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How Tech Could End Conflicted Financial Advice

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Steve Lockshin Steve Lockshin

A decade from now, major tech companies, like Google, who have butted into the financial services industry big-time might be putting an end to the “great train robbery” that characterizes advisors’ conflicted advice, Steve Lockshin, founder of AdvicePeriod, argues in an interview with ThinkAdvisor.

For years now, the outspoken Lockshin, who founded Convergent Wealth Advisors and was its CEO for 18 years, has been alerting the industry to fintech’s significance and consequences. Indeed, financial services’ very future lies in technology, says Lockshin, who invested in Betterment and other fintech firms at an early date.

In the future, the advisor contends, automated advice will bring a major depletion in the number of human advisors. And, in the consumer’s interest, financial advice-giving by major tech companies “will take the obfuscation out of conflicts of interest.” Beyond that, it will demonstrate how profits can be made without conflicted advice.

Lockshin, 54, founded Convergent, a top-level RIA for ultra-affluent clients, in 1994 and sold it to City National Bank in 2007. On the fintech front, in 1995 he started CMS Reporting — now called Fortigent — a provider of outsourced wealth management and reporting solutions, which LPL Holdings acquired in 2012.

With AdvicePeriod, founded in 2013, Lockshin continues his focus on ultra-high net worth clients. AdvicePeriod for Advisors provides an RIA platform that handles back-office operations, marketing and other functions in exchange for a percentage of revenue but allows advisors full ownership of their books of business.

ThinkAdvisor recently interviewed Lockshin, who was speaking from his office in Los Angeles. He talked about the Securities and Exchange Commission’s Regulation Best Interest, the Schwab-TD Ameritrade deal, AdvicePeriod’s upcoming innovative suite of products and Google’s capability wherein a computer assistant in a natural-sounding voice can make hair salon appointments, emulate empathy and emit human-sounding “um’s” and “mm-hmm’s.” Tip of the AI iceberg, he says.

Here are highlights of our interview:

THINKADVISOR: Your book, “Get Wise to Your Advisor: How to Reach Your Investment Goals Without Getting Ripped Off” was published in 2013. What FINRA and SEC advisor conflicts of interest that you wrote about then exist today?

STEVE LOCKSHIN: All of them. The challenge with the SEC advisors is a loophole you can drive a Mack Truck through — avoid or disclose: As long as I give you a big thick document and bury in it somewhere that I have conflicts of interest, then I’ve disclosed them — and I can still be an SEC-registered advisor. That’s the way around the tremendous amount of conflicts of interest that exist in the industry.

Isn’t that similar to what Reg BI requires?

Yes. It’s the same issue. The challenge is that it’s just too complex for the typical consumer: There’s so much fine print that people say, “I can’t influence this; so I’m just going to sign it and be done.” Reg BI needs further refinement.

What are your thoughts about the lawsuit filed against the SEC by seven states and D.C. to kill Reg BI, which is scheduled to go into effect in June 2020?

I applaud that they did it. Do I think that anything will happen in the end? No. SIFMA has an unbelievable amount of money to push their agenda, and product is still a very, very big part of the industry; economic conflicts of interest are still buried.

What does that mean to investors?

It’s just a great train robbery. The consumers are getting ripped off for the benefit of the shareholders of financial service companies. I don’t know how this issue gets resolved until we eliminate people’s ability to lobby and till we simplify.

What would simplify the situation? 

If the government said that anybody with a conflict of interest, as defined by “XYZ,” must be called a “bad broker” or whatever [term would be used] and anybody without an economic conflict of interest, who meets certain objectives, can be called a “good advisor,” that would simplify it for consumers so they don’t have to be detectives.

What’s the future of financial advice?

Ten years from now, technology will take away the obfuscation of conflicts of interest, and somebody will figure out how to make the data that’s needed digestible and accessible. That way, consumers can tell the good guys from the bad guys and then vote with their wallets. The wild card is what happens when Google, and the other major tech companies, get into the business.

What’s the threat?

They’ll go in with the right attitude of “Hey, we can do the right thing [for clients] and still make a profit.” They’ll let technology eliminate the friction, which can accelerate everything.

Are robo-advisors the solution to conflicts of interest?

There can still be a conflict of interest with a robo-advisor if they set themselves up that way. But let’s assume for a moment that we throw robos into the category of not having conflicts of interest. Hopefully, it would drive the market in that direction.

How realistic is that scenario?

So long as there’s a lot of money to be made by selling more expensive solutions, people are going to do that because the typical advisor wants to talk about two things: How do I get more clients and how do I make more money?

What do you think of the Schwab –TD Ameritrade deal?

I’m very positive and hopeful it will create some tech advancement. TD was trying to be very progressive on the technology side; Schwab isn’t making an effort. Hopefully, that TD [thrust] will positively influence Schwab. Schwab has done very well on the banking side and are pushing other areas like family office. So I hope that one and one make three.

Anything that you see as a negative?

The only folks who are going to suffer are the people who recently left Schwab for TD. I’ll be curious to see how that goes.

Is the job of financial advisor still fundamentally a sales job?

Sadly, it is. There’s no correlation between how much money an advisor makes or how many assets they have under management and the quality of their service — it’s just a reflection of the quality of their marketing and sales. It’s unfortunate that the industry has engineered the business to be an asset-gathering game.

“The industry is having a Kodak moment,” you wrote back in 2015. Please explain.

Kodak thought they could keep doing what they were doing and ignored digital — now they’re gone [through bankruptcy, they exited photo industry]. It was because of hubris. The big fat middle of our industry is somewhere between hubris and sticking their heads in the sand. The typical advisor has no clue what technology can do today, let alone what it will do in five years.

So the future of fintech is still extremely rosy?

Yes. The best evidence is all the venture and private equity dollars that have gone into fintech. It’s mushroomed over the last five years.

Will there still be human advisors 25 years from now?

There will be a reduction in human advisors relative to the number of consumers today. Computers will talk just like us — or better.  [Digital assistant feature] Google Duplex — available now — sounds like another person talking to you on the phone, and you can have a conversation. It can make dinner reservations for you and say [interjections and fillers] like “um” and “OK.”

That’s an impressive start.

What they can do with neural networks in AI is unbelievable, and we’re just scratching the surface. They can even teach computers to have what seems like empathy.

Advisors need to have empathy to put themselves in clients’ shoes so they can understand their needs.

Advisors are [phony]: The data say that the typical advisor detracts value, not adds any, and that their typical client portfolio looks like the advisor’s portfolio, not the portfolio that’s appropriate for the client, because the advisor has a bias.

Broadly speaking, why do you think robo-advisors are superior to human advisors?

A robo will outperform a human advisor over the long term nine out of 10 times because investing is easy — it’s the humans that are a problem. Think of a robo like an exoskeleton. If you wear one, you can lift a tank because the exoskeleton does the work for you, and you need fewer resources.

What’s your next big project?

We’re automating some of the stuff that’s in estate planning and rolling out a new suite of products in January. We hired an engineering team that’s building [things] that people say can’t exist.

What do you mean by “can’t exist”?

The typical advisor says that computers can’t do estate planning. Nonsense! We do as complex estate planning as can be done. It’s all rules-based decision-making — so it can certainly be automated.

What do high-net worth and ultra-high net worth clients really want and need from their advisors?

What they want is to transition the responsibility of their financial success from them to somebody else because it’s too complex or they want to focus on their business or just enjoy themselves. What they need is a truth-teller who’s well versed in solutions that apply to them.

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