This is based on an article in the “Financial Adviser” – it reflects the Money-Guidance viewpoint
In times when investment returns are low, reducing expenses can sometimes make the difference between profit and loss. A popular strategy to reduce costs is to eliminate the middleman, which is what makes online investing so appealing. But this approach will not eliminate the need for financial advisers, because investing big money involves face-to-face relationships.
Trading, investing and banking online offers convenience – people can access their account 24 hours a day. If a client has a question that requires a response from a live person, that is no problem – tiered service can reduce waiting times for an advisory firm’s best clients. Virtual investing might require upfront investment in technology, but it saves the expense of high street offices along with salaries and commissions for advisers based there.
Interacting online also has its drawbacks. Online dating is a good example where things are not what they seem, and few people would go online to get medical, legal or accounting advice. Online investing makes sense for people who know and understand what they are doing. It is an excellent vehicle for investors who want someone to follow instructions and execute trades.
But the role of the financial adviser is far from dead. When people part with large sums of money or make important decisions, they prefer to do so face-to-face – it is easier when the advice comes from someone who knows and cares about you. Consider the following 10 reasons why a face-to-face advisory relationship is superior to online investing:
1. People make judgments. Before accepting advice most investors want to size up the other party. In politics, countries’ leaders meet at summits and look one other in the eye. Former UK prime minister Margaret Thatcher famously said of her Soviet counterpart, Mikhail Gorbachev: “This is a person I can do business with.”
Why it is important: many people need to determine informally whether the adviser is knowledgeable and has their best interests at heart. You will need to meet them.
2. Bricks and mortar. Buildings imply stability and a commitment to the community. Investors like to see hard assets such as property. It makes them feel their assets are “secured”.
Why it is important: investors want to see a parent firm with deep pockets before they entrust their money to an adviser.
3. Longevity. Established firms in familiar surroundings communicate stability. Knowing that the adviser across the table has a long-term career with the firm puts clients at ease.
Why it is important: the adviser is the face of the firm in the community. They assume a long, successful career is built on doing the right thing for their clients year after year.
4. Referrals. People often refer their friends to a firm because they have had a good experience or got a good deal. Something might be on sale, but it is more likely people are referred to individuals who made a process go smoothly.
Why it is important: in property transactions, once a contract is signed the estate agent’s job is to keep the sale on track until it is completed. This is a people skill – estate agents often build their business on personal referrals.
5. Accountability. It is human nature to apportion blame when things go wrong. If someone has made a mistake, few investors want to say: “It’s my fault I lost money. I wasn’t paying attention.” In politics, world events and sport, we hold individuals accountable, rather than organisations.
Why it is important: clients are accepting advice from a person they expect to hold accountable for the results, based on the advice given.
6. Confidentiality.Many people feel data they enter on their computer might as well be displayed in lights in Piccadilly Circus for all to see. Regardless of a firm’s best efforts, systems get hacked and data gets stolen.
Why it is important: like the confessional, people assume details they tell their adviser in confidence stay that way. Although advisers maintain client contact records, they use some discretion in which details to include.
7. Avoiding misunderstandings. Meeting face-to-face allows investors to ask questions they might find difficult to word or are too embarrassed to ask online. The adviser can look for visual clues – is the client following what the adviser is saying? Advisers can read back an order so that a client understands what they are agreeing to.
Why it is important: each party can read the other’s facial expressions and probe with questions. Many marriages fail because of breakdowns in communication.
8. Relationships. Trust means a client being confident an adviser is working in the client’s best interests. Trust is the foundation of many personal relationships. Many clients befriend their advisers because of traits displayed during the investing relationship.
Why it is important: social people surround themselves with people they trust, often with skills that make their lives easier.
9. Consider the alternative. Investing online might save money in the short run, but what if the investor makes a mistake? The financial consequences of choosing bad investments or holding others for too long outweigh the savings from lower fees.
Why it is important: as people age, their number of peak earning years declines. The older the investor the less time they have to earn back losses from a poorly chosen investment. That is why they need advice.
10. Negotiation. Online investing is cheaper in the prospective investor’s eyes. Everyone still makes money, so it is important be aware of what you get and what you pay for each approach. The adviser’s fee structure is not fixed like train fares.
Why it is important: neither the online nor the face-to-face approach is a perfect fit for everyone. Working with an adviser has advantages. Discuss the cost in terms of the difference between the two alternatives – advisers are often open to compromise.
When stock markets are soaring, some investors might think anyone can do an adviser’s job. When markets plunge, people might assume advisers sit on the sidelines while clients’ assets evaporate. These investors do not understand how advisers add value or bring other benefits to the table. The following four key areas are where advisers can prove their worth.
Studies show that most of an investor’s return over time comes from proper asset allocation. Graphically speaking, if a client is standing in the road and a speeding lorry is heading towards him, the adviser is the person who picks him up just in time and puts him back on the kerb – that has value. This is important because the index fund investor is standing in the road because they are fully invested 100 per cent of the time.
In terms of sectors and industries, an index fund’s return should match approximately the performance of the index it tracks. Indices usually comprise sectors. Some will outperform, others will underperform. The broad index investor holds them all, while the adviser adds value by suggesting sectors to over- or underweight.
A stock market rises like an escalator and goes down like a lift. Few investors can be detached when the news predicts the end of the world. The return for mutual fund investors over time is often far lower than the return of mutual funds as a class – investors often buy at tops and sell at bottoms. Advisers help get clients “off the window ledge” when news is bad and encourage them into the market before all the good news is apparent.
Finally, there is the question of yesterday’s winners. An adviser based in Pennsylvania in the US remarked that an investor might enjoy good investment results because they owned a portfolio superbly designed for the previous market cycle. Advisers help with forward thinking to position clients for anticipated changes in the economy.
So, while it is tempting to cut out the middleman by investing online rather than working with a financial adviser, choosing the former route means considering a portfolio or retirement savings as a do-it-yourself project. Some investors are skilled, others less so. That is where a face-to-face relationship with an adviser truly adds value.
Bryce Sanders is president of US financial services consultancy Perceptive Business Solutions
Another way of looking at things may be:-
People make judgments: some prefer to do so dispassionately by evaluating hard data, without “noise” from whoever may be presenting it.
Bricks and mortar: some may see fountains in the foyer as an unnecessary cost which is reflected in their investment returns.
Longevity: Being around a long time may not be tantamount to proficiency. Some consumers may well think that the adviser has been “…doing the right thing (isn`t that what Gordon Brown used to say?) year after year”. Others may think the fact that this young person has recently achieved Chartered/Certified status may mean they have topical knowledge.
Referrals: I believe that Hargreaves, Bestinvest, et al, may have had a few of these as well.
Accountability: A good FCA-authorised online adviser has to be equally accountable.
Avoid misunderstandings: It might be argued that misunderstandings are less likely if systematically documented as part of an online process. Human intervention can sometimes skew outcomes (e.g. risk-profiling scores are often higher when a male is being asked the questions by a female adviser). Marriages can also fail because people have spent too much time face-to-face!
Relationships: Friendship with clients often comes a poor second when money has been lost. Trust is important, but don`t let`s get too sentimental, as clients tend not to be – a recent CFA survey found that only 7% of investors felt that financial firms “do the right thing.”
Negotiation: Train fares aren`t fixed when you go online.
Emotional arguments: Those who get their overweight and underweight arguments right are rare. Humans (if Freud is to be believed) have an instinct to preserve – often translating into over-caution and missing out on market rises due to a herd mentality.
Incidentally, the IOD`s legal helpline is excellent and widely-used by its members. And, I think the FCA may subject firms and their advisers to more stringent tests than E-Harmony does with its potential dating suitors.
Clients really are too diverse to generalise about this much.