Independent Thinking^®

Technology and the Human Touch

Private clients are gaining a great deal from technological innovation. In common with just about every other industry in the United States, technology is transforming wealth management, affording investors greater access to research and investment products, lower transaction costs, and improved reporting.
 
New tech-based services can also help attract a new generation to investing, just like the discount brokers did for their parents, providing them with online tools to save and access basic automated financial advice. Global investment in financial technology, or FinTech, tripled to $12.1 billion in 2014¹ in part on expectations that tech-savvy young people will naturally want to engage with computers, rather than people. The jury is still out as to whether these firms will survive a market downturn, however.
 
McKinsey & Co. noted in early June that it is not yet clear whether these firms can move beyond simple investment solutions, capture non-Millennial investors at scale, or replicate the trust and intimacy of a human advisor.² That’s because investing is never just about the money. It’s about articulating lifestyle, family, business and philanthropic goals, adjusting tactics as markets and personal circumstances change, engaging family members, and securing retirements and legacies, through all market cycles.
 
Consider asset allocation, ideally the product of personalized wealth planning. Robo Advisors, as the new online services providers are commonly called, instead rely on general questionnaires, usually based on algorithms rooted in Modern Portfolio Theory, to establish risk and return objectives. The resulting asset allocation is to mostly passive investment vehicles, not dissimilar to the so-called target date options in 401(k) plans, albeit generally more cost effective.
 
This is a workable solution, provided the investor has only cash to invest, needs only a basic level of financial planning, truly understands his or her risk tolerance in all market conditions, and doesn’t really want to talk to another person. (It is almost impossible to access actual humans at these firms.)
 
Investors with concentrated single holdings or existing portfolios comprised of individual stocks, bonds, and mutual funds would have a difficult time transitioning to Robo Advisors, which aren’t able to incorporate existing holdings into a portfolio. Forced sales would likely incur large tax gains.
 
It’s also important to note that the complexity of income and estate tax law requires careful consideration when implementing investment strategies. Tax loss harvesting is a much-touted capability at several of the new financial technology firms, but none are able to manage the treatment of highly appreciated assets or advise how to incorporate charitable gift planning to mitigate the liability. Their algorithms won’t tell you how much Apple stock to donate or suggest sophisticated gifting strategies, such as utilizing a charitable remainder trust.
 
Cash flow planning, liability analysis, concentrated stock planning, charitable planning and, of course, multigenerational estate planning, are similarly beyond the capabilities of FinTech. It’s unlikely that any software application could ask the right questions in the first place, let alone consider all the factors required to create a truly customized financial and investment plan.
 
Technology has made it much easier for clients, particularly those with less complex accounts, to build cost-effective diversified portfolios, which is a good thing. It has also made access to investment information much more readily available and, as such, consumers are armed with a lot more information, particularly about fees. There is no doubt that increased transparency is good for the industry as a whole.
 
Each individual and family situation is truly unique, however, as are attitudes to risk in different market conditions, especially in a down market. The best advisors – whether coaches, teachers or preachers – are the people who can inspire and guide their charges, in good times and in bad, and at every fork in the road. For now, and probably for years to come, high net worth investors are better served by experienced advisors who are able to really listen and communicate with their clients.
 
Iain Silverthorne is a Partner and Wealth Advisor at Evercore Wealth Management. He can be contacted at [email protected].

¹ Accenture. March 26, 2015. “The Future of FinTech and Banking”
 ² McKinsey & Company. June 2015. “The Virtual Financial Advisor: Delivering Personalized Advice in the Digital Age”