Secret Tool For Today’s Financial Advisors

October 08, 2014

Traditional financial advisors are under siege from all sides. But they’ve got a key weapon at their fingertips.

Right now, on our home page, we have evidence of what I think is the most important trend we’re seeing in financial services. It’s not a product launch, or a clever structure or a brilliant way to make money now.

It’s Josh Brown and Barry Ritholtz launching a boutique robo advisor.

It’s not because Brown and Ritholtz are two of the smartest guys in the business (they are), or that they’re masters of new technologies and social media (they are) or even that they’re conservative, ETF-centric wealth managers (they are).

It’s because they’re the way the successful financial advisor of the future adapts.

When I talk to financial advisors, which I do a lot on email, at conferences and in Bloomberg messages, I hear a lot of angst. Over the last 20 years, much of the advisory business has changed. It used to be that advisors spent most of their time on two activities: picking hot managers to deliver alpha to their clients; and playing golf or doing less strenuous networking activities to get new clients.

The problem, of course, is that picking hot managers turns out to be a mug’s game. So a lot of advisors embraced a new role—that of actual investment manager. Their clients turned to them to build asset allocations and pick sectors, or even stocks. And the golf-playing model of getting new clients seems to work less and less well with a new generation of the tech-savvy, Twitter-wielding young affluent.

Triple Threat

At the same time, three trends in the ETF space seem to be competing for their business:

At the low end of the market, robo-advisory firms (detailed exquisitely by Elisabeth Kashner last month) have made the task of portfolio construction and maintenance seem trivial. And that dirty little secret is completely out there.

Matt Hougan’s nearly free ETF portfolio isn’t rocket science, nor is rebalancing it once in a while or even tax-loss harvesting to maximize efficiency. The robo firms take that simplicity and wrap it in slick technical trappings that appeal directly to the very new clients all that golf playing was supposed to capture.

At the middle-tier of the market, so-called smart-beta products are taking away the at-least-perceived value added being provided by financial advisors who specialized in strategies like sector rotation or tactical asset allocation. Why pay an advisor for that, when hundreds of cheap ETFs are promising to do the same thing in a single package?

And at the higher end of the market, third-party strategists like the ones regularly featured here in our ETF Strategist Corner are packaging their asset-class insights into model portfolio wrappers, creating another pull on the client dollar.



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