Remember all the buzz about robos? How they were going to take over the industry? They haven’t, far from it. Now the latest “solution” is single-account investment models, a great “product” but one with misunderstood and unintended consequences.
While robos improved the digital experience and lowered costs, their offerings are essentially proprietary ETFs, which are not designed to play nice with other investments in a household portfolio. Single-account models are a variation on the same problem – they are a fancier multi-asset class product that, like robos, doesn’t work well with other holdings.
Our industry finds itself with both hands firmly on the rearview mirror as these offerings fall short of what investors want and need.
We have a bird’s-eye view of $1 trillion of retail investment assets. The vast majority of those assets belong to people over age 50. They want a retirement that works for them and their family. But investors have an uncanny knack for buying high and selling low, and chasing the latest fad at the cost of their long-term goals.
Buying another product, no matter how good, doesn’t help investors achieve their objectives unless they embrace what we call smart-householding – managing all of the accounts and products in a household portfolio in a cost-smart, risk-smart, tax-smart way.
The key factors in improving outcomes, according to an MMI research paper,are: lowering costs, managing risk and reducing taxes. EY, Morningstar, Vanguard and Envestnet have all done studies and found that investors can significantly improve financial outcomes by coordinating all the accounts in their portfolio. EY found outcomes can be improved by 33% over an investor’s lifetime when managed in a smart-householding way. Morningstar said 183 basis points of annual benefit can be achieved when the household is managed in a cost-, risk- and tax-smart way.
We are aware of more than 40 firms, including Morgan Stanley, Ameriprise, LPL, Envestnet, Jackson National, Financial Engines, Goldman Sachs, SEI, Tegra118 and others, that are moving away from uncoordinated products, accounts and software tools to embrace comprehensive, coordinated household solutions designed to improve investor outcomes.
Let’s examine the elements that robos, single-account models and other uncoordinated strategies fail to connect or coordinate.
Advisers have a desktop full of technology. What’s missing, until recently, is the integration and coordination of the data that flow through advice tools: CRM, data aggregation, financial planning, proposals, household-level rebalancing, multi-account income optimization. Data and tools are the connective tissue to bring it all together in a coordinated way.
Virtually all investors have multiple accounts, products, advisers and custodians, but little to no optimization of their portfolio to maximize returns and income. Many of these new smart-householding platforms quantify the financial benefit of smart-householding in dollars and cents. Advisers report that this results in increased asset consolidation.
Advisers’ clients lead busy, complicated lives. They know the cost of getting their investments wrong is high, so they prefer to rely on the human judgment of professionals to make investment decisions. The demand for this judgment grows as more money and products populate the investor’s portfolio — and as market volatility rears its ugly head.
These are not issues that disappear when you add yet another product to an uncoordinated, chaotic mix. I would suggest that advisers look instead into the cost-, risk- and tax-smart ecosystems that are available today. They guide advisers and clients on how to improve outcomes step by step, trade by trade and, most importantly, how to quantify the benefit of those improvements over time in dollars and cents. This not only demonstrates to investors the benefits of coordination but also underscores the value of the adviser.
This is where smart-household portfolio management comes into its own. Forward-looking advisers who can harness this solution will improve their service — and ultimately, the financial lives of their clients.
Jack Sharry is co-chair of The Future of Financial Advice initiative at InvestmentNews, co-chair of and executive vice president of