Practical analysis for investment professionals
13 April 2017

To Compete with Robos, Advisers Must Become Financial Physicians

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 clients’ 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.

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“Andy Rachleff says the idea [of robo-advice] is to . . . make financial advisers as obsolete as travel agents,” Statman told a roomful of advisers at the 2017 CFA Institute Wealth Management Conference. “That will be the case if you try to compete with robo‑advisers 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.”

These skills are especially important in the decumulation phase, when clients’ priorities may start to shift.

Communication: Separating Bots from Beings

“You do what no robo‑adviser does: You ask, you talk with your clients, you listen to them, truly listen,” Statman told the audience. “You empathize, you diagnose, you educate, you treat, and all over again, because they will forget what you have done for them.”

Statman likes to think of the work of a financial adviser as akin to being a “financial physician.”

To promote clients’ well-being, financial advisers must ask a simple question: “How are you?”

“They want to tell you,” Statman said. “Your 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 well‑being immensely. You will increase yours, because you will get their gratitude, and you will get also to keep them as clients.”

Statman sees wealth accumulation and decumulation as two sides of the same coin — 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.

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“Wealth Is for Well-Being”

“What is wealth for?” he asked. “Wealth is for well‑being. After all, you cannot take it with you.”

The problem, according to Statman, is that the same tools that help in accumulation — such as framing or mental accounting — stand in the way of decumulation.

“There is such a thing as too much self-control.” Statman said. “We put money into two major accounts. One is income, and the other is capital. The rule is: ‘Spend income, but don’t dip into capital. Reinvest your dividends, don’t spend them.’ This helps us, but keeping those boundaries between income and capital in that rule can get in our way.”

Before we had Excel spreadsheets and other software programs to help us keep track, people would separate money into jars — what we tend to think of as separate “buckets” of money.

“Framing 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,” Statman said. “We would like to go on vacation, but the money is in an account that is dedicated to our kids’ educations. We are going to feel horrible if we dip into this account for the vacation, so we don’t, and we leave that account to accumulate.”

This is a flawed approach in the decumulation phase. “Because 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,” he said.

Also, some people experience powerful feelings of regret when it comes to spending.

“Dealing with clients’ aversion to regret by dipping into capital in regular intervals . . . is really an important job,” Statman said. “The 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 self‑control. The problem is that they cannot let go.”

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Act as a Financial Physician

This is where the flesh-and-blood adviser has an advantage.

“You are not a robo‑adviser,” Statman told the audience. “Your 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 well‑being . . . You help them accumulate responsibly, and now you can help them decumulate responsibly.”

For another perspective on the robos vs. humans debate, see “What’s Next for Robo-Advisers?

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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 author’s employer.

Image credit: ©Getty Images/SDI Productions

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About the Author(s)
Lauren Foster

Lauren Foster was a content director on the professional learning team at CFA Institute and host of the Take 15 Podcast. She is the former managing editor of Enterprising Investor and co-lead of CFA Institute’s Women in Investment Management initiative. Lauren spent nearly a decade on staff at the Financial Times as a reporter and editor based in the New York bureau, followed by freelance writing for Barron’s and the FT. Lauren holds a BA in political science from the University of Cape Town, and an MS in journalism from Columbia University.

3 thoughts on “To Compete with Robos, Advisers Must Become Financial Physicians”

  1. The growth rates of the purely B2C automated platforms have slowed down because of the mismatch between relatively high client acquisition costs and relatively low average client revenues. The ultimate impact of the technology is in its ability to power and scale traditional advisors – not replace them.

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