Will Financial Advisors Become Obsolete?

The financial services industry is changing.

The bad news is that some financial advisors -the ones who refuse to adapt and evolve - will get left behind. The good news is that change often brings tremendous opportunities to those who embrace it. 

For instance, in 2015, I remember hearing rumblings of how social media would become a powerhouse marketing strategy for financial advisors in the next few years. So, I began telling financial advisors how to get clients with LinkedIn, which has been one of the most successful client-getting approaches to date. 

It’s critical for financial advisors to stay abreast of trends because they could get left behind… 

I remember telling financial advisors to integrate email marketing into their businesses and being mocked because, according to “experts!”, email was a dying medium. Today, according to McKinsey & Co., email is 40X more effective than Facebook and Twitter combined. Email also - according to Forrester - has a higher conversion rate than search engine optimization (SEO) and social media marketing… COMBINED.

My Unique Vantage Point…

I’m one of the few people in the world who has cultivated an audience of a wide variety of financial services professionals. Sure, there are other groups and companies out there, but they tend to cater to a specific type of advisor or charge so much money that they exclude new advisors and advisors looking to jumpstart their businesses. 

My business, on the other hand, has products ranging from as low as $50 all the way up to several thousand dollars. I am perhaps best known for my monthly paper-and-ink newsletter, which reaches financial advisors all over the globe. I also have a blog with gobs of articles and a weekly podcast called “Financial Advisor Marketing”, both available for free.

This means I’ve seen a LOT. 

I also am fortunate enough to be able to get knee-deep in advisors’ problems and see where the industry is headed. So, I’d like to address the future outlook for financial advisors and answer the pressing question… 

“Will financial advisors become obsolete?”

Well, let’s see… 

It's Called PERSONAL Finance For A Reason!

There’s not a day that goes by that I don’t have a deeper and more profound respect for the work financial advisors do for their clients. I am amazed at how much some advisors care for their clients and how far they’re willing to go to help people. 

THAT, my friend, can never be replaced. 

Still, I hear from financial advisors who worry that robo-advisors and the proliferation of free planning tools will hurt their businesses. And maybe they will, if the advisors have no value-add outside of a basic financial plan and/or money management. But that’s not why people hire financial advisors… 

People hire financial advisors to help them design a life. 

Anyone can hop online and buy a financial product. It’s also just as easy to get information about various financial topics. Clients and prospective clients are literally a few keystrokes and clicks away from learning anything they want about insurance, 401(k)s, IRAs, taxes, and more. 

A financial advisor’s job is to put the pieces together.

Good financial advisors exist to coach their clients and shorten the learning curve involved with financial decisions. Imagine needing to access $50,000. You could: 

• Call your financial advisor and say, “Hey, I need to get my hands on fifty thou. What’s the most efficient way to do it?”
• Spend hours Googling tax implications, watching YouTube videos on different strategies, and browsing forums. 

I don’t know about you, but I value my time far too highly to waste it trying to figure everything out myself. 

Today’s clients take titles seriously. When they hire financial advisors and planners, they expect advice and plans tailored to their situation. After all, a personal finance YouTube channel can give them information, but it can’t tell them how to apply it to their lives. 

If anything, I think an abundance of robo-advisors and free financial planning tools will HELP advisors, not hurt them. This is because they will bring attention to important financial topics. Things like planning for retirement, rebalancing, tax-loss harvesting, etc. will become more embedded in the zeitgeist. In my opinion, this will only whet the public’s appetite for financial advice. 

In the same way WebMD didn’t make doctors obsolete, these tools won’t make financial advisors obsolete. It will make people more informed and increase their awareness for when they eventually hire an advisor. It’s a win-win. 

However, this means financial advisors who try to differentiate by investment selection and/or strategy will struggle to add value. Their value will come from comprehensive financial planning and good financial decision-making.

For example, a good financial advisor will encourage his or her clients to save more money. This seems boring but, according to GoBankingRates, over 20% of Americans don’t even have a savings account and, according to BankRate, nearly 30% don’t have an emergency fund. 

And as if that weren’t enough, the amount you save is the single biggest determining factor in how much you will have in retirement. Sadly, too many people focus on things such as chasing returns and cutting fees. 

A 2017 report from the Government Accountability Office found that the median retirement savings for Americans between age 55 and 64 was only $107,000. I’m sorry, but I would much rather have a financial advisor coaching me to earn more and save more than brag to all my Reddit buddies about how I’m only paying .05% on my too-hot-to-trot index fund. 

Of course, an article titled “Start Saving More Money” isn’t as sexy as “2020’s Hottest Mutual Funds, Ranked”. 

In any case, several studies have demonstrated that financial advisors help their clients make more money than they charge. Vanguard’s Advisor’s Alpha ® is a popular one, which found that advisors can increase people’s after-tax returns a few percentage points. If you understand this, you realize that financial advisors shouldn’t “cost” people a dime. If anything, it’s like GIVING them money. 

"Will Things Stay The Same?" Of Course Not...

“There are two options: adapt or die.” - Andy Grove

The only constant in any business is change. I am writing this article in September 2020. If you would’ve asked me this time next year about financial advisors going virtual, I would’ve told you more and more advisors were working remotely, and that mass adoption would probably take several more years. 

Well, here we are.

My point is that change can happen both quickly and slowly. An example of slow change is niche marketing within the financial services industry. I started beating the “have a niche” drum back in 2015. Sure, there were many advisors who already had niches but that was the first year where I started to see the idea get embraced by more people.

The old way of hiring a financial advisor is based on geography. People would open their phone books (do those even exist anymore?) and search in the “F” section for “financial advisor”. Or they would ask a friend, who undoubtedly knew someone in the local area. 

The new way of hiring a financial advisor is based on specialization. It’s all about finding someone who can serve your specific needs. 

For example, I am primarily an income investor. I look for things that will give me a dependable cash payout. Oh, and before you email me saying I should be doing something different… don’t. I already take enough risk in my business. I don’t need any more in my investments, thank you. 

I found my financial advisor by looking for someone who specialized in income investing. Plain and simple. I found someone who matched my investment philosophy. 

I didn’t ask anyone for a referral… 

I didn’t interview multiple advisors… 

And I DIDN’T batter him with objections when I finally found him.

He was known for his specialty, he demonstrated his expertise, and he was willing to work with me. He had a niche and I was in that niche: it was a match made in money heaven. This is the way of the future, people. 

I can tell you, without any hesitation, the financial services industry is shifting to a niche-based model. We have already entered the “specialization wave” because more and more financial advisors are realizing how profitable it is to specialize. 

To be candid, this approach WILL become less effective in the future as thousands of financial advisors niche down. My aggressive estimate is that by the mid-2020s, niche marketing will be the new norm for the financial services industry and any advantage to be had will be gone. My conservative estimate is that we will at least be at the tipping point in the mid-2020s. 

However, we are in a gold rush right now. Any financial advisor who picks a niche and doubles down while there’s still time will be rewarded in the coming years. Such is the power of embracing change.

Future Outlook For Financial Advisors…

First of all, the profession is growing, not dying. According to the Bureau of Labor Statistics Occupational Outlook Handbook, employment of finance planners is expected to increase by 7% from 2018 to 2028. This is higher than the average for all occupations, which is only 5%. 

Plus, the demand for financial advice is increasing. A quick look at Google Trends shows that “financial advisor near me” has been increasing in demand for the past five years, with a spike in March 2020. Searches for the term “financial advisor” have also been increasing over the past five years. 

Financial advisors who serve millennials are positioned to do especially well in the coming decades. Baby Boomers (people born between 1944 and 1964) are expected to transfer $30 trillion in wealth to younger generations. In no prior time in American history has such a vast amount of wealth moved through the hands of generations. 

I’m also seeing more and more financial advisors embrace a monthly retainer model, where they charge a fixed dollar amount rather than a percentage of assets under management. Next generation clients may not have tons of investable assets, but they can have income and a willingness to pay for financial advice. A retainer model is a viable solution for advisors who want to serve this market.

"But What About Those Darn Robo-Advisors?”

I know, I know. Robo-advisors are coming to kill us all in our sleep. Yawn.

I’m not naive. Robo-advisors are kicking serious butt right now. As of March 2020, Betterment had more than 500,000 user accounts and $22 billion AUM. Wealthfront isn’t far behind, with $21 billion AUM and 400,000 user accounts.

Robo-advisors are great for creating a portfolio, periodically rebalancing it, and managing it for tax savings. Plus, with the advent of artificial intelligence, it’s not far-fetched to imagine that a robo-advisor could learn someone’s investment objectives, risk tolerance, lifestyle changes, and more. 

Some advisors say that people who use robo-advisors are nothing but price-shoppers. I concede that this is at least partly true. There will always be a segment of the population who shops based on price. From what I’ve seen, the type of person who uses a robo-advisor would be a DIYer anyway, which is the type of person who wouldn’t have used a financial advisor in the first place. 

As with many things in life, whether or not to use a robo-advisor comes down to personal preference… 

1. Is direct human contact important to you? Then use a human financial advisor. 
2. Are you willing to let someone else do all your investing (in other words, you have no control)? Then use a robo-advisor. 
3. Do you disagree with the investment allocation robo-advisors use? Then use a human financial advisor.

The Bottom Line…

No, financial advisors will not become obsolete. 

They WILL have to change and evolve, but they’re here to stay. 

There will always be a place for client-focused financial advisors who work hard to add value to people’s lives. If that’s you, the future is bright. 

Related: An Open Letter To Financial Advisors With Imposter Syndrome