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Morningstar Kitces Credit: Wyckoff-Tweedie Photography

Morningstar Notebook

How technology will impact advice, Bogling and more.

Navigators of Uncertainty

It’s not easy to tell a ballroom full of financial advisors that many of them will be replaced by robots unless they step up their games. But that’s what Michael Kitces did at the recent Morningstar Investment Conference

Kitces, director of wealth management for Pinnacle Advisory Group and publisher of the Nerd's Eye View blog, offered a vision of the future of financial planning in the digital age — it's challenging. He views robo-advisory services as part of a broader shift to technology-enabled planning; one that will make it possible for advisors to work much more effectively with clients. Still, providing holistic, client-centric planning will be critical to survival.

“The good news first,” Kitces told the conference, which attracted about 2,000 advisors and professional investors. “Most of you will not be replaced by robots in the future. But the bad news is, that’s only most of you. Some of you are in trouble.”

Kitces thinks that ten years from now, planning will be done in real time. Quarterly, printed plans will be a thing of the past, replaced by living, breathing plans updated with market data in real time. Meetings with clients will be shorter and more frequent.

“People think millennials won’t want to engage with advisors personally, but what we see is just the opposite,” said Kitces. “Millennials are some of most demanding clients we’ve seen. They want to talk all the time.”

The text message generation, he suggests, wants to get answers to its questions within an hour or two. “But it doesn’t have to be a long meeting, it could be just 15 minutes.”

The biggest challenge will be defining the value of advice in a world increasingly driven by technology. “We are being disintermediated from the business of providing expertise in a very dangerous way. But the fact that we don’t always get the best answers online still drives people to the experts,” he said.

He also thinks the real value-add will be using technology to help clients navigate uncertainty, explore alternatives and help solve complex problems.

Robo-advice technology won’t be the competitor — it will be the platform that helps enable advisors paint the picture for clients, according to Kitces.

“Has anyone had a client who retired then came in for their first meeting and said they were miserable? Or, a client who is saving for retirement, but really might not enjoy that outcome? Maybe you could point that person toward the idea of working until she can become financially independent and [find something that] has purpose and meaning. Technology doesn’t do that. We do that."

Your Best Fund Partner

Two senior Morningstar researchers released a new study at the conference that identifies fund companies the firm believes will be the best partners for advisors in the decade ahead.

Laura Lutton, director of North American manager research, and Gregory Warren, senior equity analyst, predict that the fund industry will grow by $10 trillion to $24 trillion by 2021. They also believe that nearly half of industry assets (48 percent) will have migrated to passive funds by that time.

The best-positioned firms will offer the least-expensive funds, including Vanguard, DFA and BlackRock/iShares. Active managers will be strong partners only if they can demonstrate repeatable investment processes and predictable returns; examples cited include Dodge & Cox and PRIMECAP Odyssey. Other winners may include firms that can differentiate themselves, such as Parnassus, which focuses on stocks with ESG attributes.

“Active funds need to change the idea that active equals poor performance,” said Lutton. “The flight to passive funds is continuing — the losers are active funds with weak performance, processes and higher fees.”


Speaking of passive funds, Vanguard founder Jack Bogle took an indexing victory lap in feisty remarks via videolink. Bogle recalled the derision heaped on indexing in the early days by critics who doubted investors would be satisfied accepting “average” returns; instead they would insist on getting “best” returns.

Pouring salt in the wound, Bogle flashed on the screen a poster featuring Uncle Sam saying: “Help Stamp out index funds — index funds are Un-American.”  

“Let me be clear,” Bogle said, “It was never my intention to build a colossus. My only intention was to earn for the families who entrusted their savings to us the best returns we could achieve realistically at the lowest cost. I was too stupid to realize that if we merely gave investors a fair share of the returns we would become a colossus.”

Small Investor Access to Advice

Opponents of the U.S. Department of Labor fiduciary rule argue that the regulation will cut off access to advice for small investors. David Blanchett, head of retirement research at Morningstar, isn’t buying it.

“That is not what we’re seeing so far,” Blanchett said at a session on the future of the fiduciary standard. “To us it is a straw man — not terribly compelling. First, we are seeing solutions that serve the small end of the market. Second, you need to ask. If people were rolling money over from workplace plans to IRAs and getting de minimus advice, maybe they are better staying in their workplace plan, especially if they are in a target date fund that can serve them better.

We have considered this argument [against the fiduciary standard] deeply, and there just is not much evidence that there will be huge drop off in the availability of high quality advice.”

Health Savings Accounts

Health Savings Accounts (HSAs) are now available in 29 percent of employer health plans, up from 4 percent just ten years ago, according to Jake Spiegel, a Morningstar senior research analyst. HSA expansion plays a central role in various Affordable Care Act repeal-and-replace proposals floating around Congress.

Some experts also pitch HSAs as a tax-advantaged way of saving to meet health care costs in retirement (although the main purpose of the accounts is to help people meet current-year deductible costs, and employers often make an annual contribution for that purpose).

HSAs do have unique tax features — contributions are tax-deductible, or pre-tax if made through payroll deduction; investment returns also are tax-free as a withdrawal made to pay for medical expenses. Despite the impressive growth and rising interest in expanding their use, Spiegel sees some challenges for their growth as retirement saving vehicles.

“Our research suggests that people don’t use HSAs as effectively as they could,” he said. “Only 5 percent of account holders contribute the statutory maximum and only 4 percent were investing their contributed funds.”

Providers are finding it challenging to offer HSA accounts that are “good for meeting the current health care spending needs, and simultaneously being good as an investment vehicle,” Spiegel said.

A current Morningstar research project examines the mix of fund offerings and fee structures. “You find a good mix of 50-50 stock and bond funds, target date funds and equity or bond funds,” Spiegel said. “With fees, we are at the same point where we were with IRAs 20 years ago — it’s the Wild West. They vary quite a bit.”

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