Secret Tool For Today’s Financial Advisors

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

Reviewed by: Dave Nadig
Edited by: Dave Nadig

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.


Adapt Or Die

So what’s a financial advisor to do? Either adapt, or be very good at the other core competency of successful advisory firms: actual advice.

Look at the model being promoted by folks like Ritholtz Wealth. They’ve built a financial advisory business not based on providing better mousetraps of flipping coins and getting heads 10 times in a row, but by actually working with their clients.

The value that they’re bringing to the bulk of their client base isn’t investment acumen, it’s the handshake. It’s actually understanding what the client needs, and helping them get there.

What they are doing by launching into the robo space is simply meeting clients where they are. Because of their strong presence in social media, I imagine they get a lot of inbound inquiries where, frankly, the high-touch approach just isn’t appropriate, and the financial need is pretty basic—simple portfolio management.

They looked at their business and adapted their model.

We’ve seen other successful advisors adapt in different ways. Mebane Faber of Cambria Investment Management took the ETF route, and went from advising wealth clients to running a passel of ETFs based on the firm’s philosophies.

Austin, Texas-based Sage Advisory is one of dozens of firms that expanded their horizons by taking their tactical ETF strategies out to other advisors through model portfolios, augmenting a substantial wealth management business in ways they couldn’t have done on their own.

Three threats. Three adaptations.

The Fourth Way: The Handshake

For the vast majority of advisors, however, I’m guessing that the real value-add isn’t launching a robo advisory firm, launching your ETF or becoming a third-part strategist.

The real value-add is focusing on the one thing you provide that no technology and no portfolio can provide: actual advice. True financial advisors do a lot more than just manage money: They actually shake hands with and get to know their clients.

True financial advisors match up the realities of modern liabilities—health care, college tuition, retirement, charitable aspirations—with the ever-shifting nature of modern assets: uncertain real estate values, a fluid tax environment, the lack of traditional pensions, the plug-in/plug-out career path.

That’s the real value of a financial advisor. And the best ones will recognize that this is where they add value, and not look to the ETFs, strategists and robo firms as competitors, but as liberating tools that can free them up to do what they’re really good at: the handshake.



You can reach Dave Nadig at [email protected], or on Twitter @DaveNadig.

Prior to becoming chief investment officer and director of research at ETF Trends, Dave Nadig was managing director of Previously, he was director of ETFs at FactSet Research Systems. Before that, as managing director at BGI, Nadig helped design some of the first ETFs. As co-founder of Cerulli Associates, he conducted some of the earliest research on fee-only financial advisors and the rise of indexing.