.
The rise of robos
With advancements in technology and the industry as a whole adopting tech quicker than ever, clients not only want but have come to expect tech-based tools and service as part of their financial planning experience.
Clients gain more confidence when they see something being done more analytically and systematically. When discussing the percentage of portfolio allocation and a client’s risk directive, it’s more meaningful when the client gets to see the advisor incorporate all their financial information step-by-step. When they see this happening, they know they’re getting an objective systematic analysis and the computer is crunching all the numbers.
This doesn’t mean that the advisor’s intuition isn’t good, in fact it’s necessary. The dialogue is what enables the best use of technology. The intersection of humans and technology is what clients are seeking and the challenge advisors are facing.
The way to provide the client the best of both worlds is to leverage technology to enhance the client’s experience and reduce their costs. Good financial technology tools allow the advisor to do both. For some advisors, the laborious nature of customizing risk directives, optimizing tax efficiencies, and rebalancing household accounts drives up the cost of advice. Using technology to reduce the operational time and thus expense to the client is a huge efficiency that can better serve the client leading to better client retention and more referrals.
Risk assessment is not up to par
While we are on the topic of tech rising, another challenge that some advisors have seen is the challenge of risk assessment tools, and quite frankly, the lack of services out there to holistically capture a client’s true risk tolerance. Traditionally, these tools are simply a one-dimensional exercise focused primarily on personality. But, the other important aspect is determining a client’s ability or capacity to take risk, is done by utilizing the chronology of one’s cash flows.
The weakness in the personality based tools is that they fail to capture that inclusion of cash flow chronology and capacity to take risk. For example, an advisor might have a young client who is willing to take risk who is using money sooner rather than later, to purchase a house, pay for an education, or for a wedding, which hasn’t adequately been factored into their risk profile. By contrast, there might be an older client who in fact has a higher ability to take risk but the more simplistic tools assume that just because the person is older that they should have a lower risk level and that’s not always the case either. It needs to be a more scientific process that utilizes and incorporates the actual data available not just something presupposed based on someone’s age or proximity to retirement.
Advisors should aim to incorporate risk tolerance assessment tools that offer this two-dimensional solution. In today’s financial planning world -- one where tech tools are increasingly in demand -- the proper risk assessment tool is a foundational staple in any advisor toolkit, and only bolsters their critical understanding of the client and the longevity of their collaborative relationship.