The New Era of Investment Advice: Finding a Clear Path Forward

RIAs are being buffeted by significant headwinds, including:

– Competition from newer entrants like robo-advisors

– Cost pressures and fee compression

– Time and resource scarcity – more to do in the same 24 hour day, product proliferation and complexity, and increasing regulatory demands

These cross currents and challenges seem to make it harder than ever to help clients achieve their goals, and for advisors to meet their own business objectives.  But adversity creates opportunity, and successful advisors in this new era will recognize that the tools and means to thrive are within their grasp. These include: leveraging the benefits of low-cost investing using ETFs, effectively constructing diversified portfolios in a changing investment environment, and capturing the potential benefits of factor investing.

Like the age-old debate of passive vs. active, viewing the new era as a contest between human and robo-advisors misses the point.  The best thing for clients, and the clear path forward for advisors to succeed in this new era, is to embrace the best of both.  Why wouldn’t you take advantage of technology to systematically rebalance client accounts and improve tax efficiency in taxable portfolios? How can you pass up the cost advantage of the diversified beta available in ETFs at only a handful of basis points in certain cases? At key life stages, will clients really forego an advisor’s judgment, experience and guidance to settle for an entirely digital experience?

Let’s start with the most straightforward: cost. Investment professionals know that costs are simply negative returns that detract from asset growth and compound over time. So, in acting in our clients’ best interest, we should always be looking for opportunities to lower investment costs.  But using ETFs doesn’t mean an exclusively passive approach. Advisors can build the core of clients’ portfolios on low cost, systematic and diversified investment vehicles, and be selective, and perhaps more effective, about active allocations.  Certain ETFs can provide your clients with exposure to the broad U.S. stock and bond markets for less than five (5) basis points! On behalf of your clients, how can you not take advantage of the scale these ETF manufacturers have built?

But don’t stop there. A straight-up indexed approach will generate index-like returns and index volatility, including the full brunt of downside participation. Remember the Great Financial Crisis and the markets of 2008? How about the Tech Wreck of 2001?  If they were invested in those markets, your clients most assuredly do. Will bonds provide the same equity-drawdown counterweight after 35 years of falling interest rates? Maybe, but maybe not. It behooves a client-focused advisor to explore other potential diversifiers such as liquid alternatives. The ETF product landscape has expanded to include alternative products and strategies, with pricing generally more reasonable than mutual funds and certainly cheaper, more liquid, and more transparent than private hedge funds.  But alternative strategies require additional research time, resources, and expertise – do you have it? If not, this is an area where you might consider outsourcing to a specialist, an ETF Strategist who has expertise navigating the space.