Making the Right Tech Moves

By Michael Finke

October 02, 2017 at 08:00 PM

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If you're making a living giving financial advice to clients, you're probably overestimating how much better you are than a computer program.

Can a human do a better job of building a tax-efficient investment portfolio that's continuously managed to adapt to a client's changing circumstances? Can a human sense when a client is feeling most vulnerable to making bad investment choices and provide instant feedback to push them in the right direction? Can a human assimilate all a client's personal and business information, all their asset holdings, their employer benefit options and the investment circumstances of their parent's estate when giving advice?

Of course we can't. Our brains have a finite ability to store relevant information, and we can only evaluate a few moving parts at one time. There is plenty of evidence from empirical studies of cognitive load theory that humans aren't computers.

The more complex the knowledge task, the more we can benefit from technology that can supplement our limited memory and processing ability. We're also not very good at acknowledging our limitations, so we likely need the help of software more than we think we do.

There are also many specialized knowledge areas in financial planning that have proven to provide great value to a limited number of experts who truly understand, for example, charitable planning strategies or retirement-savings rules. But all these tax rules are simply an algorithm — the expert has made an investment in time and effort to learn the many rules and effective strategies to gain an edge within the rulebook.

No expert can understand every possible strategy available to a client. A good analogy is chess. Chess has its own arcane rules and masters understand the strategies that give them the highest probability of winning.

But technology allows computers to recognize these strategies and test 200 million positions per second, and it now dominates even the most knowledgeable human players. Mobile phones now have the computing power to beat a grandmaster.

There are some planning software programs on the market that help advisors and individuals make better choices, but most agree that the state of financial software created to help advisors make better recommendations isn't as advanced as it needs to be. This is surprising since there is far more money to be earned by helping individuals save money on their taxes or earn a higher return than can be made beating a chess champion.

'Swivel Chair'

The biggest problem for advisors is that they're faced with an array of software programs. Each one tries to solve a specific aspect of planning, but the programs aren't easy to use and to integrate with one another. According to Andrew Anderson, market strategist at Northwestern Mutual, today's advising software creates what he refers to as "the swivel chair concept … advisors have one computer screen to do portfolios, another for taxes, another for servicing clients, etc."

Each software program provides its own unique workflow task but each operates independently. "The swivel chair concept reflects how rudimentary the technological support of the industry is," notes Anderson. "Being a holistic financial planner is a fairly new profession that's still evolving." And so is the technology.

"Technology available for advisors needs a lot of improvement," according to Rajneesh Motay, head of Advice Engines at Morningstar. "Not everything in an advisor's workflow has been automated to the extent that they can scale up easily."

Even Morningstar, which perhaps provides the most comprehensive suite of advisor software solutions, recognizes this usability gap. "We haven't yet provided as much technology help as we perhaps could. That's where Morningstar is headed," Motay says.

Among the problems with advisor technology is the time and knowledge needed to input data correctly and use the program effectively. Does a new advisor have the time to learn each software program?

Those new to the business often need help the most, but instead find themselves spending most of their time developing new client contacts. Can software help professionals deliver better advice and spend less time in front of a computer and more time in front of clients?

Style vs. Substance

Among advisor technology companies, too much effort is going into the creation of client-facing output that looks impressive, Anderson says, and not enough effort is focusing on developing software that has the complexity to truly provide value. It's going to take quite a bit of costly programming time to beat the grandmaster of IRA strategies or the charitable-planning guru.

"A lot of what the technology is trying to do is focusing on creating sustainable, repeatable output that makes the client feel good. Not all … fintech is focused on how to create the best possible answer," explains Anderson.

Why do software companies spend so much effort on producing pretty output for end users? The answer might be related to compensation and the inability of most clients to evaluate whether they are, in fact, receiving the most sophisticated advice. If the primary objective is to onboard a client, there's no value in producing software that continually works to eke out an additional 10 basis points of net return.

This is especially apparent among financial software programs that help advisors and their clients plan for retirement. The primary transaction occurs when a client moves their IRA money to an advisor, and they are able either to reap the immediate rewards of commissions or of ongoing fees.

Since managed client dollars are sticky and commissions are frontloaded, advisors care most about providing clients with a solution that motivates the client to move their assets. If pretty graphs and a sophisticated-sounding Monte Carlo analysis are the best way to make the sale, then that's what the software company will provide.

The real payday is done, though the client really needs the software to manage their retirement assets after the point of sale. This is where the real value is provided, but where software has generally failed to deliver the goods.

According to Anderson, "I haven't seen a single strong example of a tool that can help advisors make more informed recommendations to clients. The financial software is focused on the sale, but not necessarily on providing value after the sale. [It's] deep on user experience and design, but not deep on how it calculates its results."

Advisors' Real Needs

Do advisors want software that helps them make the sale or software that helps them make more sophisticated recommendations that the client might not even appreciate? Anderson believes that software developers think advisors are looking for "a thing that will look really cool and make my clients nod 'yes.' I feel like many advisors underestimate the value clients place on more sophisticated advice."

If software providers are going to invest in building better technology, are advisors going to buy it? First, clients need to appreciate the substance. The average client may not know the difference between a highly sophisticated planning strategy and one that looks good on paper. At least, they won't appreciate it until they visit with a competing advisor who points out that their old advisor could have done a better job.

How does software help an advisor do a better job? It should be sophisticated enough to evaluate multiple aspects of a financial plan. The programming should be powerful enough to rival the quality of recommendations made by industry experts.

Plus, advisors need to be able to easily demonstrate the value software provides to gain an advantage over their competition. Anderson believes that the "best in class will see a merger between CRM tools, client-facing resources, digital media/marketing, financial analysis and financial plans, compliance, client-facing output, user interface for the back office, client-facing digital output and the academic rigor applied to 'answers' all combined into one power tool."

Of course, one reason to consider buying sophisticated fintech is to prevent a lawsuit. If you've made a recommendation to a wealthy client and the recommendation turns out to cost the client millions in taxes or penalties, could you have prevented the potential lawsuit by running the recommendation through financial software first?

Will lawyers start scrutinizing the recommendations made by advisors who aren't using software to make sophisticated tax-planning recommendations? This remains to be seen, but could eventually be a game changer.

Still Relevant?

While the planning industry is focused on developing software solutions to help advisors, most of the fintech industry is acting as if human advisors no longer need to be part of the equation. Robos haven't proven to be the existential threat that some in the industry feared, but that doesn't mean the advances in software won't eventually start impacting the advising profession.

The big advantage consumer software has over advisor software is the ability to easily integrate multiple accounts and provide immediate feedback. It's not surprising that banks and financial-services companies are also in the market for fintech firms that can provide value to existing customers. Instead of offering a higher rate of return on investments, a bank can offer a suite of tax-planning, budgeting, retirement and business-accounting services that are especially appealing to higher-net-worth clients.

Many wealthy potential clients are motivated to see an advisor when they don't feel comfortable handling these types of decisions. But if institutions can provide these services and do them well, what is the motivation to see a human advisor? This is an especially important fear for advisors hoping to capture millennials, who generally prefer interacting with a computer to risking the potential loss of time and awkwardness of dealing with a human.

The answer seems to be a natural need for an entity to understand our range of goals as well as the complexity of family dynamics that comes with putting together a comprehensive financial plan. Studies show that there is a limit to how much professional services we're willing to pay for online.

At some point, we demand an empathic human who is compassionate and capable of coming up with solutions that account for our emotional and our quantitative needs. Research even shows that we prefer getting an imperfect recommendation from a human doctor to a more perfect recommendation from an algorithm.

A good place to look when predicting where technology will move the financial-planning profession in the future is to see how technology is transforming the field of medicine. We now have evidence that technology can provide a more accurate patient diagnosis than a human doctor.

Hospitals advertise that they have the most advanced technology, leading to greater demand for innovation. The newest technology companies are even using artificial intelligence to communicate more empathically with patients.

Does this mean that the demand for doctors has decreased? Of course not. Doctors now have the tools to provide greater value, and fintech promises to do the same for advisors.

Technology should be seen as a tool that allows doctors and financial advisors to focus on what they do best — ask the right questions to gather information and develop a plan for treatment that is customized to the individual (with a little help from a grandmaster).

Reader Input

This comment is in regards to the article by Michael Finke in your Summer 2017 edition of Research on Wealth, entitled "What's the Point of Investing?" The author suggests that an investor can purchase a 30-year U.S. Treasury bond paying 3%. At that rate, you would double your money in 24 years.

However, there is a superior alternative with zero extra risk, which is buying U.S. EE savings bonds. These aren't exciting or widely advertised, but they are guaranteed to double your money in 20 years — four years earlier than with a 30-year U.S. Treasury bond, thereby yielding 3.6% as long as you hold them for at least 20 years.

You also have the advantage of being able to redeem these bonds any time from 20 to 30 years after purchase, so if your income varies widely from year to year you can select the year when you would pay the lowest federal taxes. You have even greater flexibility by being permitted to pay accrued interest along the way, rather than upon redemption.

In addition, like a 30-year U.S. Treasury bond, the interest is free of state and local taxes and is subject only to federal taxes.

—Steven Jon Kaplan, RIA Kearny, N.J.

Michael Finke responds:

Steven makes an excellent point about the very underused EE bonds, and his letter serves as a useful reminder that advisors should consider EE bonds for clients seeking higher-yield safe investments. The one caveat about EE bonds is that investments in them are limited to $10,000 per year per Social Security number.

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