Financial Advice And Innovation

Chances are you’re reading this on your desktop, laptop or using some mobile device. The Internet has become a main pipeline for the delivery of market news and investment information. It’s also highly interactive in that we’re able to track and trade our investments with relative ease. Some say that technology will replace the need for quality investment advice though a professional. I don’t see that happening.

Innovation has changed the way financial advisers communicate with their clients.  Advisers now use Instant Messaging, Skype, blogs, Facebook, Twitter, email and multiple other means to keep clients informed and engaged. The internet has certainly made long-distance advising easier and more interactive. I founded Portfolio Solutions® on this concept and we rely upon it to stay competitive.

Innovation has also led to the rise of so-called robo-advisers, where no human is involved in the financial advice and investment implementation process. A computer does all the thinking, recommending and investing. Will this diminish the need for quality investment advice though a human professional as some have speculated? I don’t believe so.

By 1960, telephones were installed in nearly 80 percent of all households. This changed the way people communicated with their advisers. They didn’t need to visit their local bucket shop every time they wanted to trade a stock or a bond. Trades could be made over the telephone with a broker who could be located anywhere in the country.

Yet, even with telephone technology, most investors still preferred something more personal. This is why companies such as Merrill Lynch, Dean Witter, EF Hutton and many other Wall Street firms thrived during the 1960s by opening physical offices in every medium-to-large town and city. There’s something about the human element of financial advice that no amount of technology can replace.

Whenever technology disrupts an industry, there are losers who do not innovate with it. However, I haven’t witnessed any reduction in the demand for professional advice in this recent innovation cycle. If anything, innovations in capitalism have led to a greater need for personal advice. For example, there are more than 1,500 exchange traded funds covering a variety of niche markets and alternative investments that didn’t exist a few years ago. Someone needs to sort through all of this stuff and separate the strong from the weak.

It’s not as though better communication has made individual investment performance any better. In my book, The Power of Passive Investing, I document studies covering several decades of investor performance. For the past 100 years, more efficiency in communications has not led to greater efficiencies in decision making by investors. At best, all that can be said is that the cost of investing has come down some.

Nobel Laureate Robert J. Shiller discussed his view on capitalism at the 2012 CFA Institute Financial Analysts Seminar in his talk titled, Capitalism and Financial Innovation. Shiller points out that capitalism must be constantly updated through innovation in order to be successful in its purpose of achieving society’s goals. He also said that new ideas don’t change the need for quality investment advice:

“One important needed advance relates to the state of investment advice. People need good, solid financial advice. The complexities of a financial system require that investors be educated, but that alone is not enough. Serious deficiencies exist in modern financial society, and the average person needs financial guidance from a real person—not a website. That good information can be found on the internet is a big step forward, but the problem is that most people won’t seek the information they need and won’t read the information given to them. They need someone to actually talk to them. People benefit immensely by having a trusted adviser with a fiduciary duty to represent them.”

New pipelines of communication may change the way information is delivered, but it doesn’t change the demand for quality investment advice. At the end of the day, humans want other humans giving them this advice and helping make important personal decisions. Websites, blogs, Twitter, etc. are great tools for disseminating information, but the advice itself still needs to come from a real person who is known and trusted.