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Is Schwab Intelligent Advisory A Threat To Independent Financial Advisors?

December 22, 2016 12:06 pm 29 Comments CATEGORY: Technology & Advisor FinTech

Last week Schwab announced the release of a new "robo" service, called Schwab Intelligent Advisory. And while the announcement was met with little attention from financial advisors, this announcement is a much bigger deal than most advisors and industry commentators have given it credit to be.

In this week’s #OfficeHours with @MichaelKitces, my Tuesday 1PM EST broadcast via Periscope, we explore what Schwab Intelligent Advisory really is, why it's not a robo, and why that actually means Schwab Intelligent Advisory is even more of a real threat to independent RIAs.

Because while the media instantly dubbed Schwab Intelligent Advisory as a "robo" service, it is actually much more. Schwab Intelligent Advisory provides comprehensive financial planning plus investment management, delivered by real CFPs, who are available 24/7, at a cost of just 28 basis points, and an account minimum of just $25,000.

In other words, Schwab Intelligent Advisory is truly designed to be a mass affluent financial planning and investment management solution. Schwab is clearly looking to compete with Vanguard's Personal Advisor Services (undercutting their 30 basis point cost), but Schwab Intelligent Advisory won't only be a competitor to Vanguard. Instead, the reality is that Schwab will be a threat to any advisor serving the mass affluent market – which is most of us in the independent RIA community!

Realistically, Schwab's intention is certainly not to go directly after the clients of advisors who utilize their custodial services - more likely Schwab sees an opportunity to fill the void when headcounts drop after salespeople can't meet DoL fiduciary - but one way or another, Schwab's marketing message is going to reach mass affluent investors, who will realize Schwab Intelligent Advisory's services look an awful lot like their existing advisor's (but at a much lower cost!).

Schwab's announcement is also bad news for robo-advisors, but potentially great news for the CFP Board. Disregarding Vanguard Personal Advisor Services (which isn't truly a robo), Schwab Intelligent Portfolios is currently the largest robo-advisor with more than $10 billion in AUM. That means that despite already being the largest robo, Schwab is shifting their attention towards a more comprehensive model that can actually take business away from other advisors, suggesting that when Schwab looks at its robo data, it sees the real opportunity isn't a pure robo after all! Fortunately for the CFP Board, if Schwab (and competitors) are successful, they are going to be hiring hundreds of CFPs, and continuing to drive demand for the designation as firms require their employees to pursue it.

Ultimately, the emergence of models like Schwab Intelligent Advisory will benefit consumers, but advisors must acknowledge that for anyone serving the mass affluent (which is most of us!), the marketplace is about to become much more challenging, and the crisis of differentiation is just going to keep getting worse.

How Behavioral Biases Lead To Hard-To-Capture But Sustainable Alpha

December 21, 2016 07:00 am 9 Comments CATEGORY: Investments

The “Paradox of Skill” is the recognition that as the average skill level of a group increases, it actually becomes harder and harder for superstars to occur; as the skill level rises, the variability around the group average declines. This phenomenon helps to explain why despite the improvement in baseball players, no one has hit over .400 since Ted Williams did it 75 years ago, and also provides insight on why it’s getting harder and harder to find “good” active investment managers. Because the whole field has gotten so much better, it’s actually become incredibly difficult to stand out from the (already excellent) pack.

As a result, a growing base of data suggests that the amount of available alpha is shrinking, a combination of both the paradox of skill itself, and the mere fact that more and more investment research is revealing previously unknown investment factors that, once known, can no longer be exploited the way they were in the past.

Yet despite this trend, a number of known investment opportunities have continued to persist, even though they’re widely known. For instance, it’s long since been documented that small cap outperforms large cap, that value generates a long term premium over growth, and that stocks exhibit momentum effects. But for all the research showing these outperformance opportunities to be available, investors fail to invest sufficiently to fully take advantage of them.

The gap, however, may be at least partially explained by the growing field of behavioral finance, and research that shows all the ways that we fail to invest “rationally” despite having all the available information (or without bothering to get it in the first place). And in point of fact, many of the most popular – and persistent – alpha opportunities, from small caps to value to momentum, are actually well-explained by common behavioral biases (including the availability, familiarity, and recency biases) that are hard-wired into our brains. Which helps to explain why they’re persistent – because their very nature is the tendency to impact our investment decisions, even when we “should” know better.

Of course, the caveat is that “sustainable alpha” opportunities created by persistent behavioral biases may be the hardest to exploit, precisely because those behavioral biases impact us as well – both in the investment decisions we make, and as advisors, the investment decisions we must justify to clients (who themselves have the same biases). Or viewed another way, it may be the persistent challenge and “risk” of trying to buck the behavioral trends that generates the risk premium associated with sustainable alpha in the first place!

How The UK RDR Ban On Commissions INCREASED Demand For Financial Advice

December 19, 2016 07:01 am 16 Comments CATEGORY: Planning Profession

The Department of Labor's fiduciary rule has become a highly contentious issue in the US, with some suggesting that it will ultimately improve the quality of advice for consumers, and others suggesting it will lead to a damaging mass exodus from the industry. But the reality is that debates about lifting the standards for financial advice is not unique to the US; in fact, countries ranging from Australia to India, and from the Netherlands to the UK, have all enacted even more stringent reforms than the DoL's fiduciary rule, in most cases resulting in an outright and total ban on all investment commissions. Which provides us an interesting glimpse into how the financial services industry really is impacted as fiduciary standards are raised and commissions are reduced.

In this guest post, industry commentator Bob Veres shares his recent interview with Keith Richards, regarding the ban of commissions in the UK that was implemented in 2013 after their Retail Distribution Review (RDR), and how it has impacted demand for financial advice. Richards is the CEO of the U.K.'s equivalent of FINRA, and a former executive at UK equivalents of a major life insurance company, and before that a major broker-dealer.

Given his background, Richards was not surprisingly a major skeptic of the commission ban before it was enacted. But the "surprise", he reveals, is that the ban on commissions has actually created an environment which is better for both the industry and advisors. Richards believes that transparency and separation of fees from products has resulted in advisors better understanding the needs of their clients and articulating the value they provide, which has resulted in clients who are perfectly willing to pay for an advisor's expertise. In fact, demand for financial advisors is on the rise since commissions were banned, and financial intermediaries that feared a massive decline in revenue are actually seeing an increase, instead!

However, there are some reasons to believe that a ban on commissions in the US might not play out the same way it did in the UK. The key distinction is that nearly 20 years ago, the UK began to lift the educational standards for financial advisors, which meant that by the time commissions were banned and advisors had to get paid for advice, they were actually reasonably well trained to deliver that advice. By contrast, in the US, a wide swath of "financial advisors" have nothing more than basic Series 7 or Series 65 licenses, and consequently might not have enough training and education to get paid for their advice alone, if they were actually required to do so! Which means ultimately, lifting the standards for financial advice in the US needs to consider both the fiduciary duty of loyalty, and educational competency standards as well!

Nonetheless, for those advisors - or executives at financial services companies - who fear that a fiduciary standard and limitations on commissions would be destructive to the financial advisor business model, hopefully this perspective on how an even more stringent fiduciary standard and commission ban in the UK actually increased demand for financial advice, and the success of financial services companies, will be helpful food for thought!

Weekend Reading for Financial Planners (Dec 17-18)

December 16, 2016 02:50 pm 2 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" - this week's edition kicks off with the news of yet another legal victory for the Department of Labor, as the request from the National Association of Fixed Annuities (NAFA) for a preliminary injunction to stop the DoL fiduciary rule was denied (though NAFA's appeal for its original loss to the DoL is still pending).

Also in the news this week was the launch of Schwab's new Intelligent Advisory service, an expansion of its "robo-advisor" program for the mass affluent that will provide access to a CFP certificant who provides a personalized financial plan (in addition to investment management), all for a mere 0.28% AUM fee (plus the cost of the underlying ETFs) with a $25,000 minimum - a bold competitive shot across the bow of Vanguard's Personal Advisor Services (with a 0.30% AUM fee and a $50,000 minimum), but also to a wide swath of independent financial advisors who also work with mass affluent clientele (some on Schwab's own Institutional platform!).

From there, we have a slew of advisor technology articles this week, including: the latest results of the annual Financial Planning tech survey (though unfortunately, this year FP magazine is limiting access to the survey results!) and only highlighting the top few companies in each category; a review of new advisor marketing tools Snappy Kraken and Twenty Over Ten; a discussion of the new PFM app Moven, which competes primarily in the banking space but could see adoption from the clients of financial advisors; a look at "sleeve accounts" in portfolio accounting software and why they can be more efficient than just creating multiple accounts to separate clients' assets; a review of the latest (and pending) tech developments at the major RIA custodians (Schwab, Fidelity, and TD Ameritrade); how Riskalyze intends to deploy its new $20M of private equity (by pivoting from "just" a risk tolerance assessment tool to a broader "robo" solution that supports acquiring and onboarding new clients); and a look at the explosion of new DoL compliance technology tools (and why there may already be "too many" for what most advisors really need).

We wrap up with three interesting articles, continuing the technology theme: the first is a look at the ever-expanding impact and power of social media tools, which aren't just a marketing channel but are allowing people to organize new social and political movements in ways that simply weren't feasible in the past; the second is a review of several financial-oriented websites and apps that are increasingly pivoting towards becoming "automated financial assistants", from Digit to Mint to Credit Karma, which could begin to compete with financial advisors, or simply complement areas they don't typically advise on anyway; and the last is an overview of the empirical research that still suggests, in the end, that technology and automation really don't cause mass unemployment, and can even boost employment in some sectors (as the number of bank tellers increased after the introduction of the ATM), but with the accelerating pace of technology change, suggests that at a minimum we need to get better about helping people prepare for new jobs and industries (which has both job training and financial planning implications!).

And be certain to check out Bill Winterberg's "Bits & Bytes" video at the end, which this week includes coverage of the new Schwab Intelligent Advisory solution, the news that Finicity has raised $42M of venture capital to begin development again on the "old" Intuit Financial Data APIs, and the rollout of Yodlee account aggregation capabilities on the Envestnet|Tamarac Advisor Xi platform.

Enjoy the "light" reading!

Is Financial Planning An Industry Or A Profession?

December 15, 2016 08:26 am 3 Comments CATEGORY: Planning Profession

In financial services, the terms "industry" and "professional" are often thrown around casually and used interchangeably. But in the end, are financial advisors simply part of the financial services "industry", or do they deserve to be recognized as "professionals" instead? Is there a point at which we switch from one to the other? What does it take to really earn the label of "professional"?

In this week’s #OfficeHours with @MichaelKitces, my Tuesday 1PM EST broadcast via Periscope, we explore the difference between an "industry" and a "profession", and what this distinction means for those who wish to see financial planning regarded as a bona fide profession.

Because the reality is that there truly is a difference between an industry and a profession. Bona fide professions – such as divinity, medicine, and law – are distinguished from other occupations by common elements, such as having a specialized body of knowledge, education and experience requirements, societal recognition of the "good" they provide, ethical requirements (to which they're actually held accountable), and control of their terms and labels (and who can and cannot hold out as a professional).

By contrast, the term "industry" typically refers to a grouping of companies focused around particular service or business activities. Industries are also broader in scope than professions. Professionals may work within an industry, but there's more to an industry than just professionals. Which means it's not a matter of whether financial advisors are professionals or part of an industry, but that as professionals they would still be part of an industry.

Nonetheless, the question still arises as to whether financial planning itself really merits the label of being a profession... and unfortunately, it appears the answer is "No", or at least "Not Yet". Because while many financial planners have voluntarily decided to fulfill more rigorous education, examination, experience, and ethical requirements (such as via CFP certification), the reality is still that anyone can choose to call themselves a financial advisor or a financial planning professional, and the public often can't tell the difference (at least, not until after the fact).

Which means until financial planning (re)gains control of its terms, the financial services industry will continue to include both the financial advisors who elevate themselves to the standards of a professional, and also all the rest who may hold out as "financial advisors" to the public but who have little actual training as such!

Policy-Based Financial Planning: Linking Financial Life Planning To Actionable Recommendations

December 14, 2016 07:02 am 1 Comment CATEGORY: Client Trust & Communication

The Investment Policy Statement (IPS) is a staple of investment management and provides crucial guidance for (discretionary) investment managers about how to implement portfolio strategies on behalf of a client in times of uncertainty (when the client may not be there in person to help make the decision).

Yet the reality is that the concept of a “policy statement” transcends just the world of investments. Arguably, it can be effective across most domains of financial planning – not necessarily to establish a plan of action for the advisor in the absence of the client, but for the client today to establish a plan of action for handling an uncertain future. In this context, the “financial planning policy statement” is a form of choice architecture, narrowing future decisions in a manner that can help to eliminate the “bad” emotional choices from consideration.

Of course, it’s still necessary to establish appropriate financial planning policy statements in the first place, linking underlying client values and core beliefs to structured policies that are flexible enough to address future unknowns, yet specific enough to provide clear, actionable guidance when the time comes. Which means the financial planner needs both a means to discover and understand a client’s values and beliefs (not just the financial data), and the tools to formulate and test policies that might be recommended to the client.

Overall, though, this kind of “policy-based financial planning” approach actually has the potential to provide the crucial link between financial life planning and technical financial planning strategies, serving as a means to translate values and beliefs into structured policy statements that can be implemented with the client. At least, if financial planning software is ever improved to the point that such financial planning decision rules can be illustrated in the first place!