Flows Before Pros

This is not another article about Reddit, Robos, and Robinhood.

Well actually, it a little bit is. But hear me out: We’ll be light on the pontification (we know you don’t need a 4,000th article on GameStop) and heavy on the conundrum financial advisors face and the trump card held by providers of financial advice.

Adaptation or Creative Destruction?

Economist Joseph Schumpeter coined the phrase “creative destruction” in the 1940s to describe how innovation often improves the lives of many at the expense of a relative few.

A prime example is the invention of the automobile, which expanded travel capabilities for a wide range of people but put many horse traders and buggy manufacturers out of business. And I haven’t even mentioned the fate of the horses…

In the age of Reddit, Robos, and Robinhood, many financial advisors now face the same conundrum as buggy makers.

The question is whether they will adapt and thus remain essential (and reap the rewards) or succumb to the forces rendering a good portion of their offering obsolete.

We believe advisors have insurmountable advantages against these forces but also face major threats, depending on where they place their focus.

The Democratization of Investing

Value investing and the 60/40 have long been the go-to investment philosophies guiding advisors as they help clients reach their goals. However, these principles appear at odds with the current zeitgeist driving markets. Not to mention, the growth factor has outperformed value for nearly a decade, and the “40” in the 60/40 equation has been buoyed for decades by accommodative monetary policy driving rates to zero.

Now you have a growing number of retail investors who don’t care about value, finger-tip access to DIY investment tools, and interest rates with hardly anywhere to go but up.   

It makes me think of a phrase we began using several years ago: “the democratization of investing.” For us, it was applied primarily to the sometimes-esoteric area of systematic investing. We wanted to take the approach made famous by a handful of hedge fund managers and apply it using instruments that all advisors could access for their clients. What we didn’t realize would happen so quickly is that this idea would bypass advisors altogether – threatening rather than elevating their practices.

Watch out Mortimer and Randolph…this spells trouble for the old guard.

The new phrase we have observed is, “flows before pros.” This is the idea that the momentum created by retail investors through passive index investing, active behavior as we saw with GameStop, and investing platforms such as Robinhood is more powerful (and potentially more profitable) than old school portfolio management techniques like value investing and the 60/40 portfolio.

A Strategy King Solomon Would Love

What has been will be again,
what has been done will be done again;
there is nothing new under the sun.
Ecclesiastes 1:9

Advisors who might feel threatened by the current landscape should remember they possess something that provides a wide moat against Robos, Reddit, and Robinhood – relationships. This is the trump card for providers of financial advice.

People may come to an advisor seeking , but they stay based on relationship and client service. If advisors can turn their chair away from the computer and toward their client (literally in an in-person world, and figuratively in a socially distanced one), and if they can provide competitive financial planning and portfolio management, then there is nothing to fear.

In short, advisors who build solid relationships and select sound investment strategies are better equipped to go with the flow.

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