To Compete with Robos, Advisers Must Become Financial Physicians



It is an all-too-common chorus today: Can robo-advisers substitute human advisers?

Not if the purpose of the connection is to extend shoppers’ well-being, says Meir Statman. Why? Because that requires human interplay.

This is an intriguing perspective coming from Statman, the Glenn Klimek Professor of Finance at Santa Clara University and writer of Finance for Normal People: He is well-known for his analysis on behavioral finance and sits on the advisory boards of varied wealth administration publications. And he’s a member of the funding advisory board of Wealthfront, the $5-billion digital recommendation platform based by Andy Rachleff.

“Andy Rachleff says the idea [of robo-advice] is to . . . make financial advisers as obsolete as travel agents,” Statman instructed a roomful of advisers on the 2017 CFA Institute Wealth Management Conference. “That will be the case if you try to compete with robo‑advisers head-to-head. You have to build on your value-added, that human touch, that emotional intelligence, that role of a minister, of a priest, imam, rabbi, teacher. That is way more than just doing pie charts.”

These abilities are particularly essential in the decumulation section, when shoppers’ priorities could start to shift.

Communication: Separating Bots from Beings

“You do what no robo‑adviser does: You ask, you talk with your clients, you listen to them, truly listen,” Statman instructed the viewers. “You empathize, you diagnose, you educate, you treat, and all over again, because they will forget what you have done for them.”

Statman likes to think about the work of a monetary adviser as akin to being a “financial physician.”

To promote shoppers’ well-being, monetary advisers should ask a easy query: “How are you?”

“They want to tell you,” Statman stated. “Your clients want to tell you, if you let them, if you help them tell you what it is that they want, what it is that they fear. When you do that, you will increase their well‑being immensely. You will increase yours, because you will get their gratitude, and you will get also to keep them as clients.”

Statman sees wealth accumulation and decumulation as two sides of the identical coin — it’s simply as essential for an adviser to supply clever counsel on the spending of the wealth as it’s on the constructing of the wealth.

“Wealth Is for Well-Being”

“What is wealth for?” he requested. “Wealth is for well‑being. After all, you cannot take it with you.”

The drawback, in accordance with Statman, is that the identical instruments that assist in accumulation — reminiscent of framing or mental accounting — stand in the way in which of decumulation.

“There is such a thing as too much self-control.” Statman stated. “We put money into two major accounts. One is income, and the other is capital. The rule is: ‘Spend income, but don’t dip into capital. Reinvest your dividends, don’t spend them.’ This helps us, but keeping those boundaries between income and capital in that rule can get in our way.”

Before we had Excel spreadsheets and different software program packages to assist us hold observe, individuals would separate cash into jars — what we have a tendency to think about as separate “buckets” of cash.

“Framing money into what is income, what is capital, what is money for utilities, what is money for vacation, and so on, helps us when we accumulate,” Statman stated. “We would like to go on vacation, but the money is in an account that is dedicated to our kids’ educations. We are going to feel horrible if we dip into this account for the vacation, so we don’t, and we leave that account to accumulate.”

This is a flawed method within the decumulation section. “Because people want to maintain that boundary between income and capital, when it is time for them to, in fact, spend from their capital, they find it difficult, impossible to do,” he stated.

Also, some individuals expertise highly effective emotions of remorse relating to spending.

“Dealing with clients’ aversion to regret by dipping into capital in regular intervals . . . is really an important job,” Statman stated. “The trait that helps us save gets in the way. Conscientious people save. Conscientious people come to meetings on time. Conscientious people who make a promise deliver on that promise. They have wonderful self‑control. The problem is that they cannot let go.”

Act as a Financial Physician

This is the place the flesh-and-blood adviser has a bonus.

“You are not a robo‑adviser,” Statman instructed the viewers. “Your advantage is not in beating the market. Your advantage is not in pie charts. Your advantage is in creating this bond, this emotional bond, with your clients, to serve them as a financial physician to increase their wealth, but more important, to increase their well‑being . . . You help them accumulate responsibly, and now you can help them decumulate responsibly.”

For one other perspective on the robos vs. people debate, see “What’s Next for Robo-Advisers?

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All posts are the opinion of the writer. As such, they shouldn’t be construed as funding recommendation, nor do the opinions expressed essentially mirror the views of CFA Institute or the writer’s employer.

Image credit score: ©Getty Images/Imagezoo

Lauren Foster

Lauren Foster is managing editor of Enterprising Investor and co-lead of CFA Institute’s Women in Investment Management initiative. Previously, she labored as a contract author for Barron’s and the Financial Times. Prior to her freelance work, Foster spent practically a decade on employees on the FT as a reporter and editor based mostly within the New York bureau. Foster holds a BA in political science from the University of Cape Town, and an MS in journalism from Columbia University.


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