New 2021 Fintech Puts Increased Pressure on Advisors to Deliver Exceptional Value

The paradigm has shifted in how people are managing their money.

The spread of technology in the world of personal finance has created a new era of wealth management. Financial decisions, planning, and investment used to be more communal processes.

In the old days, one had to shop around to find an advisor or broker that would fit their specific needs. Then there was scheduling the appointment, taking time out to attend the meeting－all to accomplish actions that can now be conducted in a few minutes with a smartphone while having coffee in the morning.

Aside from the time commitment that used to be needed to manage one's wealth, there was also a financial barrier to entry. Many financial advisors required a minimum of $100,000 worth of investable assets from would-be clients.

There was no way that the everyday blue-collar worker could dabble in the stock market on their own.

IRAs, mutual funds, and 401Ks were pretty much the standard investing route for the majority. 

But times are changing.

The last 18 months have given rise to an impressive suite of autonomous wealth management tools, apps, and solutions that individuals can access directly from their pockets.

For advisors, understanding this rapidly evolving marketplace is key to engaging prospects and generating new clients in spite of the perceived convenience that these new fintech solutions promise.

The Evolution Of Personal Financial Management

The rise of autonomous personal finance solutions shouldn’t come as a surprise. It’s the product of decades of groundwork.

The tides slowly started to change as a new machine came onto the scene: the personal computer.  As new capabilities of the computer were being explored, it didn’t take long for innovators to see that there were some pretty obvious implications for finance.

In 1983, a company called Intuit was formed and with it, the birth of personal financial management software. Their flagship product, Quicken, was a landmark achievement in how people could now manage their finances. Time-consuming financial planning activities that used to require using pen, paper, and calculator could now be streamlined and neatly organized on a PC.

Fast forward to today, and Financial Technology has grown at a dizzying rate. Where the personal computer opened up the door to people having more control over their finances, the internet completely blew the door off the hinges. We have an unprecedented amount of software-based tools at our disposal.

Advancements in A.I. are increasingly serving to automate planning and advising functions.  Stocks can be purchased with spare change. We’re truly in an era of unprecedented freedom and control in how we plan for our financial futures.

• The global personal finance software market is now estimated to reach well over $1 Trillion by 2023.
• 63% of smartphone users now have at least one financial app
• There are now more than 12,000 financial technology start-ups worldwide
• Only 39% of consumers plan to continue using financial services solely provided by traditional providers

The picture is clear: anyone can now get into the personal wealth management game. And the opportunity is only growing. So with that said, let’s take a look at the trends and tools that will lead the way as a new decade begins.

Rise Of The Robo Advisors

As previously mentioned, the barrier to entry for personal investing is about as low as it can possibly get.  Financial software continues to make strides in how algorithms and A.I. can assess a person’s financial situation and provide advice accordingly. The term “robo-advisor” may sound like some kind of terrible B movie title, but it’s a pretty accurate description of just what these tools are.

Let’s look at the major players going into 2021.

Betterment. Betterment represents the industry leader in automated portfolio management. Since its beginnings in 2008, it’s thrived on it’s combination of versatility and simplicity. The fact that there’s no account minimum needed to start symbolizes the new universal appeal of personal wealth management. Plus, it’s hands-off approach is extremely appealing to those that just need a simple way to get the ball rolling.

After opening an account, the Betterment technology gets to work learning about the specifics of the customer’s financial situation. A survey process diagnoses one’s investment experience, goals, as well as risk tolerance. The software then turns your account into a portfolio of exchange-traded funds which are diversified across various asset classes.

At a very reasonable fee of 0.25% annually, Betterment remains as the go-to for those who know they need to get going on planning for their future, and prefer to be shown what the best way to begin.

Wealthfront. While Betterment could be considered the torch-bearer of robo advisors, there are some new players that are taking the model and running with it. Wealthfront is a great example. 

Like Betterment, automated algorithms diversify an investor’s account across low-cost index funds and exchange-traded funds. The first point of difference is that Wealthfront does require a minimum of $500 to open an account.

However, for accounts with a balance of less than $10,000 there is no fee for utilizing Wealthfront’s services.  For many this could prove an even better alternative to breaking into investing.

Wealthfront also brings another unique characteristic to the table.  Instead of relying on behavioral economic theory like other robo advisors, it incorporates the experience of real Wall Street professionals.

Chief Investment Officer Burton Malkiel is a former professor at Princeton and also served on the President's Council of Economic Advisors. He leads a committee that leverages their expertise in the markets in how best to accommodate the needs of Wealthfront’s customers.

Robo advisors like Betterment and Wealthfront have made such an impact that the heavy hitters of investment advising had no choice but to take notice. It’s a trend that proves too costly to ignore. Behemoths like Fidelity and Charles Schwab now offer their own manifestations of robo advising.

In a study titled “The Rise of Robo: Americans’ Perspectives and Predictions on the use of Digital Advice,” Schwab found that:

• 58% of Americans expect to use a robo advisor by 2025
• 45% say that robo advice will be the technology that has the biggest impact on financial services
• Nearly half of boomers using a robo-advisor (46 percent) say robo advice is perfect for their life stage

That last statistic makes an interesting point.

It’s not unreasonable to think that the tech era of money management would be primarily motivated by the Millennial generation and their preference for all things digital. But studies like Schwab’s show Baby Boomers to be surprisingly open to a helpful hand from artificial intelligence.

When it comes to investing, a study found that only 43% of Millennials are investing, and 21% of those who have invested less than $500 total.

The study further showed the number one reason that those aged 18-35 aren’t taking a more active role in their financial future is because they don’t feel that they have enough money to invest.

In light of these findings, there are plenty of tech platforms looking to up the comfort level enough to take the investing plunge.

Can You Spare Some Change? Then You Can Buy Stocks.

Robo advisors are a great route for the individual looking to get a portfolio up and running sooner rather than later. This investor isn’t too concerned with calling any of the shots, per se; the less homework involved, the better.

Now, tools to assist one who wants to get more proactive in what they’re putting their money into are everywhere.

“Spare change” apps are a hot trend going into 2021.  Decades ago, no one would have thought it possible to actively buy and sell stocks with only a few bucks at their disposal.

Now, this is precisely the business model for apps that are trying to hammer the message home: significant funds aren’t needed to get going.

Here are some of the platforms that will be playing a prominent role in low-cost market entry.

Robinhood.   In 2015 Robinhood changed the game when they debuted their app that allowed for commission-free trading.  In addition, there’s no minimum required account. For no cost whatsoever an individual can become an official market participant. Stocks, ETFs, options, and cryptocurrencies are all available for users to purchase with less money than it takes to buy a beverage from the local coffee shop.

Users also get access to investment news as well as the ability to set customized price notifications. A $5 per month premium membership grants access to even more in-depth research and allows for margin trading.

There’s no question that Robinhood will remain one of the hottest personal finance tools going into 2021.

Webull.  Webull took the business model of Robinhood and added the dimension of more intensive market research.

Like Robinhood, there are no account minimums or commissions.  It’s the more advanced user experience that separates Webull; it seeks to appeal to an investor who has more than just a passive interest in market investing.

The platform’s added technical analysis provides for a more advanced investing experience if desired.  Real-time quotes, a full financial calendar, analyst ratings, and even in-depth charts are all available. 

Acorns.  This app is the epitome of spare change investing. Acorns is sort of like a hybrid－half robo advisor, half savings tool. Perfect for the individual who just can’t commit to putting money aside for investing, Acorns delivers the “out-of-sight, out-of-mind” option.

A user opens an account and links a credit or debit card of their choice to it. Then anytime a purchase is made, Acorns rounds it up to the nearest dollar amount and invests the additional change into a portfolio of diversified ETFs.

Acorns offers different tiers of membership, with the lowest starting at $1 per month.  There are also $2 and 3$ monthly options. The top level offers the user the option to set up a checking account directly through the app itself.

Better Ways To Budget

Aside from investing, there are plenty of resources that can help people organize their finances and work towards eliminating debt. 

Before, it took a pretty healthy level of self-discipline and know-how to stay on top of all the debits and credits. An honest show of hands would probably reveal a minority percentage of the population up to the task of creating their own Excel spreadsheets to keep up-to-date. 

Today’s technology can make anyone feel like they have a CPA-level understanding of their financial situation.

Mint.  Mint is one of the most popular personal finance apps around. This popularity is going to increase in the coming year.

Mint provides its users with one of the most straight-forward  and easy ways to see the big picture of where they stand financially.  By linking all of one’s accounts, Mint aggregates all the user’s financial activity to show a real time statement of where one stands financially.

There’s no limit to the amount of categories the user can create. Everything is automatically updated so there’s never any lapse in accuracy.  It also lets customers set reminders for bills that need to be paid.

Mint is extremely versatile; it can be as detailed or basic as desired.  This efficiency and versatility are underscored by the fact that it’s a completely free app to use.

You Need A Budget (YNAB). For the more “fiscally-motivated” individual, YNAB takes the premise of Mint and kicks it up a notch. This is not a free service. There is a monthly fee of $6.99. However, the company offers users a 34-day free trial period to assess whether its right for them or not.

There’s less automation going on with YNAB. Users have to manually categorize each transaction at the end of the day. It’s strength lies in that it forces the customer to build better financial habits...for those who are into that sort of thing.

YNAB doesn’t operate on the overall, Mint big-picture concept. It’s focus lies on the immediate tasks at hand. The user creates a budget for the month and then has to answer for every dollar spent. There are tutorials provided to instruct the user on developing better habits. Overspending that might have previously gone unnoticed will be brought right to the user’s attention with YNAB.

So Where Do Advisors Fit in?

As a financial advisor, you’re probably wondering…“Where do I fit in?”

And while it’s tempting to feel as if you’re getting squeezed out, the reality is that there’s still plenty of room for the advisor who understands his or her place in this new market.

Now that you understand what you’re up against, you can zoom in and focus on the value you provide (that apps and automated robo tools can’t).

Tax planning is one area that comes to mind. This is an aspect of financial planning that’s difficult to automate. The changing nature of tax codes and the individual complexities make it a perfect sweet spot for advisors to target. And successful lead generation will depend on careful articulation of this value proposition.

James M. Comblo, Certified Financial Fiduciary from FSC Wealth Advisors, likes to emphasize the urgency of maximizing savings today (with uncertainty ahead).

“With taxes near historical lows and set to increase in 2026, or potentially sooner with a new president in office, now is the time to reposition your assets to take advantage of the tax sale,” Comblo believes.

James C. Musgrave, CRPC, of Research Financial Strategies agrees with that assessment.

“Many assume taxes will go up under the Biden administration. Taxes have to go up eventually regardless of who is in power because, quite simply, our government spends more than it makes in tax revenue. As we don’t know when or how much taxes will increase, we recommend that our clients have money in taxable, tax-deferred and tax-free accounts to have some control over their taxes in retirement.”

It’s insights like these that robo advisors and pocket smartphone apps can’t provide users.

While they might be able to provide some tax optimization, there’s no explanation of the big picture. This leaves everyday investors on the outside looking in.

Top financial services professional Ralph Short of Welcome Home Financial Partners believes it’s important to communicate this idea to clients so that they can have a more comprehensive understanding of their finances.

“With an increase in market volatility, the possibility of changing tax laws, and an uncertain economy, now is the perfect time to seek a second opinion,” Short tells prospective clients. “Employees and business owners nearing retirement should work with a financial professional to stop the economy, Uncle Sam, and Wall Street from stealing or reducing your retirement. Remember your financial security does not come with instructions!”

Issues like taxes get even more complicated and convoluted when it comes to niche industries and professions.

And while there might come a day when these apps have enough user data and are algorithmically-sophisticated enough to make tailored recommendations, that day has not yet come.

Take entrepreneurs in the technology field, for example.

As financial planner Alaric Goth, AWMA, of McAdam LLC explains it, “Tech professionals can sometimes choose to be compensated with company stock - imagine being paid in an asset that continues to appreciate in value on its own. Despite this, there are a number of tax pitfalls that must be carefully navigated to make the most of this type of compensation to best achieve the individual financial goals of these professionals.”

Tax advice and planning is just one example of an area where robo advisors and smartphone apps have trouble matching up. And, as a result, this is one area where human advisors can press in and offer value to clients.

Advisors who continue to exploit areas such as these will have no trouble growing their practices in 2021 and beyond.

Bright Days Still Ahead for Advisors

This influx of Financial Technology into daily life is unlike anything that's been seen before. No matter the goal or objective, there is a very affordable (or completely free) means of becoming a more financially-conscious member of society.

While many advisors feel like they’re getting strong-armed out of the industry, this isn’t true. The key is to identify the areas where technology is lacking and leverage your experience to provide maximum value to clients.

If you can accomplish this, you’ll enjoy continued success for many years to come.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.