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Advisors Don’t Need to Abandon Small Accounts

Advisors can use technology to continue offering advice to small accounts under the fiduciary rule.

The statutes under the Department of Labor’s much-discussed fiduciary rule were designed to protect investors. However, if the rule is implemented without major changes, it will inadvertently cause investors with small accounts—mostly middle-class Americans saving for retirement or their children’s college tuition—to lose out on the benefits of holistic financial planning that only a human advisor can provide.

As it stands now, the fiduciary rule requires advisors to make investment and financial planning recommendations that are in each client’s best interest. Advisors need to be able to document the reasoning and calculations behind every piece of advice they deliver, and justify to clients and regulators alike how they determined that a certain recommendation would be in a particular client’s best interest.

This is a big undertaking for advisors, many of whom are already strapped for time and resources. According to a 2014 Fidelity Investments study, the average advisor devotes 14 hours per year to account management per client, but meets with less than half of their clients for annual reviews. Furthermore, the American College of Financial Services found that, over a 12-month period, the average advisor secures just three prospect meetings for every 10 referrals, leading to only 0.5 new clients.

The more stringent documentation and best-interest assessments outlined in the fiduciary rule are already causing advisors to concentrate on larger accounts in order to efficiently manage their businesses while remaining profitable and compliant. A research report published by Cerulli Associates in June 2016 found that only 8 percent of financial advisors focus on targeting and serving the 89.6 million American households with less than $100,000 in investable assets—which make up 71 percent of all American households.

In turn, robo advisors are stepping in to fill the void, marketing themselves to middle-class investors as a cheaper and more personalized alternative to traditional advisors.

A No-Win Situation for Small-Account Investors

The pure-play, business-to-consumer robo advisors aren’t sophisticated enough to offer holistic financial planning, which involves working closely with investors to make decisions that benefit their entire financial lives—not just their investment portfolios—over the long term. Robo advisors utilize computer algorithms to build and manage investment portfolios for individual investors. These algorithms make assumptions about market conditions and performance based on historical market data.

But assumptions can be wrong, as we learned in the recent presidential election. Allocating to investments and strategies based on past market performance isn’t the same thing as giving advice based on an in-depth understanding of an investor’s long-term goals, tolerance for risk, investment preferences and other factors.

That’s what traditional advisors do. They can forge trusted relationships with investors, and apply their experience and expertise to help investors make the best decisions to navigate the markets as well as protect and grow their overall wealth.

Pure-play robo advisors can’t possibly meet the same fiduciary standards required of their human counterparts. Ironically, these same robo advisors advocate for the fiduciary rule. Why? Because they want the business from the small-account investors that the rule is, albeit unintentionally, causing traditional advisors to abandon.

Simultaneously, some pure-play robo advisors are also acting as vendors to large financial institutions, providing their underlying technology so these institutions can launch branded digital advice platforms for “self-directed” investors who wish to independently make investments and monitor their portfolios.

Small-account investors are presented with a no-win situation—they can either invest directly with robo advisors, or they can utilize self-directed platforms from financial institutions. Neither of these options enables them to actually work with an advisor who they trust, and who can offer them holistic financial advice.

Advisors: Be The Solution

The abandonment of small-account investors to robo advisors and self-directed investment platforms only exacerbates an already serious problem in this country—most Americans don’t receive guidance and assistance from a trusted financial professional who can help them better understand their financial lives, and how they can best achieve their financial goals. Northwestern Mutual’s 2016 Planning and Progress study reported that 68 percent of U.S. adults don’t work with an advisor who offers lifetime financial planning.

Fortunately, technology solutions available today can empower traditional advisors to solve this problem, and offer all Americans, regardless of the investable assets at their disposal, the holistic financial advice they need. Advisors can harness digital client portals to efficiently service all accounts, and document all points of contact with clients beginning in the prospect stage—enabling advisors to spend more time managing accounts, proactively attending to clients as the need arises, and targeting prospects.

The client portals developed by technology providers are capable of aggregating financial data and accounts from a broad spectrum of institutions, and comprehensively presenting this information in easy-to-navigate dashboards, which advisors and their clients can access whenever they want, from any location. Modern client portals also allow clients to update their goals as their lives change, and immediately alert advisors so they can adapt financial plans and ongoing advice as needed.

Today’s client portals empower advisors to efficiently monitor and service all accounts, and provide clients with the peace of mind that comes from knowing they can easily reach out to a trusted advisor when it’s important. If advisors take advantage of these digital tools, they can optimize their practices so that small accounts are no longer burdensome, but profitable assets—thereby providing tens of millions of hardworking Americans with the financial advice and planning they need to save more and achieve their goals.

David Lyon is CEO and founder of Oranj, a Chicago-based provider of digital technology solutions for financial advisors.

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