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Lately the financial planning world is full of news about the threat from “robo-advisors” — online software services that manage clients’ investment portfolios with minimal involvement by actual humans. Some stories even suggest that financial planners could fall by the wayside amid this rise of the robots.
There are several key areas where advisors add value that robo-advisors cannot. Advanced financial planning is the most important thing an advisor can offer. What makes sense for one client may not for another because everyone’s financial situation is so different.
I regularly help clients with advanced tax planning, estate planning and insurance recommendations. Life — and financial planning — is not as simple as just saying, “Buy index ETFs, and rebalance once a year.” People want and need much more nuanced advice that takes into account all the elements of their financial lives.
This is especially true with the ever-growing complexity of our financial system. The proliferation of 401(k), 403(b) and 457 plans, Roth IRAs, SEP IRAs, tax deductions, phase-outs, capital gains, estate taxes, variable universal life policies and a million other financial topics create a serious education problem. The system has become so complex that knowledgeable advisors who can decipher these topics are more important than ever. They can play an incalculable role in helping clients make the best decisions.
Planners must overcome suspicion
Of course, financial advisors have some work to do to make this case to the public. Many consumers are suspicious of financial advisors, viewing them as just product salesmen. The sad part is that excessive and hidden fees in financial products do indeed drive consumers to lower returns, higher premiums and general distrust for the financial industry. This results in fewer people working with real advisors because they aren’t sure whom to trust.
One way to clear up this perception, and to clean up the industry, is through uniform adoption of the fiduciary standard, which would mandate that financial advisors provide advice that is in the best interest of the client at all times. This standard, versions of which are now moving through Washington, should be a true fiduciary standard, and not a watered-down version that industry lobbyists have weakened to the point of irrelevance. Reform at the SEC level and certainly with the Financial Industry Regulatory Authority would make sense as well.
Another way to educate the public about the true importance of financial planning is continued community and educational outreach. Required personal-finance courses in high schools and colleges would be a great start. Teaching these subjects is one of the smartest ways to show young people that there are better ways to manage their financial lives. The more educated they are on the subject, the more they will realize there are few one-size-fits-all solutions.
People need help
As the public gets educated about financial planning, and the people giving the industry a bad name increasingly become exposed, more Americans — especially middle-class Americans, squeezed on all sides, who most need the help — will recognize the valuable service that financial planners can provide. That means true financial planners — those who work on a fee-only or hourly basis, with their clients’ best interests in mind, not salesman looking to push products they have a financial stake in.
One thing that is clear is that financial advice is badly needed. The biggest mistake consumers make with their finances is ignoring them. People regularly think to themselves that they will get to it later. Retirement seems so far away and such a big expense that it is natural to feel overwhelmed by the idea.
Financial advisors can help consumers create a plan, which almost always makes handling their finances easier and less stressful. Good advisors will monitor their progress and regularly check in to make sure things are working as expected.
There’s nothing wrong with robo-advisors in general. In certain simple circumstances, it’s a valid approach. But trusted financial planners will always have a crucial role to play in people’s financial lives.
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