Robo Advisors

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#264 Fiduciary: The F-Bomb About to Hit Retirement Plans

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As the Department of Labor prepares to roll out new rules, which would require investment companies, brokers and advisors to put the interest of retirement savers first, our guest Ray Ferrara, former Chair of the CFP Board, joins us to discuss the fiduciary standard and why the financial services industry should embrace, not fight it. Ray has been one of the key players involved in the national debate surrounding the rules that should govern financial advice and was one of the experts who testified before The Employee Benefits Security Administration, the DOL division responsible for spearheading the change. We began the conversation with an explanation of the proposal, which would require that retirement investment professionals not only be held to a higher standard of putting clients first, but they would also have to fully disclose and eliminate conflicts of interest that exist.

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The Financial Planning Coalition, a collaboration of the Certified Financial Planner Board of Standards (CFP Board), the Financial Planning Association (FPA) and the National Association of Personal Financial Advisors (NAPFA), strongly supports the DOL’s proposed rule and notes:

"Retirement investors face a perfect storm in the financial services marketplace. With ever-increasing responsibility for their own retirements and the need to choose from an increasingly complex set of financial products and services, retirement investors more than ever need competent financial advice that is in their best interest. Yet the current regulatory framework allows advisers’ interests to be misaligned with the interests of retirement investors; it does not require advisers to clearly and openly disclose the standard of conduct under which they operate or their actual or potential conflicts of interest; and it permits market practices under which retirement investors are simply unable to distinguish advisers who provide fiduciary-level services from those who do not."

This rule could be a game-changer for the industry. No longer will companies be able to sell opaque, expensive products that once were deemed "suitable" but will not pass the fiduciary smell test. And if you hear complaints from the industry, saying that the rule will mean that they will no longer be able to serve the middle class, I say, THANK GOODNESS! That means that they can no longer peddle their expensive, clunky products, like variable annuities or non-traded real estate investment trusts. And if they choose to raise minimums or fees, consumers have plenty of choices, like services offered by Betterment or Rebalance-IRA, which offer ease and simplicity at a fraction of the cost that those big firms charge.

Thanks to everyone who participated this week, especially Mark, the Best Producer in the World. Here's how to contact us:

  • Call 855-411-JILL and we'll schedule time to get you on the show LIVE 
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#263 Robo Advisors are Cheaper and Maybe Better than Humans!

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ReBalance-IRA.com CEO Mitch Tuchman, who pioneered America’s first online investment advisory service, joins the show to discuss how the advent of robo advisors is helping to force down fees in the financial services industry and why an algorithm may be a better investment option than a conflicted salesperson. Mitch conceived of and built a service for do-it-yourself investors to manage their own retirement portfolios with MarketRiders and then enhanced the service for those who wanted a human touch with ReBalance-IRA. Robo advisors are poised to be the beneficiaries of the Department of Labor's soon-to-be-released rule on fiduciary, which Mitch believes will be a turning point for the industry.

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Thanks to everyone who participated this week, especially Mark, the Best Producer in the World and the worst LinkedIn User. Here's how to contact us:

  • Call 855-411-JILL and we'll schedule time to get you on the show LIVE 
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Should You Use a Robo Advisor?

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“Robo advisors are going to kill the brokerage business,” carped a financial consultant from one of the big wire houses. That’s an overstatement, but financial professionals and brokers who have mostly been selling investments and not providing financial advice may find that software and algorithms could eventually make them obsolete. The advent of new technology has put some of these old school pros on their heels, as investors – especially younger ones – find the process of answering risk tolerance questions on line and utilizing computer generated asset allocation plans preferable to face-to-face meetings with various salespeople, who are hocking the product du jour.

Over the past twenty years or so, traditional brokers and advisors have slowly but surely jacked up fees for smaller accounts. It’s not hard to understand why they would do so. Many branch managers tell their staff something along the lines of “it takes the same amount of time and energy to work with a $200,000 client as a $1,000,000 one, so stop spinning your wheels with the small fries!”

The way that large firms stomach working with smaller clients is to either hike their fees (two percent or more for assets under $250,000) or to keep selling high cost, commission-based mutual funds or insurance products. Unfortunately, for those who were not do it yourselfers, there weren’t many other alternatives, that is, until the advent of the robo advisor.

The process is easy: log on to one of the robo advisor platforms like Wealthfront or Betterment, and you will be asked to complete an online questionnaire, which takes into account some of your general financial goals and objectives and your risk tolerance. Based on your responses, the robo advisor’s proprietary algorithm will slot you into the most appropriate portfolio. The firms usually use exchange-traded funds, provide rebalancing, reinvest dividends, and in some cases, can harvest tax losses.

Mutual fund and discount brokerage firms like Vanguard, Fidelity, Charles Schwab, TD Ameritrade and E*Trade have similar variations on the theme. The fees range from 0.25 to 0.75 percent of assets plus fund expenses and most services require an investment minimum.

In some cases, these firms will also provide financial advice, but a bit of caution: it is tough to create a computer model that understands who you are and can listen carefully to address your financial needs. If you have significant assets, a complicated financial life or need some extra hand holding, you may want to eschew the robo advisor route and pay up for a human being, who can provide you with customized, one-on-one advice.

As I have advocated in this space, if you do choose to work with a financial planner, please be sure that he or she is bound by the fiduciary standard. A fiduciary duty means that a financial professional must put your needs first. (CFP® professionals and Certified Public Accountant Personal Financial Specialists (PFS) are both held to the fiduciary duty.) Those who aren’t fiduciaries are held to a lesser standard, called “suitability,” which means that anything they sell you has to be appropriate for you, though not necessarily in your best interest. The SEC has noted, “most [investors] are unaware of the different legal standards that apply to their advice and recommendations…and expect that the recommendations they receive will be in their best interests.”

Here are three resources to find fiduciary advisors:

As robo advisors mature, the choice may not be black and white. In fact, some financial planning and investment management firms are using the new technological platforms to reintroduce their services to smaller clients. This hybrid solution may provide the best of both worlds for those investors who want to keep fees down, but also need financial advice from time to time.