The future of advice and planning is bright, if leaders step up to make it so.
The Supreme Court’s decisions on abortion and gun safety reinforced how ideology polarizes politics and prevents civil discussion and progress. Market ideology has also polarized discussion and harmed advice standards.
Market ideologues fueled the 2010’s transformation of advice by preaching the supremacy of minimal regulation and maximum choice and disclosure. There’s been no serious refuting of the choice mantra, despite exhaustive analysis from scholars, advisors and consumer advocates.
Every communication today is deemed advice: sales, product recommendations, investment advice, planning, and digital services. Behavioral nudges may soon follow.
But ambiguity reigns. “Advice” and “best interest” are the key terms, but lack meaning.
The meaning of advice needs to be reset by fiduciary advisors. Here are four articles to start the conversation. The first two cover a classical view of advice by a law professor. The third article by two Vanguard researchers discusses the role of robo digital services. The final article is a report by Philip Paleveev on how his research reflects consumer ambiguity and uncertainty.
Law Professor Arthur B. Laby
Fiduciary Obligations of Broker-dealers and Investment Advisers by Arthur B. Laby
Laby, a Rutgers University Law School professor, has written widely on fiduciary duties and advice over the last 20 years. In this 2010 law review article, he drilled down on advisor and broker differences.
Laby addressed an issue that few have. It is the cultural and business differences between advisors and brokers and what he called brokers’ “fundamental characteristic.” He wrote that broker-dealers acting as principals “cannot readily act in their customers’ best interest. Advisers are poles apart. Other than negotiating a fee, advisers are typically not in an adversarial position with their clients.”
Laby’s latest (2020) article, Advisors as Fiduciaries, should be a required primer. He included a review of the classic advice professions and described how advice is unique, important and necessitates client trust. Advice is to “give one’s opinion” as to the best course of action in a context of “close personal communications.” Laby’s premise is that advice is a human act delivered by competent, expert professionals loyal to clients.
Quantifying the investor’s view on the value of human and robo-advice, by Paulo Costa and Jane Henshaw
This article discussed a digital view of advice based on a survey of 1,500 investors.
The article opened as follows: “Frequent financial news headlines may lead people to believe that human advisors are under threat from technology.” It concluded, “Client loyalty to human advisors is durable.”
Researchers assessed the value of advice in terms of three measures: portfolio, financial and emotional. Advisors and robos offered similar value on portfolio and financial measures. On emotional measures, differences were found.
“Human advised clients derive more emotional value” than robos do, according to the researchers. By a gap of 76% to 16%, investors preferred human advisors for “developing a connection/relationship with me”; for being “empathetic to my personal situation” it was 75% to 18%; for feeling “listened to and understood” it was 73% to 19%.
Many, including Michael Kitces, agreed with Vanguard that robos are no threat to advisors. Yet, Vanguard’s key assumption raised questions about what this research means.
The key assumption was that assigning uniquely human qualities of “emotion” to robos and branding robos as “advisors” informs the public.
It does not. Instead, it confuses and fails on its face.
The assumption should be that human investors do not associate concepts like “relationship,” “empathy” or better “listening” with a robo or digital platform. This is just common sense. To assume otherwise would be laughable – except for Vanguard assuming otherwise.
The basic question is why Vanguard branded digital services as “advice” and then re-branded advice as “human advice.” This is problematic because the legal status and effectiveness of robos has been questioned.
A digital service should be branded as such, as a digital service.
Vanguard’s 22-page report cited “human” 160 times, including 15 times on the final page. This was deliberate and must spur fiduciary advisors to raise questions to Vanguard.
The ensemble practice
How Investors Choose: 2021 Consumer Report, by Philip Palaveev
This 35-page paper drilled down to how investors with a minimum of $100,000 in personal income search for an advisor.
Only 42% of those high-net-worth individuals had an advisor; the reputation of the firm and advisor mattered to investors when searching for an advisor. Also, 24% of high-income clients previously worked with an advisor.
Advice industry publisher Bob Veres wrote about the report in Advisor Perspectives in March.
Veres asked Palaveev if consumers understood what “advisor” means. Palaveev noted there is confusion about what constitutes an advice relationship, particularly among employees getting answers from HR about a 401(k) plan, and with retail investors working with discount BDs or insurance brokers.
Veres concluded, “The profession faces ominous signs. The data doesn’t explicitly say that; you have to look closely at the underlying details.”
Laby’s writings on fiduciary advice are deeply rooted in law and the legal and social science literature. They are foundational. They have also been seriously discounted by market ideologues seeking to blur understandings and erase legal distinctions between suitability, best interest and fiduciary advice.
Vanguard’s branding of robos as advisors is hard to rationalize. Meanwhile, the SEC’s Reg BI erased established distinctions between brokers and advisors. Both are asked to meet the same best interest standard. Critically, customer or client interests must no longer be put first. A nuance of the new language permits that the interests of customers, brokers and their firms may be treated the same.
The word fiduciary has been banished from Form CRS. The concept of “equity” has been introduced as an alternative in securities advice.
The new challenge? An advocacy group analysis suggested that the DOL fiduciary advice rule is racist. The group asserted that if the DOL rule is reinstated, about 2.7 million individuals would suffer from reduced retirement savings and the disproportionate impact would fall on people of color, Latinos and black populations.
Ideologues of all stripes have pushed slogans at the expense of civil discourse. But there has been some progress. After Uvalde, gun rights and gun safety moderates were forced to speak to each other to find common ground.
The future for planners and advisors is as exciting as Dick Wagner once described, though only if leaders make it so. In 1773, the United States faced revolutionary voices that were mounting and its future was hardly guaranteed.
This future will require new voices and leadership. Leaders must assess the threats and opportunities with candor and speak out for the profession’s high standards. Leaders must speak the truth and act with courage. Leadership was indispensable in 1773. It is today.