To Compete with Robos, Advisers Must Become Financial Physicians
by Lauren Foster, CFA, CFA Institute
It is an all-too-common refrain these days: Can robo-advisers replace human advisers?
Not if the goal of the relationship is to increase clientsâ well-being, says Meir Statman. Why? Because that requires human interaction.
This is an intriguing perspective coming from Statman, the Glenn Klimek Professor of Finance at Santa Clara University and author of Finance for Normal People: He is well known for his research on behavioral finance and sits on the advisory boards of various wealth management publications. And he is a member of the investment advisory board of Wealthfront, the $5-billion digital advice platform founded by Andy Rachleff.
âAndy Rachleff says the idea [of robo-advice] is to . . . make financial advisers as obsolete as travel agents,â Statman told a roomful of advisers at the 2017 CFA Institute Wealth Management Conference. âThat will be the case if you try to compete with roboâadvisers head-to-head. You have to build on your value-added, that human touch, that emotional intelligence, that role of a minister, of a priest, imam, rabbi, teacher. That is way more than just doing pie charts.â
These skills are especially important in the decumulation phase, when clientsâ priorities may start to shift.
Communication: Separating Bots from Beings
âYou do what no roboâadviser does: You ask, you talk with your clients, you listen to them, truly listen,â Statman told the audience. âYou empathize, you diagnose, you educate, you treat, and all over again, because they will forget what you have done for them.â
Statman likes to think of the work of a financial adviser as akin to being a âfinancial physician.â
To promote clientsâ well-being, financial advisers must ask a simple question: âHow are you?â
âThey want to tell you,â Statman said. âYour clients want to tell you, if you let them, if you help them tell you what it is that they want, what it is that they fear. When you do that, you will increase their wellâbeing immensely. You will increase yours, because you will get their gratitude, and you will get also to keep them as clients.â
Statman sees wealth accumulation and decumulation as two sides of the same coin â it is just as important for an adviser to offer wise counsel on the spending of the wealth as it is on the building of the wealth.
âWealth Is for Well-Beingâ
âWhat is wealth for?â he asked. âWealth is for wellâbeing. After all, you cannot take it with you.â
The problem, according to Statman, is that the same tools that help in accumulation â such as framing or mental accounting â stand in the way of decumulation.
âThere is such a thing as too much self-control.â Statman said. âWe put money into two major accounts. One is income, and the other is capital. The rule is: âSpend income, but donât dip into capital. Reinvest your dividends, donât spend them.â This helps us, but keeping those boundaries between income and capital in that rule can get in our way.â
Before we had Excel spreadsheets and other software programs to help us keep track, people would separate money into jars â what we tend to think of as separate âbucketsâ of money.
âFraming money into what is income, what is capital, what is money for utilities, what is money for vacation, and so on, helps us when we accumulate,â Statman said. âWe would like to go on vacation, but the money is in an account that is dedicated to our kidsâ educations. We are going to feel horrible if we dip into this account for the vacation, so we donât, and we leave that account to accumulate.â
This is a flawed approach in the decumulation phase. âBecause people want to maintain that boundary between income and capital, when it is time for them to, in fact, spend from their capital, they find it difficult, impossible to do,â he said.
Also, some people experience powerful feelings of regret when it comes to spending.
âDealing with clientsâ aversion to regret by dipping into capital in regular intervals . . . is really an important job,â Statman said. âThe trait that helps us save gets in the way. Conscientious people save. Conscientious people come to meetings on time. Conscientious people who make a promise deliver on that promise. They have wonderful selfâcontrol. The problem is that they cannot let go.â
Act as a Financial Physician
This is where the flesh-and-blood adviser has an advantage.
âYou are not a roboâadviser,â Statman told the audience. âYour advantage is not in beating the market. Your advantage is not in pie charts. Your advantage is in creating this bond, this emotional bond, with your clients, to serve them as a financial physician to increase their wealth, but more important, to increase their wellâbeing . . . You help them accumulate responsibly, and now you can help them decumulate responsibly.â
For another perspective on the robos vs. humans debate, see âWhatâs Next for Robo-Advisers?â
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All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the authorâs employer.
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