(The opinions expressed here are those of the author, a
columnist for Reuters.)
By Mark Miller
CHICAGO May 4 Who will help you plan for
retirement - a robot or a cyborg?
Pundits have been saying for some time now that the future
belongs to “robo-adviser" - automated portfolio services that
use algorithms to manage investments. The robo-services have
attracted interest as a way to deploy low-cost advice, but
retirement planning guru Michael Kitces thinks the real winners
will be “cyborgs” - human advisers aided by advanced technology.
Resistance may be futile, as the Borg collective warned the
crew of the Enterprise on "Star Trek." Advisers will have little
choice but to integrate robo-like technology into their
practices, according to Kitces, director of wealth management
for Pinnacle Advisory Group and publisher of the widely followed
Nerd's Eye View blog (bit.ly/2pALT8N).
In a provocative presentation at last week’s Morningstar
Investment Conference here, he argued that technology actually
will free up advisers to focus on providing more holistic advice
to clients and reinforce their value at a time when so much
basic planning information is available for free on the
Meanwhile, the new fiduciary standard requiring
conflict-free advice on retirement accounts is pushing the
planning field toward providing broader services that go well
beyond portfolio management.
Market returns are uncertain, but planners can help boost
retirement outcomes by helping clients control the factors that
are within their control. A 2013 paper by Morningstar
researchers found that retirees can generate 23 percent more
income by making more intelligent financial planning decisions
of the type typically offered by planners, including optimizing
asset allocation, fine-tuning their retirement withdrawal
strategies and making tax-efficient drawdown decisions.
Kitces thinks the most important strategy for advisers will
be to use technology to help clients navigate uncertainty,
explore alternatives and help solve complex problems.
The landscape of technology-enabled advice is becoming
concentrated in the “cyborg” category, he notes, with players
like Betterment, FutureAdvisor and JemStep all adding human
advice components to their tech offerings.
“The cyborg category is winning, not robo,” he said.
The big value-add, Kitces said, will be helping clients
think through more complex questions. “We can be navigators of
uncertainty and explorers of alternatives - what happens to my
plan if I retire sooner? What if I want to work in retirement,
or find a new career? Technology doesn’t do that, but it can
facilitate the conversation if I can use technology to paint the
picture for clients.”
VANGUARD GRABS THE LEAD
The dominant player in the hybrid cyborg category is mutual
fund colossus Vanguard, which launched its Personal Advisor
Services (PAS) two years ago this week; at the end of the first
quarter this year, PAS had attracted $65 billion in assets.
Research firm Cerulli Associates reports that 2016 year-end
assets under management at PAS were roughly four times larger
than its nearest competitor, Schwab Intelligent Portfolios ($13
billion) and far ahead of Betterment ($6.1 billion), Wealthfront
($4.7 billion) and Personal Capital ($4.3 billion).
PAS benefits from Vanguard’s massive scale - at its launch,
$15 billion was transferred from a legacy advisory service for
high net-worth clients, and 85 percent of clients already were
Vanguard customers before adding PAS. Most are closing in on
retirement age, said Frank Kolimago, who heads the service.
“Many of them were comfortable self-directing their
investments while they were accumulating assets, but concluded
that with the complexities of retirement it’s time to get some
professional help,” he said.
PAS advises retirees on tax-efficient drawdown and
decumulation strategies. Advisers also help with Social Security
optimization, estate planning and nonretirement goals such as
college saving, or perhaps saving for a vacation home.
One of the most profound changes, Kolimago said, is the
shift away from the old brokerage orientation of beating the
market investing to meeting objectives. “We frame the
conversation that way - how well are you doing related to your
own unique objectives?”
He adds that the human dimension plays an important role in
volatile markets. "We can serve as an emotional circuit-breaker,
and help people from making short-term decisions that can hurt
them in the long run."
Opponents of the fiduciary standard keep looking for ways to
bring it down - an effort that is likely to fail. Meanwhile, the
cyborgs (and robos) already are far down the track toward a
fiduciary reality. PAS is a registered investment advisory firm
that already complies with the conflict-free standard. “It’s
straightforward for us," said Kolimago. "Many things that the
rule requires are already built into what we have designed.”
(Editing by Matthew Lewis)