C is for cost: What is the cost and value of basic investment management from advisers?

Once more, I want to say that Russell Investments believes in the value of advisers. And we believe communicating that value to your clients is more important than ever. That’s why we keep sharing this easy-to-remember formula:

VOA Formula

In the first blog post in this four-part series, we discussed the value of annual rebalancing. Then we covered behavioural mistakes. In this post, we’ll tackle the cost of basic investment-only management.

We’re talking about basic investment-only management because we all know quality investments are important. We believe services such as asset allocation, security selection and portfolio construction are the building blocks of any successful investment strategy. All three are critical for hitting a client’s financial goals.

But here’s the thing: Investments are only one component of a comprehensive financial strategy. Wealth managers do so much more. Robo-advisers may be great at taking in large amounts of available numeric data and creating if/then criteria for specific, predictable problems. Human wealth managers, on the other hand, still have the advantage of taking in many additional sources of information, including the personalities of clients, the surprising life events clients face, and the other non-numerical aspects of a real person’s investment journey. A skilled wealth manager can then craft a comprehensive, real-world financial plan that addresses the unique needs that every individual client faces.

The human factor

When the stakes are high, humans want to work with humans. If you don’t believe me, remember the last time the service went out on your TV during a big football match or a major golf tournament. You had to call the company and dial in to that robotic call-centre phone tree to get assistance. And you dreaded doing it. So, what did you do? If you’re like me, you immediately punched the number zero on your phone, hoping to bypass the artificial intelligence of the phone tree and connect to a human. That was for a football match. Now replace that relatively trivial incident with the lay-awake-at-night issue of life savings. When the stakes are high, I believe we all long for humans - not robots - to get us through.

This is why I worry about investors. When markets are going well - when we’re in the glow of a long bull market - then inexpensive robo-advisers sound great. But what happens when markets turn downward? What happens when volatility strikes? If this year is any kind of indicator, then volatility still makes investors clamour for guidance - for direct responses to their feelings of uncertainty.

I also worry that investors may think that all robos are basically the same. They’re not. Even among the top five robo-advisers, they still offer varied experiences, sometimes for very different pricing. And sometimes, I suspect that when investors pay for a robo service, they assume they will get a service similar to a human adviser, only to find out during troubling markets that that’s simply not the case. Robos, by definition, are data-driven. We believe in data and the value of data. But data doesn’t always tell you the entire picture, especially when it comes to humans. The business model of robos is not designed to deliver the personalised guidance that many investors require to stay on course during tough times. In fact, if you read my recent blog post on behavioural mistakes, you’ll see that our research makes us believe that preventing those mistakes made by investors is the greatest value that advisers provide.

All that said, basic investment-only management is not only worthwhile, it is necessary. According to Bankrate, 25 – 501 basis points is the typical cost of the top robo-advisers as of March 2020. That number is significant, but it should be a warning sign as well. If your value proposition is based on your investment management prowess, keep in mind how much that’s worth, especially when compared to other more potentially valuable services you may provide. This is why we advocate for model strategies where suitable. By outsourcing your investment management, you can free up your time to focus on the highest value services.

Don’t fear the robot

While robos continue to commoditise, helping your clients with their investment decisions is a vital part of what you do. And robo-like technology is here to stay. Don’t fear it. We believe embracing the benefits of this technology - and there are benefits - is the best way forward, both for you and for your investor clients.

Ironically, I believe robos have built their business since 2008 by learning from human advisers. Humans are what robos intend to emulate. They learn from you. But let’s set irony aside and see what we can learn from them.

First of all, it’s important that advisers recognise that technology has become a vital medium for millennials, generation Xers and their cohorts. The Gen Xers and millennials talk through technology. It is often their first communication preference. So then, are you talking to your younger clients, in their preferred language? As the chart below shows, there is generationally growing interest in online planning tools and technology. How are you incorporating these tools into your practice?

Investor Interest In Online

Analyst note: data represents the percentage of retail investor households that would like to use online financial planning features. Respondents who currently view and update their financial plan online are omitted.

Source: Phoenix Marketing International, Cerulli Associates.

Technology can also help you prioritise your time, so that you, the human adviser, are focused on the highest value deliverables. Which internal processes within your practice can be automated? I know many advisers have started down that path, but you can likely do more. How are you using technology to automate low-value tasks and shift your saved minutes to more client-facing time?

Do you have an online presence and social media support that drives your brand? Don’t just think in terms of your website. Think of your online presence as your 24/7 team member that plays an increasingly vital role with prospects that perhaps you’ve never even met. If these prospects can get a good feel for what you offer - including not just your expertise and your services, but also your personality and the personality of your team - then these prospects have a higher likelihood of making a valuable connection.

Finally, how can you leverage technology to support your inventory strategies and the customer experience of your existing clients? This is another place where technology can be used to shift time to more client-facing tasks.

The bottom line

In the formula of adviser value, C is for the cost of basic investment-only management. During times like these, when markets are volatile, it is imperative that advisers have the most efficient partner to help navigate through these turbulent times. We encourage advisers to explore how both robos and skilled outsourcing partners can help make the most of your time and add the most value, both for you and your clients. 

Any opinion expressed is that of Russell Investments, is not a statement of fact, is subject to change and does not constitute investment advice.