On May 1st, 1975 the government deregulated fixed commissions in the brokerage industry. At the time, I don’t believe many in the industry would have said this would make any great impact on revenues, and history shows most chose to carry on with the status quo. Few stock brokers (that was the title financial advisers used back then) felt there would be much change in their business. One man did see an opportunity, though, and moved to found a firm that charged significantly less in transaction fees. That man, of course was Charles Schwab, who would build a significant and competitive that would capture one-third of portfolios by 1999. I think it isn’t unfair to say my industry is not good at seeing what innovations will reshape the industry. It is, after all, much easier to carry on with what you know.

And yet investing is nothing if not the practice of trying to predict success and innovation.

When I licensed in 1986, broker dealers (as financial advisors were called at the time) made up the largest percentage of the market, about 95%. To increase profitability those big companies began getting rid of any brokers who were not generating $75-100,000 in brokerage commissions. The average family income at the time was $43,000, but profitability was more important than loyalty to these big firms. Those dismissed brokers had licensed under the Securities and Exchanges Act of 1932, which made them registered representatives, and only required that they provide investment options “suitable” for each client. This meant that, if two investments fulfilled all the criteria for a suitable investment, the broker could suggest the one which gave her a greater kickback (if you’ve heard me go on about fiduciary responsibilities at all, you know my feelings regarding suitability).

Many of the brokers the big firms dismissed became independent and licensed under the Investment Company Act of 1940, which required that they have fiduciary responsivity toward their clients, and had to make every decision in the clients’ best interests. They are held to stricter oversight, and can be sued if their decisions are viewed as being anything other than in the client’s best interest. By the 1990s and 2000s it was not just the dismissed brokers who became independent, but larger producers who wanted out from under the big firms were leaving and licensing as Investment Adviser Representatives and Registered Investment Advisers. This channel of Registered Investment Advisors have gained momentum, and recently Cerulli released a report which said that in 2016, RIAs grew by 6%, and the large brokerage firms were down 1.6%; they predict that by 2019, registered investment advisors will have more assets under management than the brokerage houses.[1]

The big brokerage firms and their representatives (financial advisers) did not see the impact of the discount brokers. The big firms and financial advisers did not see the rise of RIA independent channel. As in the past, I believe that the financial industry will be disrupted again – this time by robo-advisors. When you look at most financial advisors’ performance, they put together portfolios which have generally underperformed. When I worked at those big firms we were told “to sell yourself and your personality, not your returns.” I began doing fee based accounts in 1991 when the general practice was to charge 3% on the first $500,000 or so of assets under management. Fees began to drop, in my opinion, because of poor performance. It is certainly hard to justify a 3% fee when the account is only growing at 5%. Many brokers have taken their fees down to 1% and below.

Not only are fees under pressure because of poor performance, but today almost all the same services financial advisors offer can be provided by robo-advisors at a 90% discount. I was sitting on the plane next to a financial advisor from a large brokerage firm. I asked what their value proposition was. He claimed it was the personal connection, willingness to meet in person, and willingness to “hold hands” during tough times in the market. He said nothing about delivering great performance. It is true that human financial advisors will do the things he mentioned. Is that enough to justify charging ten times what a robo-advisor will charge?

That advisor also commented the robo-advisor will be used by millennials but not their older clients (as millennials were the stated target). The fact is, we are seeing people across the spectrum (of age, income, and background) using robo-advisors. My Private Banking, an industry publication, produced a survey in 2016 which found that 40% of high-net-worth investors were considering using a robo-advisor.[2] Lower costs, convenience, and greater access to personalized options were all stated reasons for high-income interest in robo-advisors. One in five respondents were even concerned that their current financial advisor wasn’t making decisions in their best interest and thought they would see better advice from the robo-advisor.

Now the question is, when set side-by-side, what does the broker, or financial advisor, bring that the robo-advisor doesn’t? Robots are much more adept at compiling and analyzing data than the human brain, or even the very basic computing software (or more complicated, even) we use to put together financial plans. Frankly, I think financial plans as a whole are flawed, as we saw them come apart in 2008/09 (you can read those options in greater depth in other blogs). I hear you cry – robots don’t have that personal touch! But how many people still want that? I have a number of clients overseas that I have never met in person, others who live out of state and I only speak to them over the phone. Personality and the “human touch” aren’t valuable enough to have clients prioritize them over efficiency and lower fees.

Our value proposition at Adams Financial Concepts is to deliver over the longer-term superior performance. That is something the robo-advisors are not doing. That is something that the very large majority of financial advisors are not doing.

Josh Brown in his book Backstage Wall Street said this: “Most of the brokers I know and have met over the years are phenomenal, world-class sales people…But a great many of these security selling savants don’t attain the knowledge necessary to actually accomplish anything for their clients… Selling one’s expertise is much easier than actually developing an expertise, especially as it pertains to investing.”

If you look at other studies, Dalbar presented a report that said the average equity investor (including those who are clients of financial advisors) for the past 30 years has averaged a 3.69% return.[3] Compare this to the S&P 500, which is at 11.11%.The industry is going through a lot of changes, and I believe that the best selling point for a human advisor over a robot is the provide superior returns. That is what brings value to an advisor. Not human touch or better plans, but a tangible, superior return. The industry is changing again, and we, whether we are registered financial advisors, or brokers, or clients, must not imagine it will be slowed down. We must be prepared for what the future brings.

[1] Cerulli Associates Global Analytics. The Cerulli Report: US RIA Marketplace 2016. 2017.

[2] My Private Banking. Robo-Advisors 2015.

[3] Dalbar’s 22nd Annual Quantitative Analysis of Investor Behavior. 2016. http://www.qidllc.com/wp-content/uploads/2016/02/2016-Dalbar-QAIB-Report.pdf