Financial Advice Will be Commoditized for 99% of People?

Awesome to see WSO create its own WM forum now... Enjoyed reading the responses to this post so far.

Obviously, there are plenty of baby boomers entering retirement with $250-500k in retirement savings who need financial assistance. These boomers likely make up the majority of people who need financial advice. However, my concern with this demographic is that unless they are expecting some huge inheritance in the near future or have sizable real estate assets, it seems like a robo advisor could offer them a one-stop-shop for wealth management.

In other words, it appears that any lifelong "W2 employee" that has been essentially generating most of their wealth from salary + bonus + 401k can follow a simplistic (cheap) wealth management strategy that can be recommended by robots/algorithms. Baby boomers can just plug in their inputs on their laptop, for instance, and get well-informed investing recommendations from a robot (e.g. 30% in S&P ETFs, 50% in gov/muni bonds, withdraw 6% y/y, etc.). After all, it seems like there is only so much you can do with ~$300k in savings, and the investing decisions can be pretty streamlined right?

This issue has me concerned for the long-term value proposition of the typical financial advisor. Clearly, you'll always find some people who prefer a human advisor but as people become more accustomed and comfortable with the use of smart-data software, it seems that financial advice would only become even more commoditized (and cheaper) for the common man in 20+ years. For these reasons, it seems that as a typical FA you'd likely need to secure hundreds, if not thousands, of client accounts worth $250k on average to take home a lucrative amount of money that is comparable to IB/PE/HF/ER counterparts.

Despite this, I can clearly see the attraction of being a wealth manager for the top 1% of high net worth people in the U.S. The "moby dicks" of people who not only have $5 million+ of assets but also have these assets spread out in various categories such as real estate, philanthropies, trust funds, etc. appears to be a compelling area of interest. An algo robo advisor simply cannot recommend a useful strategy for this high level of wealth. It requires far more due diligence with tax avoidance strategies, asset allocation, loopholes etc. Wouldn't it make sense to avoid being a financial advisor for average retirees and rather only aspire to be a private banker for the ultra high net worth individuals? 

TLDR: Will robo advisors eliminate the need for a middle-class financial advisor? Is private banking (for ultra high net worth individuals) a superior and more lucrative career in wealth management?

Comments (10)

Apr 19, 2022 - 7:51am
thebrofessor, what's your opinion? Comment below:

wrote about this 8ish years ago [Patrick Bateman's Videotapes]

absolutely those people could be better served by a robo. they don't have the AUM to interest most PWM teams, or if they do they won't get good service, they'll be an after thought and put into a model portfolio. this is why I think offerings like vanguard's advisory service for 30bps is a great option. you get the institutional knowledge and cost savings of vanguard plus a little financial planning. better than paying a FA who doesn't care about you 1% + sub manager fees, never get a plan, etc.

so idk that it changes it for 99% of investors, that feels like marketing overreach to me, but it definitely fills a need in the marketplace right now. I won't be worried until people with $5mm+ start going to robo. so far, I've noticed those people are DIY or have FAs, very little in between

  • Associate 1 in ER
Apr 20, 2022 - 5:54pm

Passive investing only accounts for 5% of daily trading volume for each stock in a given index (e.g. S&P500) so very long ways to go until passive purchasing of securities will materially move prices off intrinsic value.

Markets will always be tough to beat forever. Definitely not completely efficient but efficient enough for your typical retiree to almost fully index their portfolio above anything else (with maybe a few stock selections here and there)

Apr 20, 2022 - 6:06pm
AnalyzeANDchill, what's your opinion? Comment below:

Passive investors are not going to take up a ton of trading volume I wouldn't think because they are buy and hold they are passive. Would a better measure of this not to look at how much of the market or certain stocks are held by passive investors. 

May 28, 2022 - 9:05am
rickle, what's your opinion? Comment below:

Have brought this up on several threads but will do it again. Financial products are commoditized (have been for a long time), advice isn't (and likely won't be because it's all customized to the client situation). Many of you on WSO are either just starting, looking to start or have a few yrs under your belt. I've been doing this for over 30 yrs and work with clients ranging from mid market / kitchen table through HNW. I don't have UHNW. There seems to be a misconception (here) that it only makes sense for the UHNW to "hire" an advisor. I would argue it's far more important for the less well off who either don't want to DIY or don't know how (enormous market!)

To make it tangible, just this week I moved four accounts in the 250k - 400k range. Ages varied from 40 - 60. Issues varied from wanting to start drawing income for retirement through wanting to be in a position to retire in 15 yrs (very different portfolio needs). You know what wasn't different? Their existing portfolios. Almost 100% aggressive growth. The one nearing retirement had lost about 25% in the past 2 months! They essentially, either through their 401k or some other advisor they no longer deal with, threw their money into some funds and never adjusted anything. Over the years, I have found this to be the norm for many many many folks.

My providing "advice" had little to do with the actual new portfolio I suggested (literally 0% - never discussed specific assets), and everything to do with a goals oriented discussion based on their situation and the ability to show them where their assets and goals were misaligned. Don't forget the average consumer knows very little about this stuff. You guys read this and you shake your head thinking "why would they pay...this is so basic...blah blah blah." That's between your ears, not theirs. Could they educate themselves? Sure. It's not rocket science. But most never will because they don't want to. These people I mention in my example are all paying 1.5% to me plus whatever MF, ETF, CEF, UIT fees exist. Occasionally I'll build a stock / bond portfolio but most of the time I'm moving them away from over concentrated positions. We'll manage for income, total return, tax efficiency, whatever. We'll add insurance products if that needs to be part of the overall plan (legacy, asset protection, LTC, etc.)

There are 10s of millions of these clients out there. They just don't know and they aren't going to. Maybe this is a 40 and up thing but I don't think so. I think the RobinHoods of the world will ultimately do more to damage the overall investment arena than it's self proclaimed goal of "democratizing" it. That's a different conversation entirely. Scares me to see so many 20 somethings buying stocks / options and discussing on social media because they "think it's cool" when they really know nothing about the underlying securities. They all need help. They'll either learn and manage their own money effectively or they'll need an advisor. Just remember, the asset itself IS commoditized The advice isn't and that's what you get paid for.

May 28, 2022 - 11:29am
rickle, what's your opinion? Comment below:

BTW my typical competition charges 2.25% for that (plus mgr fee). I know I could charge more but I don't partly because I don't need to. I have a very simple fee grid: $1-$1M - 1.5%, anything above 1%. Have a few 3 M+ accounts and they each pay me 1% plus mgr fees. No discounting unless they get to 5M which I don't really deal with. Probably very different in the UHNW world above 10M.

Most Helpful
Jul 16, 2022 - 1:59pm
Skeptic Ape, what's your opinion? Comment below:

I am a little late to the discussion, but I align with the veterans here - it is very difficult to commoditize advice.

If you look at this solely from a portfolio construction standpoint- maybe you are right. Model portfolios are already doing a great job in serving mass affluents. But, there is more to financial planning than investments - you have estates, insurance, taxes, and a good degree of financial coaching. You overlay a genuinely put-together financial plan, and you will provide more value than what most clients expect.

Financial planning/advisory serves both technical and emotional functions. The model portfolios and robo 'advisors' can often take care of the first part. But the second part - when your portfolio is down 30%, and you want to decide whether deferring the taxes is actually a worthwhile goal, or when you lose your partner and the retirement accounts both of you were contributing to have to be suddenly changed, or when you urgently need cash but do not want to diverge from your long-term goals - those are scenarios were Financial Planners/Advisors can deliver value. And over a client's lifetime - there are countless such scenarios popping up. Every single time your Financial Planner/Advisor helps you get ou to of such situations unscathed, she delivers value.

Compound that value to 10-15 years, and you will see how clients can get where they want to be with the help of a professional.

Even with investments - only the ones who have the temperament, time, and technical skills to assemble a portfolio can and should be doing it. A large portion of the clients who work with Financial Planners/Advisors do not want this. In fact, I will take the risk of saying - some of them do not want to look at their portfolios more than a few times a year unless it requires some serious changes other than rebalancing.

I would say - robo advisory is a misnomer. Advisory, by design, has to be customized to you. So, as far as you are someone who is providing that tailor advisory to clients and helping them get where they want to be - you will be fine, irrespective of which market segment you serve.

As always - feel free to discard all the advice here. 

  • 6
Jul 17, 2022 - 7:51am
rickle, what's your opinion? Comment below:

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