Tarot cards, the flight of crows, Ouija boards, horoscopes, animal viscera: The past is a hodgepodge of attempts to read the future. Even though none of this has been known to work, we humans keep trying to predict tomorrow in hopes of being able to prepare for it and thrive.
Thanks to the 24/7 fire hose of the Internet, we now know way more than we might like about what could happen. The cataclysmic changes of the past few years have deluged us with so much information that it’s hard to know what is truly meaningful.
To help you find your way toward this uncertain future, I asked several well-respected thinkers and planners about the most significant challenges that financial advisors will face. From the deeply philosophical to the practical, and from global issues to community concerns, I think you will be interested in what Mary Malgoire, Dan Ariely, Shlomo Benartzi, Dick Wagner, Elissa Buie, and Dick Vodra have to say.
OM: Mary, what can you say about the industry today?
MM: Look at every other profession that is a true profession. They have no conflict of interest. Today, we’re at this crossroads, and I’m not sure the regulators really understand what’s at stake. We want the consumer to be able to walk into a planner’s office and know that they can trust this person without question.
I helped found NAPFA in the early 1980s and served on the board from 1984–89. [Malgoire was re-elected this year –Ed.] Back then, nobody knew the term “fee-only,” so we had to educate the public, the media and the regulators—with no budget. It felt like Sisyphus pushing the rock up the hill. We would read Money magazine articles that said fee-only planners were too expensive, so we had to call up and educate them. Consumers and even financial planners did not see the drag [of commission payment] because nothing was disclosed. That began a process of asking for full disclosure. In the early ’90s, we fought an SEC proposal to put financial planners under the NASD. We said, “No, we are fiduciaries.” It’s sad that we are still fighting this battle today.
In the future, let’s see a true profession without conflicts of interest. Let’s make sure financial advisors are employed only by their clients.
OM: What are some of the positive things advisors have done that will improve the future?
MM: I think financial planning has evolved a great deal. We now have a business model that serves the high-net-worth population quite well. The question is whether this advisory-intensive model can also serve low-net-worth and middle-net-worth clients effectively.
What I see is that technology and the Web can deliver much more efficient service for these lower-net-worth consumers. If I’m a middle-net-worth person, I should be able to go on the Web and, at a trusted site, be connected with an advisor I can completely trust. I share my personal, confidential financial data (perhaps in a standardized and widely acceptable format) and the person can advise me—I can see them on video—and they recommend the most cost-effective product to me. I can get everything I need: life insurance, a mortgage, index mutual funds, asset allocation for my 401(k), and I can talk to a real live person. So I see the delivery of advice for that client in the future being very different from that of a high-net-worth client who comes in with a crate of documents and sits down with one of us personally. That level of service can’t be delivered to low- and middle-net-worth people.
This is why I think investing can be commoditized. The vast majority of investors don’t need anything fancy. They would do just fine by implementing a basic vanilla portfolio.
OM: What can you as planners do about this?
MM: It will be a challenge; we will have to be more efficient. As Joel Bruckenstein has pointed out, we need to make sure that the systems advisors need to do their work well—CRM, document management, portfolio management, and so on—are integrated so they talk to one another. This should bring down the costs. A trusted Web platform to serve the low-net-worth to middle-net-worth client will drive fees down.
OM: What are advisors doing that may come back to haunt them?
MM: The decision that the SEC makes about who is or is not a fiduciary will haunt us if it’s not the right one. If they allow the fiduciary concept to be applied to people who sell products, it will haunt us for years to come and may damage our credibility irreversibly.
OM: What should advisors be doing to prepare clients for the future?
MM: The only thing we can do is to encourage our clients to be financially flexible. They need to be willing to adapt to an uncertain world. To say, “I don’t really have to remodel this kitchen” or “My kids can find alternative ways to pay for college.”
This means being mentally and emotionally agile. With the Visionary Dinners I offer to my clients every year, I’m trying to say, “Here’s some far-out stuff that we should allow ourselves to contemplate.” Of course, we tell them we are not in the business of predicting the future. Above all, we want to steer them away from treating investing like gambling.
I think financial advisors are finally getting this. It ties in with the whole life planning trend: being a coach; helping your clients through difficult transitions.
We will always need to be good listeners and trusted advisors. But the investing thing—you may be able to pluck that off a shelf.
OM: Dan, what should advisors be doing to prepare clients for the future?
DA: At some point in the near future, they will have to accept that the benefit they are providing their clients, in terms of balancing their portfolio, cannot justify the amount they are charging for their service. It’s easier and more accessible for clients to do that on their own.
The good news is at that point financial advisors will have to look more broadly at what they can provide their clients.
OM: Dr. Benartzi, I’ll ask you the same question I asked Dan Ariely: What should advisors be doing to prepare clients for the future?
SB: I’m not as pessimistic as Dan. But the issue is that advisors in the past have only sold performance: returns, and picking the right funds. Advisors were brokers. That misses the human element of the client. It’s not about picking the right fund, but about managing client behavior.
What we will see is that successful advisors will provide a more holistic approach. In addition to this, they will realize the human element that they need to provide. It’s about integrating behavioral finance into the entire process of the investment advisory business, from prospecting to closing to setting a plan to servicing the client and dealing with referrals. In each step of the process, you can see how behavioral science can make a huge contribution. How much risk can a client really stomach?
This will differentiate successful advisors from less successful advisors. It’s not unlike the real estate business: Those who incorporate the human element in serving their clients will win. It’s also about how they manage their business.
Given what we’ve experienced, there are more opportunities than ever for advisors to add value to their clients over the next few years.
OM: What are advisors doing, or not doing, that may come back to haunt them?
SB: So much can go wrong. Take financial terrorism; how many advisors talk to their clients about that? Maybe a client should always have $500 in the house. You need to go back to take three or four rules of thumb that your grandma and grandpa used. Grandma would have said, “You should have some cash in the house. If someone breaks in, you can always give them cash.”
Does it mean we need to create a list of all the possible risks and how to deal with them? I don’t think that’s possible or realistic. You can’t overwhelm people with too many risks and fears. You have to prioritize. I would focus on the major financial risks like inflation risk, longevity risk and investment risk.
Even then you might apply some of the rules your grandparents followed. Grandma might have said, “You have too much debt!” You know, rules like this might indirectly affect how we deal with the credit crisis.
OM: Richard, how do you see the state of the industry today?
RW: I came to financial planning out of law. I was a lawyer for five years, but really didn’t like it. Lawyers spend most of their days dealing with the rough edges of human conflict, whereas financial planners spend their days dealing with people expressing their love of others, financial responsibility and duty. I think part of the challenge of financial advisory work is to help people make decisions in tune with their values.
But one of the things I noticed when I came into financial planning is that there’s no theory. It’s still too linked to selling product. In reality, it’s considerably more profound than that.
Financial planners are operating in a theoretical vacuum, and are still the agents of industry. We haven’t established our own independence yet. ICFP has tried. When we founded the College for Financial Planning in the 1970s, five subject areas were set up, and people are still being tested on the same five subject areas, which are all financial products: insurance, securities, taxes, estate planning and retirement planning. There’s been a remarkable lack of originality.