Executive Summary
The financial planning world is in a state of change, as the rise of the digital age begins to exert its impact upon the profession. Thus far, trends have included the shift to outsourcing, the rise of web-based software, and a growing number of planners using services like GoToMeeting and Skype to supplement face-to-face meetings with more virtual interactions. As the coming decade wears on, technology will play an increasing role in the financial planning world, driving change in everything from how we deliver services to the client experience.
Nonetheless, while technology will continue to augment financial planners, it will never replace them, for one simple reason - real financial planning solutions require clients to implement recommendations and make changes in their lives, and there are few forces for behavior change more effective than the accountability of another human being. Which means, simply put, as long as we are human beings and our brains operate the way that they do, effective financial planning will require another human being at the other end of the relationship, especially in times of stress and when we need an outside perspective. Technology alone may give clients the answers... but the fact that we all don't get the right amount of exercise, eat a perfect diet, and take all the other steps necessary to become optimal human beings, makes it clear that technology delivering information alone will never be the solution.
The inspiration for today's blog post is some feedback I received on my presentation "The Future of Financial Planning in the Digital Age" which I delivered last week at both the FPA Retreat and NAPFA National, and was subsequently covered by both Investment News and Advisor One. During the session, I explained - as I've discussed previously on this blog - that the future of financial planning will look very different, as technology not only supports the delivery of planning, but also reshapes how financial planning firms grow as geographic barriers break down.
The key distinction is that planning in the future, supported by technology, will allow advisors to meet with clients and deliver value, without even being face-to-face with them. It does not, however, suggest that advisors will be replaced by technology, for one simple reason: clients are human beings.
The Difficulty Of Change
Despite the evolution of our brains - and to some extent, because of it - changing behavior is difficult and complex for us human beings. As research by Prochaska has shown in his book "Changing for Good" (and others have repeatedly shown as well), taking the necessary steps to improve our situation often requires far more than merely having all the facts, and knowing what the technically correct course of action should be. If it were that simple, the country's problem with obesity would be solved: just explain to everyone that they just need to eat less and exercise more, and watch everyone's weight drop to the ideal level.
Of course, change is not impossible; there are people who can and do take the steps to improve themselves. And as research by Robert Cialdini in his book "Influence: Science and Practice" has shown, one of the most effective systems for helping an individual to change is to make him/her accountable to another human being.
The Importance of Human Interaction
Research has shown that as human beings, we have a strong inclination to appear to others that we're being consistent in our words and actions. As a result, if we commit to a position publicly, we are often loathe to be seen changing the position later. For instance, a study by Kerr & MacCoun (1985) found that when once jurors state their initial views on a case publicly, they are reluctant to allow themselves be seen as changing their position in public; consequently, in a close case, a hung jury is significantly more likely if jurors are required early on to express their opinions with a visible show of hands rather than a secret ballot.
In a similar context, organizations that support people trying to lose weight have found that requiring someone to commit to a weight loss goal by writing it down, and showing it to friends and family, can be effective even when virtually all other techniques have failed. Exercise programs have similarly found that encouraging participants to pair up with a buddy - with a mutual commitment to meet at a certain time to complete an exercise routine - makes both people significantly more likely to actually follow through on the commitment, neither wanting to be seen disappointing the other. This accountability through social dynamics is also one of the driving factors for why personal coaches are often so effective to help people implement change in their careers and lives, and why Alcoholics Anonymous encourages members to find a sponsor - a fellow alcoholic trying to maintain sobriety who can help keep the person accountable.
Why Technology Alone Will Never Be Enough
The social dynamics involved in change - and the inability of most people to effectively change without social support - is the primary reason why financial planning will never be successfully delivered by technology alone. Because simply put, we will never hold ourselves accountable to technology and "a machine" the way that we do with another humanbeing. We are social animals. It's simply the reality of how our brains are wired.
Otherwise, we'd long since have created a website or technology tool that allows alcoholics to enter drinking habits, and get advice on how not to stay sober. Or enter details about what we eat and our physical activity, and get advice that we could immediately implement to get us to our ideal body weight. Similarly, just entering our financial information into a website, to get the factual details about how we should change our spending habits, save more, or invest differently, will not alone be enough to bring about meaningful change for most people.
The "just give them the information" approach will work for a few, who - at least in this regard - can merely gather factual information to determine a course of action and effectively implement it. And it can be a reasonable approach for relatively simple tasks or issues, that are mostly driven by a factual question to be answered and not a major behavioral issue to change. But it won't work for most people on their real financial challenges, any more than knowing we should eat less and exercise more gets everyone to their ideal body weight.
And that's before we account for the research that also shows we are often so biased in looking at our own problems that we can't even see the real problem and the path to a solution, which is why seeking the wisdom of an outside perspective on our problems has been observed in societies around the globe for several millenia.
In Times Of Stress
Of course, the kinds of change we've been talking about so far are the proactive measures someone might take to get themselves on a better course, when generally surveying their personal situation. It does not yet address the secondary issue associated with change: relapse, or more broadly, how we act differently in times of stress, when the dominant portion of our brain is not the rational, logical, thinking part but instead the irrational, emotional, biased and shortcut-prone part. In times of stress, social support can be more important than ever, and it brings a new context to the social dynamics around behavior change. It's the reason for the late-night call to an AA sponsor. Or the support of a weight-loss buddy. Or the intervention of a coach or mentor to call out a self-destructive behavior.
And as any experienced financial planner knows, intervening in times of stress can be incredibly important for clients, whether it's guiding through expert financial decisions after the death of a spouse, or during a market panic, when clients are - to say the least - not always thinking with the rational, logical part of the brain. Soothing though Siri's voice may be to some, our iPhones are not going to talk us off the ledge when we're in a financial panic or an emotionally distressed state.
How Financial Planning Will Change And Stay The Same
As a result of these natural human dynamics, the next 10 years in financial planning will not be about the replacement of financial planners with technology, but the augmentation of technology into financial planning to deliver an improved experience, monitor the plan more proactively, and overall bring about more effective implementation and behavior change.
Companies that use technology to improve the quality and efficiency of their process - like Personal Capital and LearnVest - will thrive if they can find an effective balance between real financial planners and the technology used to support them, while technology companies that seek to completely replace and eliminate the advisor - and even overtly bash them in public, like Betterment and FutureAdvisor - will suffer from a lack of client follow-thru, clients that bail out when markets become turbulent (and there's no one to talk to), and for those clients who are driven enough to do it themselves (especially regarding investment portfolios), tough competition not from advisors but the likes of Charles Schwab and Vanguard.
This is not to say that all financial planners do everything right. There are numerous conflicts in the advisory space, and even if (or rather, when) a uniform fiduciary standard is implemented, the planning profession will quickly find the challenge of competence (or lack thereof in some cases) matters as much as fiduciary principles.
Nonetheless, as long as human beings need help with their money, and to get an outsider's perspective on the problems their brains just won't let them see for themselves, and to implement products and solutions to change and improve their financial behaviors, financial planners will always have a role to play. It's just our reality as human beings.
So what do you think? Will financial planners someday be replaced by technology, or does the fact that it's a human being on the other side of the relationship ensure the planner's relevance? How do you think technology will change the delivery of financial planning in the coming years?
Financial planning will always be a relationship driven business, because you’re addressing a person’s financial habits.
It’s so easy for people to ignore technology. Technology might serve as a point of initial engagement, but if you’re doing financial planning, at some point (if there’s going to be a prolonged engagement) things need to shift over to a real person.
Personally, if I had a financial planner, I’d want to work with them in the way that is most aligned with how I currently work (Skype, chat, phone). I’m happy to meet in person if there is a real need, but otherwise, the less time spent traveling the better. Perhaps clients need to feel like they need to pay for something (face-time), but I’d just prefer to check up in a way that is least intrusive to my workflow.
In the coming years, I see planners building their client management process on top of social networks and productivity tools. Integrating all this will be a real pain, but the most flexible planners will open up new opportunities, especially as they need to find new clients who are not retired Boomers.
I’m really excited to see what happens with the iPad. There is tremendous potential for advisors to use these devices as engagement tools and to change the way they present information to clients and even prospects.
Intangible like is Financial planning services and even though we are getting more information through web and other media. One needs to have face to face interaction with other. Of course Technology will help in augmenting the quality of our interaction with the customer not on Experience and human touch. So ultimate question one needs to answer is how we use our potential to greater extent? Not just get blocked by technology irrelevance. Alone on technology man can never leave. Yet without technology we cant do business and leveraging technology along with our experience and with honest service quality will only ensure best advice.
If we are not thoughtful,emotional and logical we cant give holistic advice. We should not divorce our personal lives with professional lives. Integration brings its own sweetness into profession. We are humans we tend to behave according to pleasure or fear.
Thanks
It seems to me that our industry is not unlike taxes or law. There are plenty of online and DIY resources available, but many people choose to work with a competent professional to make sure they are not making big mistakes.
However, I DO feel that technology/DIY resources are an affordable alternative for people with modest means, that just need some basic advice, or possibly a simple asset allocation strategy for their small retirement or brokerage accounts (especially during the early accumulation years).
But by and large, I find that most people with more substantial assets and/or sophisticated financial lives, are, and always will be, best served by individual, personalized advice. The majority of my clients have already accumulated most of their lifetime wealth, and their biggest concerns are making a big mistake that could cost them significantly. I find that wealthier clients are less concerned about the highest returns, beating an arbitrary index, or saving 1% in advisor fees, but more concerned about making good long-term decisions with their money and avoiding mistakes.
Hey Michael,
Would you mind changing the link here from the Forbes article to our website? I saw the Betterment link goes to them and I just want to make sure your readers can find who you’re talking about! Thank you very much.
Josh
Joshua,
I certainly don’t want any of the links to be confusing or misleading, but the Forbes article has a picture of Bo Lu displayed prominently, and his byline to FutureAdvisor with a link to the FutureAdvisor site in the opening attribution to the article, so I’m comfortable that a reader can correctly determine the source.
Respectfully,
– Michael