A great debate is currently being waged over the future of financial advice. On one side of the argument are the historians saying, “We’ve seen this before.” From historians’ point of view, every decade or so, new business entrants swoop in to guzzle down a bunch of the wealth management pie by providing services for free or near free.
Historians remind us of two previous “failed” attempts to eliminate the financial advice business: discount brokerages and no-load mutual funds. Schwab and e*Trade the primary villains of the first, Vanguard the unquestioned rabble-rouser of the second. To historians, the rise of fintech is of the same ilk: destined to gain a little market share, a lot of media attention, and all the while, financial advisors will continue to provide the “real” value by working with people to solve real problems of wealth accumulation and distribution. Historians are immune (and generally scoff at) the infamous phrase: “This time it’s different.” To them, it never is.
On the other end of the spectrum are the revolutionaries. Watching the incredible accumulation of venture capital, finserv inroads by the FAANGs (Facebook, Amazon, Apple, Netflix and Google) and the vertical integration of old players in the field (Vanguard, once again, rears its head here) they claim, “the world has changed.”
With a wealth of data to prove their case, the revolutionaries comfortably assert that this time is, in fact, different. Not because the robo-advisors — a term quickly falling out of vogue — are so powerful, but because digital direct-to-consumer financial advice is being offered across so many channels with so many variations and so many financial resources behind it that cannot be ignored.
News of the Free
Entering into this dialogue comes the latest news from Wealthfront: free financial plans. By year end, the digital advice firm is set to offer retirement planning software to all individuals in the United States at no cost. This follows news of an integration with Intuit’s suite of direct-to-consumer products: Turbo Tax and Mint.
Wealthfront intends to win the race to free-for- expanded services, though they will not be alone. Infamous aggregator of Millennial investors, Acorns, recently announced a $50 million funding infusion from Blackrock, primarily to be used in expanding its marketing driven freemium options.
But in today’s highly competitive marketplace of digital services, free advice may not be enough. Fidelity officially won the Race to Zero, announcing its free (zero expense ratio) index funds available with zero account fees and zero trading costs for retail accounts. The infamous fintech rabble-rouser, Robinhood, just proclaimed it will self-custody in a financially stabilizing move to support its no-trade-fee trading platform.
News of free services is everywhere. And while the majority of financial advisors (many of them on the “historian” end of the belief spectrum) will doubt the effectiveness of these services in pulling away their clients, the changes do represent a direct assault on the premium price many advisors expect to earn for their advice-giving services. The sub-text is not hard to see: if you are paying a high price for financial advice, you are probably not getting what you pay for. What is too high a price? Anything more than zero.
North American baby boomers have — to this point — been hesitant to move from their comfort zone of human-centric financial advice, a solace to historian financial advisors who primarily are pulling fees from their existing book of business, not growing it.
But threats abound: 3x the U.S. annual GDP or $30 trillion, is set to transfer from baby boomers to their children in coming years. These digital-first generations are much more likely than their predecessors to have web-based services that play an outsized role in their financial advice. And what are we seeing from these digital providers? Two things matter the most:
- The plans are free.
- The marketing leads away from traditional financial advisors.
The News of the Free seems to validate the perspective of revolutionaries planning/hoping for a shake-up in the industry. But is it all so simple? Are financial advisors just one more career destined to be robotized?
Distinction With a Difference
The rise of free digital planning should surprise no one. The technology that calculates retirement needs, spending limits, budgeting effects, social security options is all fairly simple. The rise of AI and machine learning has made the calculus-grade mathematics behind financial forecasting old-hat for Silicon Valley technologists.
There is a reason why the price of the plan has dropped astronomically from its introduction in the marketplace in the 1990s: the technology to do it is relatively cheap to build. In contrast to the cost of complex “next right action” AI systems, open API data lakes, and other client-facing technologies, a Monte Carlo analysis is yesterday’s news.
Note: No historical data was available on average financial plan prices; this number is gleaned from anecdotal experiences of advisors working in planning-based (vs. commission-based) firms at the time.