Digital plus human equals the future of advice

Speculation about the future of advice will never end, and with good reason: The future is unpredictable. But when the future conversation about the future focuses solely on technology and the disruptions that will emerge as a result, we lose sight of the common thread that weaves through investing’s past, present and, yes, future: people.

The history of retail investing consists of reacting to what just happened, chasing the “hot-dot,” buying high and selling low, and following the herd — all this typically at the wrong time, with hands firmly gripping the rearview mirror.

This very human, behavioral history leads us directly to the future, which is about remedying those mistakes and avoiding repeating them. To err may be human, but to correct? That can be done with aid of technology — now more than ever.

For most investors, their retirement portfolio is a mysterious and complex web woven over time. The typical investor bought different investments at different times for different reasons from different people. Hence, investors don’t have any measure of a comprehensive, coordinated, household investment plan. How could they?

The typical investor has five to six accounts and a bunch of products custodied in many places and managed by two or three advisers. When all is said and done, looking at the clutter makes it difficult to know what investors should do with it all to achieve their goals, not to mention peace of mind.

Therein lies the future of advice: leveraging people and technology to organize, coordinate and optimize the present and past to achieve a better future. The opportunity for smart advisers and firms is what I call “post-robo math” — 1 + 1 = 3.

Morgan Stanley recently promoted its ability to deliver goals-based wealth management — quantifying and delivering improved investor outcomes — as a centerpiece of its wealth management strategy. Predicated on goals-based, household-level advice, this can be done only by an adviser and advanced technology.

According to Andy Saperstein, co-head of Morgan Stanley Wealth Management, “we’ve just never given [investors] a real good reason to consolidate assets with us. Now, they have a reason, and we can quantify that benefit for them.”

Financial advisers have no shortage of powerful technologies to enable day-to-day decision-making on each product, model and account. But access doesn’t correlate to utilization. In fact, financial planning tools are overhyped while ironically remaining underutilized.

And when it comes to implementing the recommendations, current planning tools show how to set up at the household level, but don’t explain how to organize the individual accounts in a tax-smart, coordinated way within the household. Planning tools are a good start but do not show how to set up each account to maximize tax efficiency or come close to organizing the accounts to achieve tax-smart asset location.

(More: Tax planning doesn’t stop on Tax Day)​

Morgan Stanley has made a $2 trillion bet on this. Today, it manages $2 trillion in client assets and knows its clients own $2 trillion more elsewhere. Its goals based planning system is based on planning, implementing, managing, quantifying and reporting at the household level. Morgan Stanley is the first to do this in a comprehensive way, but others are following.

Studies from Ernst & Young, Vanguard, Envestnet and Morningstar all say a coordinated, comprehensive household investment plan can improve investor outcomes by 1% to 2% a year with no additional risk. This not only creates new possibilities, it enables the adviser to retain more business, which translates to growing AUM because less is going to pay taxes.

The future of advice will include low costs, risk-smart management, tax-smart asset location, and optimal sourcing of income such as Social Security, Roth conversions and account registration types. This is where the human touch meets high tech. You can’t do all of this without software and a human adviser — 1 + 1 = 3.

James Loftin, the CEO and co-founder of GER Loftin Wealth Advisors, a financial adviser affiliated with United Planners, has taken a tax-smart technology approach, which enables him to “not only better manage my current clients but also win new business with high-net-worth clients.” This helps him “achieve significant improvement in after-tax returns for my clients and address the complex tax concerns of the mass-affluent and higher-net-worth families we serve.”

The future of advice is about implementing strategic, smart approaches such as asset location and multi-source income optimization, and implementing and monitoring the effects in real time.

It’s about quantifying and improving financial outcomes. And it improves adviser efficiency and effectiveness. People often wonder if the future of advice is digital or human. The answer? Yes. It’s both.

(More: A smarter way to rebalance)

Jack Sharry is executive vice president and chief marketing officer of LifeYield, a technology solutions provider.

Related Topics: Morgan Stanley & Co.