Imagine a World Without Financial Advisors

Everyone says the world is changing.  When cable TV was in it’s infancy, who could have imagined today we would be paying $150 a month or more for TV programming?  Some once popular businesses have disappeared.  Everyone thinks about “buggy whip manufacturers” but several mainstream businesses disappeared. Examples include video rental stores.  Telephone answering services.  Large segments of the American textile industry.  The example we might best relate to is the demise of independent bookstores and music (record) shops. Could this happen to financial advisors?

Here’s the scenario:  Robo advisors take off in a big way.  Index investing becomes the default choice.  Everyone who invests does it online through a major firm.  Like travel agents, financial advisors for the mass market disappear.  They focus on the UHNW segment of the market.

What might that world look like for the average retail investor, with the neighborhood financial advisor out of the picture?

  1.  Everyone gets the same results.  Suppose everyone fit into four asset allocation models.  The buckets were filled with indexes.  By and large, everyone would get the same result as everyone else using the same asset allocation model.  This is likely fine when the markets are doing well.
  2. Losing money is OK.  The markets don’t always do well.  Sometimes, making money isn’t an option.  All asset classes (except cash) do poorly.  The models would keep you fully invested, wouldn’t they?  There might be an outcome where everyone loses that year.  There’s no advisor to suggest alternatives.
  3. The avatar as advisor.  Someone would develop an attractive, animated onscreen avatar, like the blackjack dealers in online poker.  You could converse back and forth in simple sentences, but you would be talking to a machine.  “How can I help you today, (name)?”
  4. Lots more fine print.  When a live advisor asks you to sign something, the client is motivated to read or at least glance over the document.  They can say: “What am I signing?” and get an answer.  When engaging online, people tend to “click here to accept terms and conditions.”
  5. Trust us on fees and pricing.  You can ask a live advisor hard questions about fees.  They can take the initiative and say “This is how we make money.”  Without the advisor, it’s a “buyer beware” environment,
  6. No annoying reminders about retirement planning.  Many Americans are unprepared for retirement.  Advisors hold client’s feet to the fire.  It’s annoying, but it focuses attention on a problem that needs to be addressed.
  7. No annual reviews to focus attention.  An advisor who cares about you lets you know when you are spending too much.  They explain overweighting and margin in terms you understand.
  8. No paper monthly statements.  No frill pricing means statements would be delivered online.  It’s easy to skip reviewing them when you are busy.
  9. User generated commentary on websites.  The few advisors that are left would be subject to consumer online reviews.  A disgruntled client leaving a bad review could case problems.  Services would spring up to find ways to scrub negative reviews from truly bad actors.
  10. Comparison shopping websites.  You see this for mortgages.  Who offers the cheapest rates?  You see it on Amazon when you want to buy a widely available brand name article.  Can you think of any reason why financial service providers wouldn’t be subject to the same rankings?
  11. No personal connection.  A good financial advisor cares about their clients.  They want a long term relationship.  Without the advisor, you would literally be “just a number.” 
  12. Referrals might be rewarded with air miles.  Today people refer a friend to a financial advisor because they know they have found a good professional and want to share this resource. They are unlikely to refer to a less competent advisor.  Credit card companies give you substantial rewards if you refer friends.  People refer because they are getting something out of it.  But is it a good fit?

Investing is complicated.  Few people want to take it on as a full time hobby or sideline.  Many outsource it to a financial advisor.  It’s a process you want to be human, not automated.

Related: Market Declines Are No One’s Fault