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Industry Spotlight > Broker Dealers

Deena Katz: Process Over Product — The 2015 IA 35 for 35

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One of the biggest changes to occur in the independent advice industry over the last 35 years is that the advisors who comprise it have come to realize the importance of what they do, according to Deena Katz.

The co-chairman of Evensky & Katz/Foldes Financial and associate professor at Texas Tech University said it’s not just what the advisor does for the client, it’s the way they engage the client in the planning process.

“We now understand how valuable that process is, and how valuable it is to take people through their life issues and have them weigh in on what’s happening and be a productive part of the planning aspect,” she told Investment Advisor in a joint interview with her husband and partner, Harold Evensky, who is also featured on the 2015 IA 35 for 35.

She added that the product should not be the focus of the plan, a concept that is slowly taking root in the industry.

“I do think that the value of planning has become clear to us, or those of us who are in planning. In the early days, we charged for transactions and gave away advice. Today, we do just the opposite. We charge for advice, and the transactions are relatively low cost.”

Technology has made planning easier, but Katz remembers when it was too much of a good thing. “In the early ’90s, we actually got access to our documents on our desktop. Holy cow! We went crazy. We optimized everything because this was such an incredible gift. What we learned was that there are intelligent ways of user optimization. We didn’t have to optimize the universe to figure out what would be most appropriate.”

What Evensky calls “modular comprehensive planning,” Katz calls “holistic planning.” Whatever you call it, both approach financial planning by prioritizing small steps that a client needs to address first.

“People can’t take all the stuff in at once,” she said. “The average adult attention span is six seconds, and here we are trying to cram a big financial plan down their throat.”

Advisors who are doing a good job recognize those weaknesses and decide what needs to be done first, she said.

“We do the things that we think are most important, and then we begin to tackle the other things. We don’t ignore them, which is where a lot of the industry is now. [They say,] ‘We just do asset management.’ That really is optimizing returns, not optimizing financial life.”

Consequently, Katz doesn’t see robo-advisors as a threat, but worries that they focus too much on investments and returns and leave out the planning.

Middle-income people, the ones most likely to use a robo-advisor, “need more and better planning than people who have a lot of assets,” Katz said. “I see these robo things focusing way too much on optimizing returns–again, not optimizing retirement and life plans. But that, to me, says that most people are not financially literate, so providing a different low-cost platform is not answering the problem we have.”

She suggested the industry needs to make a deliberate push to improve the public’s financial literacy and getting those kinds of programs into grade and high schools. “Just because we provide lower cost access to things doesn’t mean it’s going to solve the problem that they don’t know any better,” she said. Educating people on financial literacy allows them to “manage these robo opportunities if they don’t have access to something else.”

Katz suggested the broker-dealer model will see a “major upheaval” in the future, calling the model “broken.” “We will need to realize that people coming into the industry now do not want to do cold calling and producing from the first minute they get in,” she said.

“They want to learn how to be good planners, they want to understand the client relationship, they want to focus on the relationship with the client and not just selling them the hot stock of the last 10 minutes. I think we’re going to have to see this entire redesign of how we deliver advice and implementation to the world.”

She said increasing numbers of dually registered brokers is an indication that that trend has already started. Broker-dealers’ margins are narrower, too, so Katz thinks many of them will turn to custodial arrangements.

“The things that cost broker-dealers money are compliance,” she said. “A lot of them think that if they turn these people into independent advisors, it will take away a lot of the problems or push them back onto the advisor.”

See the full 2015 IA 35 for 35 and the calendar for extended profiles of each honoree.


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