ELITE ADVISOR BEST PRACTICES

Looking for a Transaction, or a Relationship?

Can robo-advisors provide true advice and meet a fiduciary standard?

By Marguerite Lorenz, CTFA, CLPF #319

Key Takeaways:

  • Why would a smart investor need anyone’s advice? Is cheap and fast enough?
  • Does the Internet have all the answers?
  • How does the smart client share information, yet maintain independence?

Rarely a day goes by without a mention of robo-advisors in the financial media. According to Investopedia, “A robo-advisor is an online wealth management service that provides automated, algorithm-based, portfolio management advice without the use of human financial planners.”

Wikipedia describes robo-advisors as a “class of financial advisors that provide portfolio management online with minimal human intervention.”

Based on the definitions above, a robo-advisor is about as much of a fiduciary as LegalZoom is a lawyer. Filling in the blanks for an automated result is not the same as presenting facts to an experienced professional who can help you refine your choices by understanding your goals, and by asking you questions that you may have never considered on your own. Self-directed planning is flawed since it is based on the central shortcoming of all human endeavors—the lack of objectivity. John Bacon’s recent article in Association Adviser, “Power Suit,
Power Selling,” offers some great insight about helping customers and clients realize needs that they didn’t even know they had.

The online world continues to adjust our social life, culture and etiquette. The reduction of personal interaction is appealing, since none of us want to be sold to, and we all want to stay in control. On the surface, it seems convenient that no conversation is required (i.e., no one else’s opinion is required); we can just fill in the blanks and feel complete. The downside is that this feeling of completeness is inaccurate. TurboTax, LegalZoom and robo-advisors are all part of this trend. The unfortunate flip side of this “noninteractive” trend is the customer frustration that occurs when an issue arises and there’s no one to fix it.

I have waited on hold countless times. When given the chance to speak to a human representative, I will wait longer than when no human option is available. The issue I may be having with the vendor (cable companies come to mind) may not be on the usual list of troubles offered by the automated reception device (the computerized phone menu), and when I finally do get a resolution, I want to have built a relationship with the service representative so I don’t have to tell my story all over again. As the rising minimum wage drives more customer service functions to be automated, expectations of good service are lowered. I choose to see this as an opportunity to make us, as professionals, more useful than ever.

I teach a course about professional relationships for EstatePlanning101.org. At the most basic level, no human can be truly objective about his or her own situation. The main benefit of hiring a professional is having someone else hear what you want to accomplish, ask you questions and help you clarify your intention. Another benefit of hiring a professional is that the person has probably seen your situation many times before and can suggest solutions that might never have occurred to you. The third benefit of hiring a professional is that a pro is going to be very careful about the suggestions offered. When professionals refer potential clients to each other, they have accountability.

Many clients maintain an illusion of control before coming to see a professional advisor. They may be successful do-it-yourselfers in other aspects of their life, so why not with personal finances? Clients not only need your experience, but they need your objectivity. Many financial advisors get a second opinion from a peer before investing their own funds, just as estate planning attorneys don’t draft their own documents without another professional giving those papers a once-over.

Professionals have plenty of experience, practice and knowledge. But none of us can be truly objective about our own circumstances, when self-interest is in play. That’s why automated services such as legal document preparation, tax preparation and investment submission are so dangerous; there is no one at the other end to challenge your ideas of what should be done.

Yes, clients can input their data themselves. Yes, they can make their own decisions about how they want to invest their money. But clients’ decision-making rationale is more powerful when they have shared their goals with an expert who is then empowered to educate and inform them.

Learning the “what-ifs” is just part of the value. The other, perhaps more important, aspect of working with a professional is that this individual is not a judge, but a witness. Years down the line, when the choices clients made today create results (intended or unintended), they will realize that there was a trusted advisor early on who understood what they were trying to accomplish, gave them valuable information and recorded the actions at that time. Every advisor reading this article should take the time to be a “client” sometime. Doing so reminds us of our own value to the client, clarifies the challenges involved in sharing our secrets and helps us have genuine empathy for our clients.

Robo-advisors have no more of a fiduciary role than auto-pay banking does. For instance, to have a trust, one must have a trustor (creator of the trust who puts valued assets in), a trustee (one who takes action based on the trustor’s instruction, and who must consider the needs of the beneficiaries) and one or more beneficiaries (those who benefit from the trust). When figuring out the relationship, and who is the fiduciary, the questions might be:

  • Who is the client?
  • Who has the authority and discretion?
  • Who is the decision maker?
  • Who will be affected by the decisions?

The trustee is the fiduciary, in that the “duty of loyalty,” to the trustor and then the beneficiaries, is pivotal to all the relationships. Fiduciaries (the decision makers) typically employ many advisors including financial advisors, attorneys, CPAs and nurses, depending on the needs of the beneficiaries. When you can no longer be the decision maker (due to incapacity, resignation or death), your fiduciary will be making decisions on your behalf—first, based on your instructions, and then, based on the circumstances of the moment.

How can the advisor be the fiduciary, if the advisor is not the decision maker? An attorney recently asked me if he should also serve as trustee. I told him that if he drafts the trust document, thereby writing up the rules one has to follow, there is already a conflict of interest requiring an independent review. When you present your annual trust accounting to the trustor, which role are you in? The trustee, who is presenting the accounting, or the attorney, who is representing the trustor (who has questions about the accounting)?

Using a robo-advisor system might make sense for an investor who has spare funds to gamble. As we know, very few investments can ever be guaranteed. I see a financial advisor as a professional who suggests investments based on knowledge of a client’s entire life picture: assets currently owned, tax consequences, possible longevity, estate planning, retirement planning, lifestyle, goals, dreams, philanthropic intentions and more. When a client only wishes to purchase a financial product, and is taking responsibility for his or her own results, then the robo-advisor model works much like any Internet-based purchase does—a silent store that doesn’t require leaving the house and delivers to your doorstep.

Real-world example

Recently, I met with a prospective client who said the attorney “made him” come to see me. The client told me, “I don’t need a fiduciary, I have electronic auto-pay through my bank.” This same individual told me he has several financial advisors because he doesn’t want any one of them to know about all the assets he has. I explained that auto-pay is fine, as long as one is vigilant about the transactions. What happens when the client can no longer track the details, or remember who is supposed to receive payment? It is much easier, in my experience, to decide the transaction is correct before paying it, because trying to get money back once it has been taken through the automated process can be quite time-consuming. As for having multiple advisors, this is a self-defeating practice that misses the value of trusted relationships.

Conclusion

I miss the days of full-service gas stations and actual store clerks who were familiar with their establishment’s inventory. Our desire for “cheap and fast” has eliminated some experts from our lives who would otherwise be available to share their ideas and, potentially, protect us from things we typically wouldn’t notice. I hope your financial decisions include criteria beyond price and absolute control. Even financial advisors should be cautious about investing without the assessment of a fellow professional, just like I caution estate planning attorneys not to draft their own documents. There are no extra points in life for having done it “all by myself.”


About the Author

Marguerite C. Lorenz, CTFA, CLPF #319: Since 2003, Ms. Lorenz has been a partner in Lorenz Fiduciary Services, Inc. (LFS), and has served as a Professional Trustee and Executor on over sixty cases. Ethics for Trustees, written by Jane and Marguerite Lorenz, gives further understanding to the work of a Fiduciary. Ms. Lorenz hosts the www.EstatePlanning101.org program in San Diego, which offers 12 hours of free estate planning education, sponsored only by charities. Follow Ms. Lorenz on Twitter! @SanDiegoTrustee