Financial advisors have played an important role in helping individuals meet their savings and investing goals. However, the investment environment has changed and the role of a financial advisor has never been more different.
A financial advisor has a wide variety of services to offer. The most common services are investment management and investment advice. The investment management process is where most of the recent changes have happened. Index funds, online brokers and a plethora of internet knowledge has significantly reduced the barrier to entry for individuals to take control of their own finances.
There are even automated investment management services that provide asset allocation plans or details on which funds to invest your account balance. It is hard for advisors to justify charging one percent of the assets they manage to do something most people can now automate.
In addition, passive investing has become more popular. Investors are more aware of the research that shows the failure of stock picking. Why would an investor pay someone to pick stocks and funds for their portfolio when they can invest in the index for a substantially lower fee? This may not apply to everyone, but there are many investors who refuse to educate themselves on investing, regardless of the minimal time requirement. They still prefer investment management by a financial advisor, but for how long?
The growth in online advisors, as well as a client base from upcoming generations comfortable with online services, are challenging the notion money is only safe with a traditional investment advisor. With the steady drop in the demand for investment management services, financial advisors need to shift to their second value proposition, which is investment advice. This will need to be different than past types of financial advice. The reason is, as stated previously, simpler financial advice, such as which funds to invest in is an easy question to answer, especially when using index funds.
The difficult components of investment advice relate to the emotional barriers individuals face. When dealing with client emotions, financial advisors work less in an investment capacity and more as a financial coach. They motivate and counsel when clients need support. They also talk emotional clients off the ledge when they make poor financial choices.
None of this is new information. The investment industry is already seeing shifts in a new direction. Companies like the XY Planning Network are focused on providing a new type of financial advice tailored to younger investors who don’t want or don’t see the value in, traditional financial advisor relationships. Advisors should push in this direction, providing value with technology as an ally rather than an enemy.
Advisors who want to ride this technology wave have plenty of tools available to them. For example, with budgeting and cash flow software available, advisors can help clients meet their investing goals and let the robo-advisors handle the actual investing.
No matter what direction clients choose, there will always be a value on relationships. Advisors can prove their worth by providing tailored financial advice, education savings plans, roadmaps for non-traditional financial situations, and quality financial coaching that wrangles client emotions.
So, are financial advisors still needed? Yes, but not for the historical financial services they have been known to provide. Instead, financial advisors will serve as a link between the investor and the wide array of modern financial tools available to them. A link that focuses on relationships and navigating the, at times turbulent, waters of finance by providing education, resources and stability.