Fee pressure. Growing the business. Hiring a great team. Managing (or turning away) small accounts.
The landscape of financial advice has changed dramatically in the last decade with the advent of technology solutions, proliferation of free financial advice, and growth of the millennial population to a third of the workforce. What can an advisor do to work this to his or her advantage?
Surveys have shown that millennials are more interested in socially responsible investing than previous generations. The same goes for women, and both groups are slated to inherit $30 trillion in wealth over the next three decades, according to PWC.
Yet, many advisors won’t even discuss SRI, preventing them from offering new wealth holders a valuable service. Why?
It is largely due to the persistent myth of SRI underperformance, combined with the distrust of financial services firms (common to the older millennials who came of age during the Great Recession and have different financial concerns).
However, if advisors can offer much-needed financial planning in a manner that resonates with the next generation, they may be able to lay the foundation for their business for decades to come.
You can uphold your fiduciary duty while investing clients responsibly as technology has helped change SRI options, alongside other investing strategies, by improving risk management, increasing customization, and lowering fees and account minimums. This keeps tracking error reasonable and allows for fees that reflect the nature of the investments made.
What about fees? Automation has forced transaction costs down so much that mutual funds and ETFs just add an unnecessary layer of fees. Using pre-packaged products rob advisors of the ability to harvest tax losses with satisfactory granularity — meaning money left on the table.
Fortunately, high demand has prompted new SRI supply so advisors aren’t stuck with the old guard, and can confidently choose products that best fit their clients’ needs from both a financial and values perspective.
[Editor’s Note: A recent US SIF study found there are more than 600 ESG-linked mutual funds today.]
Customization Is Key
Technology also has made it much easier to tailor financial planning and investment strategies to each client’s unique needs, with wide-ranging implications. That is, individual-security level customization can reflect a client’s preference for carbon-efficient companies and manage the concentrated stock position that originated the client’s wealth.
Software automation also has made dollar-cost averaging and rebalancing simple — two important but time-consuming services offered by good portfolio managers.
Additionally, advisors can now profitably offer services to lower net-worth clients, filling their pipeline for future relationships and widening their referral network.
The dramatic reduction of costs and the emergence of fractional shares make algorithmic portfolio optimization appropriate for a much larger swath of investment accounts. Advisors now can access individually tailored, well-diversified public equity strategies for accounts as small as $100.
On fees, customization, tax loss harvesting, diversification and rebalancing, as well as alignment around values and the impact of investments, technology offers a qualitatively better solution and opens up a whole new client population. We also can continue to expect costs to go down.
With the time saved by technology, advisors can spend more time building relationships, meeting prospective clients, and growing their business. As for existing clients, why wouldn’t an advisor look to create a more emotional connection with clients and show that they understand them beyond the numbers?
Technology platforms make it simple for financial advisors to align client assets with client values, driving engagement and retention.
The future is coming: Keen financial advisors will be the beneficiaries, serving the emerging generation of with tech-enabled financial advice, delivering customization at scale while engaging clients on their most deeply held beliefs.
Claire Veuthey is the Director of ESG + Impact at OpenInvest. Before joining OpenInvest, she led the Wells Fargo Social Impact Investing team’s ESG research.