The evolution of financial advice
Increased regulation has introduced more transparency to the world of financial services than ever before, creating heightened awareness of fees and relative investment returns. But with the rise of fintech and robo-advice, the question now arises: what value do financial and investment advisors offer, and how has their role changed and how can they now compete?
First, it’s important to note that there are essentially three key metrics by which to judge the value exchange between clients and advisors: service, pricing and performance. The mix of the three speaks to the quality of the advisor and investment solution.
However, changes in the regulatory environment and in the psyche of investors since the 2008 Global Financial Crisis (GFC) have brought the wealth management industry to a tipping point, irrevocably changing our understanding of these three metrics, as well as introducing a number of new factors by which to measure advisors’ value propositions.
Changes sparked by the 2008 financial crisis
Investors who entered the market in the wake of the dotcom bubble and preceding the 2008 crisis were fortunate enough to experience one of the five biggest bull-runs in the past 50 years, creating the expectation that markets would simply continue to rise.
However, the GFC saw a massive pullback in financial markets, awakening many investors to the realisation that there is an inherent risk in investing that they perhaps hadn’t fully appreciated. At the same time, regulators also realised that they needed to afford investors and consumers better protection from the cowboy-type behaviour that was prevalent in the financial services industry at the time.
The effect of this additional regulation has been the introduction of greater scrutiny and wider understanding of fee and return benchmarks, as well as increased professional competency requirements.
In terms of an advisor’s value proposition, the focus has also increasingly shifted to service, or the quality of advice that is offered. Advisors now need to compete on aspects such as their social skills, their understanding of behavioural finance, and their ability to build relationships with clients in order to understand their needs and help them fulfil their unique goals.
The importance of the human touch
The recent regulatory drive has meant that advisors have been required to continuously upskill themselves in order to offer more holistic advice across all aspects of financial planning, be it investments, estate planning or tax.
However, rather than simply competing on skills, performance or fees, wealth management and financial advisory businesses are increasingly being judged by right brain metrics, or the human touch that fintech and robo-advice are simply unable to replace. And beyond that, there is a need for high-touch conversations that only people can provide.
Advisors have become something of a financial life-coach, walking beside clients through each of their life-changing moments and decisions, whether these be choosing where to send children to school, how best to support aging parents, or even deciding where to live. Simultaneously, advisors need to constantly keep an eye on the horizon, helping clients to mitigate any unforeseen risks, manage their debt burden before it becomes unmanageable, and assist them in strategizing for the successful intergenerational transfer of their wealth.
Far from becoming defunct, advisors are in high demand in the current era of uncertainty and rising complexity in financial markets, in order to guide clients through the fog. And given the growing recognition that there are no universal “correct answers”, their ability to create tailored financial solutions to meet each individual’s specific needs has become increasingly important.
The future of financial advice
As opposed to simply sending quarterly reports, this in turn means that advisors are now required to offer clients the benefit of consistent communication, ensuring them peace of mind and comfort around the clock.