Making the Right Tech Moves

Do advisors want software that helps them make the sale or software that helps them make more sophisticated recommendations that the client might not even appreciate? Anderson believes that software developers think advisors are looking for “a thing that will look really cool and make my clients nod ‘yes.’ I feel like many advisors underestimate the value clients place on more sophisticated advice.”

If software providers are going to invest in building better technology, are advisors going to buy it? First, clients need to appreciate the substance. The average client may not know the difference between a highly sophisticated planning strategy and one that looks good on paper. At least, they won’t appreciate it until they visit with a competing advisor who points out that their old advisor could have done a better job.

How does software help an advisor do a better job? It should be sophisticated enough to evaluate multiple aspects of a financial plan. The programming should be powerful enough to rival the quality of recommendations made by industry experts.

Plus, advisors need to be able to easily demonstrate the value software provides to gain an advantage over their competition. Anderson believes that the “best in class will see a merger between CRM tools, client-facing resources, digital media/marketing, financial analysis and financial plans, compliance, client-facing output, user interface for the back office, client-facing digital output and the academic rigor applied to ‘answers’ all combined into one power tool.”

Of course, one reason to consider buying sophisticated fintech is to prevent a lawsuit. If you’ve made a recommendation to a wealthy client and the recommendation turns out to cost the client millions in taxes or penalties, could you have prevented the potential lawsuit by running the recommendation through financial software first?

Will lawyers start scrutinizing the recommendations made by advisors who aren’t using software to make sophisticated tax-planning recommendations? This remains to be seen, but could eventually be a game changer.

Still Relevant?

While the planning industry is focused on developing software solutions to help advisors, most of the fintech industry is acting as if human advisors no longer need to be part of the equation. Robos haven’t proven to be the existential threat that some in the industry feared, but that doesn’t mean the advances in software won’t eventually start impacting the advising profession.

The big advantage consumer software has over advisor software is the ability to easily integrate multiple accounts and provide immediate feedback. It’s not surprising that banks and financial-services companies are also in the market for fintech firms that can provide value to existing customers. Instead of offering a higher rate of return on investments, a bank can offer a suite of tax-planning, budgeting, retirement and business-accounting services that are especially appealing to higher-net-worth clients.

Many wealthy potential clients are motivated to see an advisor when they don’t feel comfortable handling these types of decisions. But if institutions can provide these services and do them well, what is the motivation to see a human advisor? This is an especially important fear for advisors hoping to capture millennials, who generally prefer interacting with a computer to risking the potential loss of time and awkwardness of dealing with a human.

The answer seems to be a natural need for an entity to understand our range of goals as well as the complexity of family dynamics that comes with putting together a comprehensive financial plan. Studies show that there is a limit to how much professional services we’re willing to pay for online.

At some point, we demand an empathic human who is compassionate and capable of coming up with solutions that account for our emotional and our quantitative needs. Research even shows that we prefer getting an imperfect recommendation from a human doctor to a more perfect recommendation from an algorithm.

A good place to look when predicting where technology will move the financial-planning profession in the future is to see how technology is transforming the field of medicine. We now have evidence that technology can provide a more accurate patient diagnosis than a human doctor.

Hospitals advertise that they have the most advanced technology, leading to greater demand for innovation. The newest technology companies are even using artificial intelligence to communicate more empathically with patients.

Does this mean that the demand for doctors has decreased? Of course not. Doctors now have the tools to provide greater value, and fintech promises to do the same for advisors.

Technology should be seen as a tool that allows doctors and financial advisors to focus on what they do best — ask the right questions to gather information and develop a plan for treatment that is customized to the individual (with a little help from a grandmaster).

Reader Input

This comment is in regards to the article by Michael Finke in your Summer 2017 edition of Research on Wealth, entitled “What’s the Point of Investing?” The author suggests that an investor can purchase a 30-year U.S. Treasury bond paying 3%. At that rate, you would double your money in 24 years.

However, there is a superior alternative with zero extra risk, which is buying U.S. EE savings bonds. These aren’t exciting or widely advertised, but they are guaranteed to double your money in 20 years — four years earlier than with a 30-year U.S. Treasury bond, thereby yielding 3.6% as long as you hold them for at least 20 years.

You also have the advantage of being able to redeem these bonds any time from 20 to 30 years after purchase, so if your income varies widely from year to year you can select the year when you would pay the lowest federal taxes. You have even greater flexibility by being permitted to pay accrued interest along the way, rather than upon redemption.

In addition, like a 30-year U.S. Treasury bond, the interest is free of state and local taxes and is subject only to federal taxes.

—Steven Jon Kaplan, RIA Kearny, N.J.

Michael Finke responds:

Steven makes an excellent point about the very underused EE bonds, and his letter serves as a useful reminder that advisors should consider EE bonds for clients seeking higher-yield safe investments. The one caveat about EE bonds is that investments in them are limited to $10,000 per year per Social Security number.