Please welcome guest contributor Andrew Mohrmann to the XY Planning Network blog! Andrew is an XYPN member, and today he's sharing his take on why financial planners don't need to fear robo advisors -- and how they can even embrace these technologies instead of trying to beat or avoid them.
If you’re in the financial services industry, chances are you are well aware of the robo advisor emergence over the past 5 years. Many have lamented this as a disruptive technology, poised to put tens of thousands of financial consultants, wealth managers, financial planners or any other title for a living, breathing advisor out of business.
Case in point: this recent WealthManagement.com article cites that 76% of advisors view online advice -- and robo advisors -- as a threat to their practice.
I’m simply not buying it. Instead, I feel that these technologies will only augment my ability to provide my clients with objective, transparent and comprehensive financial planning. As I developed Modern Dollar Planning earlier this year, I chose to partner with Betterment Institutional to manage my clients’ assets.
Why and How I Embraced Robo Advisors
Prior to starting my firm, I spent the better part of my 20’s working at two of the nation’s top independent RIA firms where I had the opportunity to learn firsthand the value of taking an academic, long-term, and low-cost approach to investing. I don’t subscribe to marketing timing, stock picking or the idea that I can beat the market.
Instead, I look to build a portfolio for my clients (and myself) that is appropriately allocated, keeps costs low, and keeps me from reacting in volatile markets. Betterment’s approach fits well with my own philosophy on investing. I then get to focus on the issues that are going to have a bigger impact on my young clients’ lives, such as creating sustainable budgets, restructuring student debt or mortgages, making the most of their employee benefits, avoiding expensive insurance products, or even helping them craft a plan for leaving the corporate world.
I get to know them well and help them prioritize the financial steps to reach their big picture goals.
Utilizing the Tools That Are Already Available
If I were to secure a relationship with a more traditional custodian like Charles Schwab or TD Ameritrade and design new portfolios from scratch, they would end up looking very similar to those of robo advisors like Betterment. If you looked under the hood, you’d see primarily low cost funds from Vanguard, IShares and other economical index options.
So as I looked at investment management options, I figured, why try to recreate the wheel that Betterment has built? Their platform affords my young clients the ability to invest small amounts monthly at zero trading costs. They take care of time consuming rebalancing and investment of cash from dividends or deposits. I also don’t have to add on expensive portfolio reporting software.
Now when it comes to investment management, I get to spend my time helping clients with big picture asset allocation/location, determining safe savings rates and keeping them from falling prey to fear, or greed in tumultuous market periods.
People Want More Than Software
As I completed an MBA during my time at my previous high net worth advisory firm, I began to have classmates and friends start inquiring about working with me. Unfortunately, most of these folks simply didn’t have the assets to meet my firm’s minimums.
I’d point them in the direction of a low cost solution like Betterment. Surprisingly, very few of those people actually followed through on my advice! I found that when it came to their money, even though I had told them what to do, they were reluctant to use the cheap online offerings. They wanted a personal relationship that provided some assurance and answers to their questions.
It was disappointing to see my friends pass over what I knew to be strong investment options because they weren’t confident in leaning on technology like robo advisors alone.
The rollout of Betterment’s institutional platform was actually one of the main reasons I felt that I could go out and successfully start my own practice catering to my generation (I'm 29). I view partnership and effective use of the new technologies hitting the scene as a catalyst to my success.
Even Gen X and Y Are Willing to Pay for a Trusted Financial Partner
One of the first prospects that became interested in working with my new firm was a mid 30's executive at a Fortune 500 company. He loved the objectivity of my offering and decided to engage me for a single meeting Strategy Session, where we isolated a few financial planning topics of concern to him.
During that meeting, I uncovered the fact that he had significant assets for his age with an agent at a big insurance company. He was paying front loads and about 1.3% in expense ratios/12b-1 fees for proprietary funds.
I explained my philosophy on investing in more of a passive manner, keeping the costs low, rebalancing, and so on. We talked about the way that commissioned brokers are paid and the differences in incentives working with a fee-only financial planner vs. a captive agent.
A few weeks after our successful strategy session, he contacted me and asked if I would manage his investments. I happily said yes and we set up another meeting to discuss allocation and execute the transfers.
At the outset of this meeting, he mentioned that he wanted to show me a website that a colleague of his had shown him as they talked about investments at work. He opened his laptop to Betterment's website and I chuckled. I explained to him that Betterment actually had an institutional version that I use to implement portfolios for my clients.
The difference, I mentioned, was that I bring to the table planning expertise that no robo advisors are ever going to replicate, but there would be an additional fee for my involvement. I also explained that I’d have no problem if he decided to go directly to the retail version and save money.
How could I blame him when I use Betterment on behalf of my clients (and for my own assets)?
His next comment took me by surprise. He was very quick and steadfast in his decision that he would still like to use my firm for asset management, despite the fact that he'd be paying more for my help.
During that strategy session, I had cemented in his mind the value of objective financial planning. We had talked about big picture asset allocation, the fact that he carried a very large cash position given his net worth, how he should handle his company stock options, his need for estate documents, and some questions he had around purchasing rental properties some day. We touched topics and ideas that a software program is never going to replicate.
As Long As You Provide Unbiased Financial Planning, You’re Not Replaceable
I don't view robo advisors as a threat to my new business because I know that I offer clients a value that software can't deliver if I'm truly doing my job. My clients, even millennials and those comfortable using technology, understand this as well.
By partnering with technology providers like Betterment, I'm actually able to spend even more time helping my clients on the issues where I can drive real value beyond just trading and rebalancing. I’ll leave those rote tasks up to software that can do it more efficiently anyway.
About the Author: Andrew Mohrmann is a fee-only financial planner who left the ranks of high net worth wealth management to found Modern Dollar Planning, where he helps 20 and 30 somethings set a new financial trajectory. He is dedicated to helping his generation make smart financial decisions and believes they should have access to objective guidance, regardless of their current assets. You can connect with Andrew on Twitter @Andrew_Mohrmann