Some 2,000 advisors and other financial professionals gathered recently in Hollywood, Florida (during the East Coast blizzard), to debate what business and investment strategies make most sense in early 2016. The four-day Inside ETFs 2016 conference featured talks from Vanguard Chairman Bill McNabb, DoubleLine Capital CEO Jeffrey Gundlach, Betterment CEO Jon Stein, Wharton professor Jeremy Siegel and Charles Schwab Chief Investment Strategist Liz Ann Sonders.
The Vanguard chairman and CEO described the world of financial advice as a field that “is evolving” and “is driven by changing demographics, technology and a more powerful consumer.” While it is a time of rapid change, today’s market also includes “a tremendous opportunity” for advisors, he said.
The five critical considerations for advisors, which he highlighted, are as follows:
We are in a low-cost revolution. Investors now want to pay less for investments, as robo offerings create a new pricing floor. Thus, traditional advisory firms have to provide caring in-person, individualized services that robo-advisors cannot offer clients, he argues.
Advisors must adapt to a changing industry. In the past advisors won clients with good stock-picking abilities. Since technology can now do much of the portfolio-building work today, advisors should further automate routine elements of their practice, meaning they should digitize and mobilize some of the client experience, McNabb suggests.
In some ways, the world is not as complex. As portfolio construction has become commoditized, advisors cannot use this as a point of differentiation.
In other ways, the world is not as simple. Some clients entering retirement are looking for very broad advice on topics such as Social Security and long-term care; the demand for such advice is great. In addition, the questions faced by such clients “are increasingly complex,” he says. “Rules of thumb and single-product solutions rarely provide a complete answer.”
Advisors must tell their story. To differentiate themselves, advisors must explain their value proposition, McNabb explains: “Perhaps this will be No. 1 going forward … the advisors who will be most successful will be those who can absolutely tell their story in the most effective ways.”
This builds on Vanguard’s profile of the most successful advisors “who can add significantly to what clients experience; we call it ‘advisor alpha.’” Advisor alpha means that registered reps have to “be a great behavioral coach, help clients at being tax efficient and keep investment costs low, i.e., by thinking of [costs] as a percentage of returns,” McNabb explains.
Betterment’s Stein tried to warm the audience to the world of robo-advising. “There is a sense of competition between robo and human advisors,” said the New York-based entrepreneur. “I think that is a false competition.”
“By 2020, Betterment Institutional will be ‘the full-service hub’ for a new kind of advisor,” he explained. It plans to bring on advisors who want automated tasks like tax-loss harvesting and rebalancing in a paperless system, at a cost of roughly 25 basis points. “The cost of trading has gone to zero, and the cost of diversification is essentially free,” he added.
This means, for advisors, that the business they need to build is “totally different than that of 10 to15 years ago,” Stein states. “Advice is more important than ever, both robo and human, but the tools are different. We are a great do-it-yourself option.”
Clients who bring assets to Betterment “are coming to us from self-directed [platforms] and almost never from advisors,” he explains.
While many advisors work with clients that have $2 million or more of assets to invest, “We see our core clients as one with a household at under $2 million,” the Betterment executive said.
As for advisors, the platform — which includes ETF-based portfolios for clients to choose from after completing a questionnaire — frees their time up “so you can work more on financial planning, estate planning … and all the things we do not do,” he states.
DoubleLine’s Gundlach focused on the Federal Reserve and the state of the economy in his talk. “I’ve said earlier that the aftermath of Fed policies [to raise rates] is going to come back to haunt us, and we see this is happening [now].”
Describing the latest GDP data that shows the U.S. growing 2.2% per year and Europe expanding 1.6%, Gundlach asked, “Why is the U.S. raising rates when the European Central Bank is cutting them? The difference is pathetic, almost nonexistent.”
“The bond market says that inflation is falling over the long-term horizon,” the DoubleLine executive said. “The [only] inflation we do have is all in shelter,” he added.
The World Bank’s latest estimates for global GDP growth in 2016 are 2.9%, down from an earlier 3.3%, “and the World Bank is not known for pessimism,” he said. Meanwhile, the Atlanta Fed’s GDP Now indicator “is now at almost zero,” said the fixed-income specialist. “Every year we get an optimistic 3%, but it never happens.”
“I am leery of arguments that say we should ignore the bad stuff. The service economy is also falling, and if it goes down a couple points further, we could be in a recession.” He sees much more weakness in junk bonds. In fact, Gundlach says issuance in this group “is going to collapse … and that means 1% of GDP will disappear.”