On Technology

Using technology to manage investor behaviors

Differentiate yourself by managing risk so your clients can stay invested over the long term.

As a financial adviser, how do you measure the value you deliver to your clients? Or more importantly, how do your clients measure the value you deliver to them? Is it just about performance? Or is it more about the intangibles — about helping them plan for their futures with a portfolio consistent with their risk tolerance? That’s certainly been a worthwhile value-add approach that has served advisers well to date.

But what if everyone else is doing the same thing, delivering the same value, especially looking out over a future being shaped by increasing fee compression, intensifying regulatory scrutiny, and markets with persistently low interest rates and mounting equity volatility and uncertainty?

What then will make you stand out in the future as a unique and invaluable resource for the clients you serve? How will you differentiate yourself and do more for your clients?

The successful financial adviser of the future will be empowered by new technologies and new product innovation to manage investor behaviors as well as their assets. Managing investor behaviors continues to be the Achilles’ heel of successful investing. Past attempts have focused on fundamentals such as setting long-term plans, building asset allocations based on a client’s risk tolerance, and rebalancing with the hope of keeping investors on track. This approach, while sound, has not changed much over time.

However, thanks to technology, what is changing is an adviser’s ability to manage behaviors by actively and aggressively managing risk. By doing so, advisers can deliver differentiated value that provides clients a more predictable investing experience.

Managing behavior to drive value

We all know the age-old cliché: insanity is doing the same thing, repeatedly, and expecting a different result. Unfortunately, recent data confirms that investors continue to define insanity by repeatedly selling at the worst times. Such was the case in 2018 when, according to Dalbar, the average investor tried to time the market in the face of increasing volatility and ended up losing twice as much as the S&P 500. Moreover, Dalbar, which has been studying investor behaviors since 1994, has “consistently found that the average investor earns much less than market indices would suggest.”

If advisers are so well aware of this problem, why does it keep happening? Is it insanity? Or is it because until recently, advisers didn’t have the technology available to adequately manage risk?

The future is where the intentions of financial planning fundamentals unite with technology and product innovation to propel adviser value through the roof — all focused on strategies designed to manage risk.

Increased access to customizable solutions

Customizable solutions give advisers the latitude to select the market exposure, time horizon and level of downside protection and growth that are aligned with their clients’ investment goals and risk tolerance. They compel advisers to have deep conversations with their clients about risk and reward trade-offs and help set realistic expectations, this way creating a potentially smoother investment experience and reducing the potential for destructive decision-making.

Technology platforms are providing the tools to not only save advisers time and reduce the potential for manual errors, but also empower advisers with the ability to create custom solutions; manage monthly calendar lists for approved products; compare and contrast products to ensure the best client suitability is achieved; receive account-specific notifications on maturities/calls/coupons, performance reports, original offering documents and more; as well as track post-trade activity thus making it easier for them to proactively keep in touch with their clients.

While some may believe that technology platforms will remove the “human” from the equation, in fact the opposite will happen for the adviser of the future. By using technology to design portfolio solutions that address uncertainty, advisers will have an opportunity to expand their client relationships and tackle other aspects of their clients’ financial lives.

Differentiate yourself today and tomorrow: Manage investor behaviors by managing risk so your clients can stay invested over the long term. That’s how you can do more to deliver extraordinary value.

Tim Bonacci is president and CEO of Luma Financial Technologies.