While everyone is paying attention to Europe we have been thinking about the role of financial advisors.

Dan Ariely caused a bit of a stir in the blogosphere when he asked out loud whether financial advisors are both overpaid for what they do and whether they are actually doing the job that their investor clients need most.  Ariely writes:

Moving money around from stocks to bonds or vice versa is just not something for which we should pay one percent of assets under management.

The fact of the matter is that in regards to our portfolios we are not all that unique.  “Nathan Hale” at CBS Moneywatch had a post up a while back talking about how good financial advice is pretty generic.  We like to think that we need a custom portfolio, but that is really just a desire for “hot tips.”  In the end effort does not guarantee results.  He writes:

As Warren Buffett said, successful investing is like dieting: it’s simple, but it’s not easy. Don’t make the mistake of thinking that efforts to make it more complicated than it needs to be is somehow linked to superior results. For in reality, the truth is precisely the reverse.

Andrew Haigney at The EL CAP View goes further in noting that the fiduciary standard is a fig leaf behind which the investment advisory industry hides behind.  He thinks a much tougher standard, ERISA level protection, is needed to protect investors.  Haigney writes:

The bottom line is that the investment advice business is perhaps one of the greatest consumer scams of our time.  Rather than attempting to educate investors on the ills of Wall Street, regulators need to get serious about investor protection.

Anyone who reads this post by Scott Bell at I Heart Wall Street will see that there are still likely plenty of investment advisors out there that are earning 1.5% annual fees without a great deal of effort or potential for success, let alone trying to help clients with their big financial decisions.

There is already a bit a movement afoot to create better automated, algorithmic approaches to portfolio management for individuals.  The mutual fund industry has taken baby steps in the form of target-date mutual funds largely for use in retirement accounts.  The Internet age has shown us that those things that can be automated and run by an algorithm will.  More automated portfolio management solutions for individual investors are an inevitability.

Dan Ariely notes how this would free up time to do the heavy lifting of financial advice.  Ariely writes:

Financial advisors should be helping their clients with these tough decisions! Money is about opportunity cost…And that’s where the financial advisor should come in.

It’s possible that the best financial advisors already do help in this way, but the industry as a whole does not. It’s still centered on the rather facile service of balancing portfolios, probably because that’s a lot easier to do than to help someone understand what’s worthwhile and how to use their money to maximize their current and long-term happiness.

There simply is too much juice in the 1-2% annual management fee to not see that disrupted.  Especially if you take the view that the vast majority of investors do not, despite their desire, need a custom portfolio.  Creating algorithmic approaches to portfolio management will be the easy part.  The hard part will be finding those individuals willing and able to help clients with the big money decisions.


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