Morningstar Magazine - June/July 2017 - 50

Spotlight: The Future of Investing

to coach and manage a patient toward a life of
good dental hygiene.
Yet, thankfully, the value stack of financial advice
is shifting. The cost of investment selection,
and with it the assumption that most of us are
investing in a vacuum, is falling, and the
perception that financial planning has value is on
the rise. This, I would argue, is well-deserved.
This is not to say that investment selection and
portfolio selection should be considered
commodities, but rather that we are witnessing
an important rebalancing of the value proposition,
from one that was overly weighted toward
the product to one that more fully values other
factors, such as high-quality financial
advice. (See "Alpha, Beta, and ... More Gamma,"
Page 54.)
Time to Retool

It is going to be very hard for many of the largest
firms in our industry to adapt to this reality,
and I applaud those firms that are trying to reorient
their businesses to continue to serve investors
in a more holistic way. But I think we need to
be honest about the retooling that is required for
us to fulfill the opportunity in front of us.

Second, we need to restructure the industry's
standard fee and service model so that it is more
tailored to the client's need. This means that
for people who have a straightforward situation
and modest means, 100 basis points per year
in fees is probably too high. For people with
complex situations and considerable means, 100
basis points may be too low. And for people
whose situations are in flux-meaning they are
transitioning from simple situations toward the
complex end of the spectrum, or vice versa-
the successful advisory firm will find a way to meet
these folks where they're at and offer a service
model to accommodate them.
I'm encouraged by the conversations that I've had
over the past year with thoughtful independent
RIAs who are revisiting the spectrum of services
they provide to meet this reality. Many of
the more progressive large firms are also clearly
focused on segmenting their client base in a
way that is more logical, albeit potentially risky to
some of the established fee structures. We can
move beyond the one-size-fits-all model of financial
advice that we've accepted for so many years
and actually begin to provide the right service, at
the right price, to the right family members,
at the right time. What a concept.

This retooling will require at least three things.
First, we need to be clear on the skills required.
The skills that brought success to a lot of
people when investment products were at the core
of the value stack are not going to translate
to success in the future. The broker of yesterday
does not necessarily have the skills or the
interest in delivering high-quality financial
planning services. It's impressive that one of the
country's largest wirehouses hired a
psychologist to sit with each branch of advisors
to discuss how the advisors could add value
through behavioral coaching and how they could
shift the conversation from the investments
themselves to the emotions (including fear,
ambivalence, and anxiety) that investing might
provoke. But there is much work to be
done to equip advisors with the tools and support
they need to have these essential conversations-
particularly across generations and
genders, and not just with the archaic "head
of household."

50

Morningstar June/July 2017

Third, we must use data to our advantage. It is
both cool and scary to be able to collate
and analyze so much data-cohort studies and
predictive analytics will undoubtedly influence
behavior for the better. This is true for many
industries, not just ours. But due to the privacy and
security of financial information-unlike, say,
movie preferences or travel recommendations-
we need to be very clear on who owns the
client's data, who owns the advisor's data, and
what rights are associated with these various
data sets. Using the client's data to best
meet the needs of the client is the fundamental
challenge-and promise-of the future of
financial planning.
One way to accomplish this is through the creation
of personalized, goal-based performance
reporting. I can't wait for the day when the closing
level of the Dow or the S&P 500 is not reported
on nightly broadcasts. Instead, I'll be automatically
alerted that my total wealth barometer is still

in equilibrium. (Inevitably, the next alert I receive
will tell me that my son is waiting for his
allowance to be automatically deposited into his
account, but that's OK! Progress works both ways.)
So, this brings me back to an assessment
of the state of financial advice. Let's sum it up:
Now, more than ever, financial advice is:
1 Energizing and engaging, not pejorative or painful.
2 As important as high-quality medical care, and

worthy of the same level of care and thoroughness.
It's not a "loss leader" on the way to selling
something else.
3 Delivered by people with skills that are likely to be
quite different from those previously fostered
and rewarded by our industry's traditional emphasis
on investment product sales.
4 Paid for via a modular fee-for-service pricing
model rather than the historical one-size-fits-all
pricing model.
5 Backed by solid data that is not generic and readily
commoditized, as has traditionally been the norm.
Rather, it is gathered from the relevant sources
in the investor's life, and thoughtfully analyzed in a
way that is uniquely relevant to each client and
yields insight and influences behavior.
If we can work together within our industry to
bring this kind of positive change to the
people who trust us to collaborate with them
along their financial journeys, I daresay we might
convince a few of the "glass-half-empty" folks to
edge toward the "glass-half-full" approach to
life. And I'm optimistic about that possibility! K
Tricia Rothschild, CFA, is chief product officer of
Morningstar. She is a member of the editorial board of
Morningstar magazine.



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