senior couple meets with advisor at home

Although cost and convenience have always been important factors in investors’ decision-making process when selecting their wealth-management providers, they’ve been displaced increasingly by the paramount need for advice. In fact, financial advice has become one of the services that investors value most — as well as the key to a comprehensive wealth-management offering.

The U.S. securities industry was ahead of the curve in recognizing the importance of a close and interactive client/advisor relationship — and good advice as the key to rebuilding investor trust and confidence that was shaken severely by the unprecedented dramatic sell-off in financial assets and the collapse of iconic financial services institutions during the global financial crisis of 2008-09. That crisis proved financial markets were not a straight-up proposition, as earlier years in that decade demonstrated, but could be treacherous, with the potential to wipe out retirement savings.

In turn, the U.S. investment industry — including broker-dealers, registered investment advisors and investment fund companies — has steadily built out and strengthened its advisory models in recent years. A recent report from Pennsylvania-based Vanguard Group Inc. estimates that advisors add three percentage points in net returns for investors, a fact not lost on the investing public.

Investors also realized that professional advice is needed to navigate through increasingly complex financial products, balancing the need for return with managing risk and investment costs. Investors also came to understand the successful accumulation of savings depends on decisions made in the context of a comprehensive long-term financial plan linked to defined financial and lifestyle objectives.

This more realistic attitude toward the financial markets and the compelling need for advice is reflected in the ongoing evolution of online wealth-management platforms, a.k.a. robo-advisors. In the past several years, there has been a steady progression of online wealth-management startups. Many have launched with much fanfare, trumpeting their transformative impact on the wealth-management business, even though these platforms reflect an extension of existing technology. These platforms boasted about the quality of managed investment funds offered at a low cost and the added convenience of dealing through a sophisticated digitized platform. However, they have fallen short in delivering adequate financial advice and building client relationships.

Online questionnaires for “know your client” and suitability purposes combined with intermittent contact with an advisor not familiar with the details of an individual’s financial background are no substitute for frequent contact with a trusted human advisor. Robo-advisors’ recent and widespread efforts to expand the advice component of their platforms through more frequent client contact and by assigning a dedicated advisor signal that their advice had been inadequate and client take-up disappointing. The likelihood is these platforms will follow the pattern of discount brokerages, filling a complementary client need and then levelling off as a percentage of overall client assets.

These platforms have responded to client resistance by shifting their strategic focus to building out their online platforms in offshore markets in order to gain market share, offering white-label robo-advisor platforms to traditional financial advisory firms, or providing a range of administrative services for dealers and portfolio managers.

The debate on embedded commissions during the past year also has put the spotlight on the importance of financial advice for small investors. The debate has centred on small investors’ reliance on advice for managed products, and the possible loss of access to this advice if they’re either unable or unwilling to pay fees up-front rather than through embedded fees. The delay in moving forward to prohibit embedded fees may relate to regulatory concerns about marooning small investors from advice, particularly if the industry fails to provide cost-effective alternatives, such as lower-priced, fee-based accounts for small investors. Regulators may be worried about the outcome of this approach that took place in the U.K. earlier this decade, which left small investors stranded without access to financial advice.

Finally, surveys that have been conducted following the implementation of the second phase of the client relationship model, such as the one from the B.C. Securities Commission, have made it clear many small investors have access to advice and have benefited from knowledge of fees and an understanding of the investing process.

Advisors are best positioned to capitalize on this demand for financial advice. The application of emerging technologies, such as white-labeled robo-advisor platforms and the digitization of wealth-management platforms, will contribute to the diversity of products and services, improve the economics of servicing small portfolios and broaden the reach of financial advice.