Get ahead of robo-advisers by combining personal and digital services

Can you combine technology and personal interaction to differentiate yourself from robo-advisers? Can this combination be used to make your clients more loyal? Can it help clients better understand risk and return? Can it even assist clients in achieving their goals? The answers are all yes.

Using a risk tolerance questionnaire or survey to select an allocation model for your client is not enough. There are plenty of consumer risk tools available on the internet. Whether given by you or accessed by the client directly, it still boils down to “garbage in, garbage out.”

It’s easy for a client to agree to a 60/40 model based on assurances that they will do better than inflation and their downside risk will be mitigated by diversification. Yet, when the S&P 500 jumps up by 20% and their return is only 12%, many clients will not be happy. You will field questions about why their portfolios lost out on the performance opportunity. It’s not much better when the market drops. Sure, your clients’ portfolios won’t lose as much as the S&P, but if it’s a big drop, many clients will want to move to cash. The rationale is often “I can’t afford to lose any more.”

As an adviser, you’re caught in a precarious position: You can’t get all of the upside for your clients, and you can’t protect them from losses. While it’s true that education can help, it won’t fully accomplish understanding. So, to help clients comprehend risk/return concepts and give them a shot at accomplishing their goals, I like to work with financial planning software interactively.

Many financial planning tools allow for on the fly input changes that produce instant results. We use MoneyGuidePro and begin with constructing a basic financial plan based on the client’s stated assumptions and goals. When all the input is complete, we can see a graphic display of Monte Carlo results. Green means a high probability of success, yellow is a fair probability of success and red is unlikely success. With most new clients, this starting point does not show green.

Rather than dictate that the client reduce spending, cut down on vacations or delay retirement, the interactive session can provide insight into how relatively small adjustments can impact results, including:

• Increasing or decreasing portfolio risk/return;

• Increasing or decreasing savings;

• Working longer or part-time after retirement.

By allowing the client to tweak the inputs, they can more easily see how spending, savings and investment strategy decisions separately and collectively affect the bottom line. And, by showing that taking on increased levels of risk doesn’t always equate to a higher probability of success, you can move the client’s focus from returns to accomplishing goals — without the emotional roller coaster of high volatility.

Periodic interactive updates can keep clients on track and also reinforce your importance in clients’ financial lives. Robo-advisers can give them do-it-yourself tools and maybe even a resource for call-in questions. But they can’t create an ongoing personal relationship. By combining the personal with technology, your clients can get the best of both worlds.

Sheryl Rowling is head of rebalancing solutions at Morningstar Inc. and principal at Rowling & Associates. She considers herself a non-techie user of technology.

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