The Rise of Non-Investment Advisors

Investment advisors are being pushedout of the investment business. The trend starteddecades ago, and now with the adventof packaged investment products and theirenthusiastic embrace by fund companies,individual investors, and even advisors themselves,the trend has perhaps reached itslogical conclusion. Advisors have transitioned inboth their own minds and in the public’sperception from being investment advisorsto being relationship managers. Now, admittedlya huge number of activities occur underthe financial planning umbrella, and advisorsbring diverse talents to the table as they addressa multitude of client needs. Still, the trendof curtailing the advisor role in the investmentprocess is undeniable.

Decades ago, advisors often defined themselvesas stock-pickers. Using either their ownresearch or that of their parent brokerage firms,they would construct portfolios of blue-chipstocks and perhaps a few fliers for their clients.They would also ladder bond portfolios orpick a few municipal or utility bonds to add incometo the portfolio. No scorecard of their successwas kept, but the record was likely spotty.Eventually, the costs and limited diversificationof these portfolios came to be seen as disadvantages,especially before deregulated stocktrading commissions. Mutual funds presentedthemselves as a solution, and advisorsshed their role as security selectors and adoptedthe new role of selectors and evaluators offund managers.

Now freed from the need to be linked to abrokerage firm’s stock research, the independentfinancial planner movement really took off.With their newfound independence, advisorsbecame investor advocates, searching outthe best managers, seeking lower-cost optionsfor their clients. They turned the tables onWall Street. Rather than selling what they weretold to promote, advisors could direct assetsto the best managers in the market. Whilethere was much to like with this system, pickingmanagers proved difficult as many muchlovedmanagers stumbled and disappointed. Also,the costs of these investments still took a toll,especially when coupled with the advisors’ fee.

It was then that the index revolution tookhold. Despite the success many advisors had hadin selling funds like those from the CapitalGroup, academics told advisors they had nobusiness picking investment managers and insteadshould build portfolios out of index funds.Manager selection was too difficult, they weretold, but not to worry, advisors were still left withthe mission-critical task of asset allocation,which they were told was where the vast majorityof the value was. And with the lower feesfrom index funds, the advisors’ fee could be morereadily justified. If the resulting portfolios lookedtoo much like something the client could doon his or her own, the fund industry offered upexchange-traded funds—some basic, but manyexotic—that advisors could use to spice upportfolios and dazzle clients with their responsivenessto that week’s hot topic. That this wasall done with an academic halo of cost reductionand market efficiency made this approach seemall the better.

Today, this trend of pushing advisors out of theinvestment decision-making is reaching itslogical conclusion. Advisors are being told thattheir continued involvement in portfolioconstruction—even in this greatly diminishedcapacity of merely stringing togetherindex funds—is still too great. Vanguard’s recentpronouncements under new CEO Tim Buckleysignal that firm’s intent to move boldlyinto services like basic allocation and rebalancing.Vanguard argues that robo-advisors andpackaged services are far more efficient atportfolio construction than are advisors.Vanguard maintains that advisors should focuson client relationships, perhaps includingbehavioral coaching and some more complexfinancial planning, but certainly advisorsshould have very little to do with traditionalinvestment selection.

And, thus, the cycle reaches its logical conclusion.Advisors have been increasingly removedfrom the investment process—first from securityselection, then from manager selection, andnow from portfolio construction. These trends haveadvantages. Costs are declining, and diversificationis rising. Investors on the whole are likelyto be better served, especially beginning investorswho benefit from simpler solutions like targetdatefunds. Obviously, some advisors will continueto select individual securities, and many willcontinue to deploy actively managed funds. Mostwill also continue to have a hand in portfolioconstruction for now, but the odds are strong thatadvisors of the future will do less, not more,of these activities.

There’s a great irony that advisors are dialingback their involvement in the investmentprocess at the same time that the independentadvisor community is dialing up its rhetoricabout being fiduciaries. A fiduciary standardis a wonderful thing and something that is entirelyappropriate for someone who is makinginvestment decisions. Surely, fund managers androbo-advisors who craft packaged portfoliosolutions should be held to such a highstandard. But if advisors don’t pick stocks, don’tpick managers, don’t even determine theasset allocation of a client’s portfolio, should theybe held to that same standard? I have greatrespect for anyone who embraces higherstandards, but it’s worth asking: If the advisor’stask no longer includes selecting investments,is a suitability standard perhaps the moreappropriate expectation? After all, today’s advisoris not your father’s stockbroker.

This article originally appeared in the June/July 2018 issue of Morningstar magazine. To learn more about Morningstar magazine, please visit our corporate website.