Need for Human Advisors

[RE2Boys]

Just an interesting article:
Can robo advisers replace human financial advisers? - MarketWatch




"Investors’ preference for human advice is further evidenced by the decline of self-directed investors — those who want to handle their own portfolios and aren’t looking for advice. Since 2010, the population of self-directed investors has declined to 38% from 45%, even as the tools for monitoring and managing portfolios have steadily improved. Why is this happening? I believe that investors are using these tools to get a basic understanding of their situation and then turning to providers of professional advice once the complexity exceeds their comfort level."

Surprised by the stat that fewer folks consider themselves self-directed investors, would have thought the trend would be the other way.

 

[LOL!]

I think the survey is bogus or cooked. No self-respecting DIY investor would even respond to such a survey in the first place.

 

[MichaelB]

I think the survey is bogus or cooked. No self-respecting DIY investor would even respond to such a survey in the first place.

Well, it was conducted by an asset management firm.

 

[gcgang]

I'm surprised that an asset management firm admits that so many investors are DIY. frankly, I'm surprised there is such a high % DIY.

 

[mickeyd]

While most of us here are quite comfortable with DIY investing, most of the folks in the rest of the world are pretty lame or lazy and feel that they need a bit of hand-holding to get over the fear of making a "mistake" when investing on their own.

I think that what they really are looking for is someone to blame it on when their numbers go south for a while and panic ensues. Folks here expect it to eventually go south and then go north.

 

[BarbWire]

In the article, they define self-directed investors as "those who want to handle their own portfolios and aren’t looking for advice."

But in theory there is a middle ground: people who want to handle their own portfolios but seek occasional advice on an hourly fee basis, rather than relinquishing assets to someone else to manage.

I say in theory, because as I clean up my portfolio and prepare to integrate it with inherited assets I'm striking out on finding someone willing to look at a portfolio containing retail products and to critique the allocation, the strategy for rebalancing/integration, the inherited RMD strategy, etc. The ones I've been referred to all want to take complete control my assets -- at a hefty price. They want to be my "wealth managers."

So maybe the hourly fee-only adviser is a dying breed, to be replaced by the robot?

 

[braumeister]

I'm striking out on finding someone willing to look at a portfolio containing retail products and to critique the allocation, the strategy for rebalancing/integration, the inherited RMD strategy, etc. The ones I've been referred to all want to take complete control my assets -- at a hefty price. They want to be my "wealth managers."

So maybe the hourly fee-only adviser is a dying breed, to be replaced by the robot?

Alas, I think you may be right. Several years ago I had the idea that it might be useful to get a good, experienced second pair of eyes to look at my situation. So I went searching and found a couple dozen "fee-only" planners within 100 miles of me. Every single one wanted to charge me a percentage of AUM instead of a flat fee, although most of them used some very creative language to make it sound as if they weren't doing that. A couple of them even went so far as to insist on basing their fee on 100% of my total net worth, not just my investments. Where do these people come from?

OTOH, I have had some wonderful and useful discussions with my personal Fidelity rep, and that has cost me less than nothing (he also gives out perks such as free TurboTax, lunch seminars, etc.).

 

[gauss]

I suspect that what many people are paying for when they use a FA is a perceived "Peace of Mind" as opposed to pure financial advice.

Their FA tells them everything will be okay and eases their anxiety.

-gauss

 

[meierlde]

At one time it was felt that folks needed travel agents to arrange domestic travel before the web. I wonder if the FA business is just begining the transformation that occured in the travel industry.

 

[Gone4Good]

I'd say there's a real need for good, human, financial advisors with an emphasis both on human and on good.

For most people investing in panicky assets is an emotional thing. And most people really do need some hand holding when things get scary. Just go back and scroll through the threads on this forum back in 2009 to see how freaked out many previously self-assured DIY investors where when the poo hit the fan for real. And how many ended up hitting the eject button at a bad time?

We even had some hint of that recently with the latest little market hiccup at the beginning of the year.

So an advisor who helps people create a reasonable strategy to meet their specific goals and helps them stick with that strategy even when every one of their instincts tells them it's time to engage flight mode is something that is going to be in demand long after it's technically possible to replace that person with an algorithm.

 

[LOL!]

Instead of peace of mind, maybe folks want someone to blame for the performance of their portfolios. They want someone they can give a piece of their mind to.

 

[Skeptic]

So an advisor who helps people create a reasonable strategy to meet their specific goals and helps them stick with that strategy even when every one of their instincts tells them it's time to engage flight mode is something that is going to be in demand long after it's technically possible to replace that person with an algorithm.

I think the question is not whether such a good advisor is worth *something* rather than nothing, but precisely how much? An occasional modest fee? Yes. One out every three or four dollars I spend annually (that is, 1% of AUM when I'm safe-withdrawing 3% - 4%)? Not so much.

 

[meierlde]

I think the question is not whether such a good advisor is worth *something* rather than nothing, but precisely how much? An occasional modest fee? Yes. One out every three or four dollars I spend annually (that is, 1% of AUM when I'm safe-withdrawing 3% - 4%)? Not so much.

The question is is the suggested once in a while advisor business one that an advisor could live on? In particular imagine and advisor is nothing but an advisor and gets say 4 to 5 hours a year of work. That means that the advisor needs several hundred clients at a minimum. It may be that the advisory business model is broken, as hinted in some of the responses to the fiduciary rule proposal. that advisors cant make the money they think they deserve in the model.

 

[gcgang]

Instead of peace of mind, maybe folks want someone to blame for the performance of their portfolios. They want someone they can give a piece of their mind to.

It seems very difficult for an hourly advisor to survive, especially taking the above into account and wondering what kind of liability you subject yourself to for taking in a few hundred dollars "advising". You'd probably have to charge much more to cover costs and make a good living.


But I don't think many people would pay a $500-1000/hr fee even it would cost less than what they are currently paying under the % of assets model. They are in denial, not aware of what they are "paying" as long as they don't have to write a check.

 

[Skeptic]

Maybe would-be advisors should combine financial advice with some other "side hustle" to make it into a business---tax preparation or life coaching or personal finance classes or something.

 

[Skeptic]

I should say that, as another poster has noted, I think software will improve and human FAs will go the way of travel agents and bank tellers. IMHO, what's holding the transition back is that software for financial planning is currently written by financial planners, in an effort to drive business to themselves.


Sent from my iPhone using Early Retirement Forum

 

[Gone4Good]

I should say that, as another poster has noted, I think software will improve and human FAs will go the way of travel agents and bank tellers.

I don't see it. At least not until AI replaces most human thinking.

There are so many financial questions where there's no right answer. Just click on over to the Social Security Math thread for a live example. Not everything yields to a simple optimization approach.

Even deciding "easy" things like an appropriate Asset Allocation is an incredibly human decision. Sure, an algorithm can tell someone that they should have 60% of there portfolio in stocks but unless the investor fully understands what that means and is prepared to live with the consequences, that is probably not going to be a good answer for that person.

 

[LOL!]

Maybe would-be advisors should combine financial advice with some other "side hustle" to make it into a business---tax preparation or life coaching or personal finance classes or something.

You mean like their current side hustle of selling whole life insurance and annuities?

 

[jIMOh]

Just an interesting article:
Can robo advisers replace human financial advisers? - MarketWatch




"Investors’ preference for human advice is further evidenced by the decline of self-directed investors — those who want to handle their own portfolios and aren’t looking for advice. Since 2010, the population of self-directed investors has declined to 38% from 45%, even as the tools for monitoring and managing portfolios have steadily improved. Why is this happening? I believe that investors are using these tools to get a basic understanding of their situation and then turning to providers of professional advice once the complexity exceeds their comfort level."

Surprised by the stat that fewer folks consider themselves self-directed investors, would have thought the trend would be the other way.

I worked as a financial planner for about 3 years. The flaw I saw with the "business" is 75% of advisors get paid close to the same way (% of assets under management or a fee for executing transactions). Meaning most advisors make money advising on "asset allocation" in some degree- managing assets.

However the problems people have - dealing with volatility, SS strategies, withdraw rates, tax planning are much different than how the advisor gets paid.

Advisors having a CFP can add value to some of those areas- basic tax knowledge, volatility for example. But SS strategies are not something the CFPs I met understood (the average person on this board is likely to know more SS strategies than the CFPs I have met).

Investments give an advisor a reason to get in front of clients and talk, so it doesn't make sense to automate it from a sales perspective.

 

[Skeptic]

I don't see it. At least not until AI replaces most human thinking.

Don't underestimate (as the late lamented travel agent industry maybe did) the appeal of giving folks somewhat fewer options at vastly improved convenience and price.

 

[Gone4Good]

Don't underestimate (as the late lamented travel agent industry maybe did) the appeal of giving folks somewhat fewer options at vastly improved convenience and price.

That sounds great. I just don't think investing or crafting a retirement plan is anything at all like buying a flight or renting a hotel room.

To do the later, all I ever needed were the tools that travel agents had access to. Now that I do I don't need the travel agent to punch keys for me. But we've all had the tools needed to manage our own finances for a very long time. A lack of access to more, or even better, tools isn't the thing holding people back.

Don't underestimate the fundamental financial illiteracy of your fellow citizens. No web tool is going to fix that.

 

[Gone4Good]

One way I think software could further disintermediate the consumer finance sector is by making mutual funds obsolete. Instead of paying a fund company 0.2% or more every single year to hold a bunch of stocks for us we can use software to assemble our own funds and hold the stocks directly.

It's not too hard to imagine Charles Schwab creating some code allowing investors to dial in the type of portfolio they want, with as much or as little custom tailoring as they care for, press a button and the system goes out and buys all the relevant stocks.

 

[meierlde]

One way I think software could further disintermediate the consumer finance sector is by making mutual funds obsolete. Instead of paying a fund company 0.2% or more every single year to hold a bunch of stocks for us we can use software to assemble our own funds and hold the stocks directly.

It's not too hard to imagine Charles Schwab creating some code allowing investors to dial in the type of portfolio they want, with as much or as little custom tailoring as they care for, press a button and the system goes out and buys all the relevant stocks.

However the issue that makes mutual funds, is that few have the resources to buy the complete set of stocks in the 500 index. In particular with the proper weighting. Now of course if you have 10k the 500 index fund is .05% per year As another comment recall that for most ETFs you can buy a creation unit by transferring the shares that underlie the ETF to the fund and get shares of the fund. Of course again few investors are in a position to do a creation unit.
The point of the mutual fund is to enable diversification for the individual investor of moderate means.