The Digital Age Changes Everything

This analyst blog is part of our coverage of the 2017 Morningstar Investment Conference.

By Laura Lallos

The second day of the 2017 Morningstar Investment Conference opened with some good news and bad news for financial advisors.

Michael Kitces of Pinnacle Advisory Group delivered the good news first: "Most of you will not be replaced by robots in the future!"

The bad? "Some of you are actually in trouble."

Twenty years ago, investors had to wait for quarterly financial statements to be printed and delivered in the mail--or look up their stocks in The Wall Street Journal and calculate their own results. Today, this information is available instantly, in real time.

Over the next 10 years, technology will do for clients' entire financial plans what it has done for their investment statements: Information will flow into the plan real time, and the plan can be adjusted accordingly.

"The significance of this is profound," said Kitces. In the past, financial planning has been largely reactive. Planners engaged with clients initially, then adjusted plans accordingly when clients notified them of significant changes.

In the future, financial planning software will enable advisors to react in real time. A market sell-off might trigger alerts that some client accounts are now below a critical threshold, enabling the advisor "to intervene at exactly the point the line was crossed." They can reach out to these clients and devise a strategy for cutting expenses or increasing savings.

Similarly, the software might send an alert that a client who has always made regular 401(k) contributions has suddenly stopped, prompting an advisor intervention.

"That's what financial planning in the future looks like: phenomenally outbound and proactive," said Kitces.

Communicating in the Digital Age "We don't really have social norms yet about what is appropriate communication in the digital age," Kitces noted. "What is the proper way to confirm a client meeting: phone call, email, or text? Today, the answer depends on the client. But in 20 years, there will be a proper way, and there will be a drastic improvement in efficiency."

Face-to-face meetings can be inefficient for both advisor and client. Kitces said his practice has been adopting video meetings, and the average meeting time has dropped in half.

"We get to talk to our clients twice as often in same amount of time. We communicate more often in shorter snippets. Millennials are some of the most demanding clients we've seen. They want to talk all the time," he said.

Kitces envisioned a scenario between Perry the Planner and Carl the Client in 2027. They've never actually met in person. Carl is a physician in California approaching retirement. He found Perry in Pennsylvania while doing an online search for planners who help doctors transition their practices to partners. Perry has a specialized niche that protects him from competition, whether human or robo.

Rise of the Cyborg Advisor Specialization is not the only way to stay relevant in a technology-driven world. Financial planners may no longer be necessary to answer questions like "What is the contribution limit for Roth IRAs in 2017?" Google can handle that. But they can play a key role in shaping behavior.

"In the past," said Kitces, "the financial planner was a knowledge worker. Now we are relationship workers." Robo-advisors can implement asset allocation and rebalancing cheaper and faster, but that doesn't mean they will replace advisors. At the end of 2016, robo-advisors had only a 0.03% market share. "That’s not disruption."

Robo-advisors would perhaps be more aptly labeled "robo-allocators." Technology can now deliver both alpha and beta but advisors provide the "gamma," said Kitces, referring to the term popularized by Morningstar's David Blanchett and Paul Kaplan. In other words, financial advisors will continue to play a key role in shaping client behavior.

For that reason, we are now seeing a shift from pure robo-advisors to what Kitces termed "cyborg advisors." Personal Capital, for example, combines its wealth management software with the services of human advisors, who serve clients from its headquarters in Denver via tools such as video chat. Similarly, Vanguard Personal Advisor Services pairs human advisors with technology.

Technology as a Tool, Not a Threat Technology won't replace financial advisors, though it will ultimately replace much of the back office. Investors must manage ongoing uncertainty, and advisors can help them navigate it. This takes interpersonal skills, not mere information.

"It's about humans, not robots," Kitces said, "but it's all about using technology." He likened financial advisors to engineers, who stress-test models of buildings to see what might fall down. Similarly, advisors can work with clients to "stress test the financial plan."

That can't be done on a static piece of paper. Software is the tool that facilitates the conversation. It can be endlessly adjusted to account for a variety of "what-if" scenarios, and in seconds. Humans can't do the calculations quickly enough, but human interaction is key to providing the inputs.

"Technology is not a competitor. It will become our platforms," Kitces concluded. "I encourage all of you to realize that these tools are not a threat. The only threat is failing to use these tools."

Laura Lallos is the managing editor of Morningstar magazine.