If you’re making a living giving financial advice to clients, you’re probably overestimating how much better you are than a computer program.
Can a human do a better job of building a tax-efficient investment portfolio that’s continuously managed to adapt to a client’s changing circumstances? Can a human sense when a client is feeling most vulnerable to making bad investment choices and provide instant feedback to push them in the right direction? Can a human assimilate all a client’s personal and business information, all their asset holdings, their employer benefit options and the investment circumstances of their parent’s estate when giving advice?
Of course we can’t. Our brains have a finite ability to store relevant information, and we can only evaluate a few moving parts at one time. There is plenty of evidence from empirical studies of cognitive load theory that humans aren’t computers.
The more complex the knowledge task, the more we can benefit from technology that can supplement our limited memory and processing ability. We’re also not very good at acknowledging our limitations, so we likely need the help of software more than we think we do.
There are also many specialized knowledge areas in financial planning that have proven to provide great value to a limited number of experts who truly understand, for example, charitable planning strategies or retirement-savings rules. But all these tax rules are simply an algorithm — the expert has made an investment in time and effort to learn the many rules and effective strategies to gain an edge within the rulebook.
No expert can understand every possible strategy available to a client. A good analogy is chess. Chess has its own arcane rules and masters understand the strategies that give them the highest probability of winning.
But technology allows computers to recognize these strategies and test 200 million positions per second, and it now dominates even the most knowledgeable human players. Mobile phones now have the computing power to beat a grandmaster.
There are some planning software programs on the market that help advisors and individuals make better choices, but most agree that the state of financial software created to help advisors make better recommendations isn’t as advanced as it needs to be. This is surprising since there is far more money to be earned by helping individuals save money on their taxes or earn a higher return than can be made beating a chess champion.
The biggest problem for advisors is that they’re faced with an array of software programs. Each one tries to solve a specific aspect of planning, but the programs aren’t easy to use and to integrate with one another. According to Andrew Anderson, market strategist at Northwestern Mutual, today’s advising software creates what he refers to as “the swivel chair concept … advisors have one computer screen to do portfolios, another for taxes, another for servicing clients, etc.”
Each software program provides its own unique workflow task but each operates independently. “The swivel chair concept reflects how rudimentary the technological support of the industry is,” notes Anderson. “Being a holistic financial planner is a fairly new profession that’s still evolving.” And so is the technology.
“Technology available for advisors needs a lot of improvement,” according to Rajneesh Motay, head of Advice Engines at Morningstar. “Not everything in an advisor’s workflow has been automated to the extent that they can scale up easily.”
Even Morningstar, which perhaps provides the most comprehensive suite of advisor software solutions, recognizes this usability gap. “We haven’t yet provided as much technology help as we perhaps could. That’s where Morningstar is headed,” Motay says.
Among the problems with advisor technology is the time and knowledge needed to input data correctly and use the program effectively. Does a new advisor have the time to learn each software program?
Those new to the business often need help the most, but instead find themselves spending most of their time developing new client contacts. Can software help professionals deliver better advice and spend less time in front of a computer and more time in front of clients?
Style vs. Substance
Among advisor technology companies, too much effort is going into the creation of client-facing output that looks impressive, Anderson says, and not enough effort is focusing on developing software that has the complexity to truly provide value. It’s going to take quite a bit of costly programming time to beat the grandmaster of IRA strategies or the charitable-planning guru.
“A lot of what the technology is trying to do is focusing on creating sustainable, repeatable output that makes the client feel good. Not all … fintech is focused on how to create the best possible answer,” explains Anderson.
Why do software companies spend so much effort on producing pretty output for end users? The answer might be related to compensation and the inability of most clients to evaluate whether they are, in fact, receiving the most sophisticated advice. If the primary objective is to onboard a client, there’s no value in producing software that continually works to eke out an additional 10 basis points of net return.
This is especially apparent among financial software programs that help advisors and their clients plan for retirement. The primary transaction occurs when a client moves their IRA money to an advisor, and they are able either to reap the immediate rewards of commissions or of ongoing fees.
Since managed client dollars are sticky and commissions are frontloaded, advisors care most about providing clients with a solution that motivates the client to move their assets. If pretty graphs and a sophisticated-sounding Monte Carlo analysis are the best way to make the sale, then that’s what the software company will provide.
The real payday is done, though the client really needs the software to manage their retirement assets after the point of sale. This is where the real value is provided, but where software has generally failed to deliver the goods.
According to Anderson, “I haven’t seen a single strong example of a tool that can help advisors make more informed recommendations to clients. The financial software is focused on the sale, but not necessarily on providing value after the sale. [It's] deep on user experience and design, but not deep on how it calculates its results.”
Advisors’ Real Needs