As 401(k) advisors know (hopefully), the market for financial advice is undergoing a dramatic change due to factors such as the Department of Labor Conflict of Interest Rule, historically low yields in the market, and the emergence of digital robo-advisors.
And it’s not all about lowering costs, but also reaching traditionally under-served markets—lower-earning workers as well as those that are younger and just starting out, according to Boston-based research firm Cerulli Associates.
“Minimalist digital portfolios that are comprised of low-cost ETFs have become a popular product strategy used by advisory firms because of their simplicity and low-cost fees,” Tom O’Shea, associate director at Cerulli, said in a statement.
Some financial advisors fear that these digital portfolios may be too simplistic, leading clients to wonder whether the 401(k) advisor is working hard for them.
“Advisors should address this concern by offering higher order financial planning activities such as goals-based planning,” O’Shea explained.
The firm notes the aforementioned rise of digital advisors is not merely about advances in technology that help to reduce costs, but also about reaching a consumer segment long ignored by the leading firms in the financial services industry.
“Innovative digital advisors are taking on clients with shockingly low account minimums,” O’Shea explained. “Traditional firms ignore these lower-tier segments at their peril, because as digital advisors gain a toehold with this demographic cohort, they will begin to capture assets from the middle and mass market investors who are building wealth.”
As fee reduction and risk mitigation continue to be the objectives for advisors and home-office personnel who construct portfolios, about 70 percent of advisors Cerulli surveyed agreed that in volatile markets, active managers can offer downside risk protection through tactical trading.
According to Cerulli, leaders at broker-dealer firms have expressed their concerns that an over-allocation to vehicles that simply mirror an index may freight a portfolio with certain risks, such as overexposure to a handful of overpriced stocks that comprise the bulk of an index.
“Asset managers that can make the case that their products de-risk a portfolio may find a receptive audience with advisors,” O’Shea concluded. “Nearly three-quarters of advisors we surveyed agree that active and passive investments complement each other.”
With more than 20 years serving financial markets, John Sullivan is the former editor-in-chief of Investment Advisor magazine and retirement editor of ThinkAdvisor.com. Sullivan is also the former editor of Boomer Market Advisor and Bank Advisor magazines, and has a background in the insurance and investment industries in addition to his journalism roots.
