Archive for June, 2017

The Changing Landscape of the Financial Investor-Advisor Relationship

Posted by Buddy Webb, CFA®

How Technology and Regulations are Shaping More Personalized Wealth Management Practices

While its fate is currently somewhat uncertain, the Department of Labor’s new fiduciary rule has certainly brought front and center the question of whether financial professionals are acting in the best interests of their clients.

For any investor, and particularly a high-net-worth investor, trusting the financial advice you’re getting is paramount. Hiring a financial wealth advisor is all about being able to take a step back and have confidence that someone is managing your wealth with your future, goals and best interests in mind.

The primary intention of the DoL’s new rule is to require that financial advisors work in the best interests of their clients, and put their clients’ interests above their own. This requirement therefore includes revealing any conflicts of interest, and clearly stating all fees and commissions.

What the new rule signifies, along with new digital advice technologies within the wealth management industry, is a focus on a personalized financial advice standard.

And, regardless of the DoL’s fiduciary rule, financial management has already been trending in this direction.

Advisor Personalization: A New Trend in Wealth Management Expectations

Deloitte reports that one disruptive trend in wealth management we are seeing in 2017 is the idea of a “re-wired” investor–that is, an investor who expects to interact with their advisors in a different way.

“Investors no longer want to be treated as part of a segment,” the report states, “but instead as unique individuals (‘just me’), with specific goals and preferences. Instead they expect to receive advice tailored to their own circumstances.”

Rapidly disappearing are the days of more impersonal investments where the investor was largely uninvolved. Today’s investors, especially younger ones, often want to be highly involved and actively participate in their wealth management. Even baby boomer investors are taking cues from the younger generations and following suit.

What fiduciary accountability and new technology points to is better alignment between the interests of the investor AND the advisor, and these developments drive customized financial advice based on goals and personal circumstances.

Leveraging Big Data and Analytics Capabilities When Managing Wealth

The use of big data has already made a significant impact in industries such as healthcare and higher education. Wealth management is ripe for leveraging this technology as well, to deliver a more insightful and personalized investor experience.

Consider the sheer volume of data created each year–and it continues to grow exponentially. Understanding how to interpret and best utilize this data to optimize clients’ portfolios and provide needs-based advice is key in today’s advisor-investor relationship.

Additionally, unification of perhaps disparate investment data allows for a deeply analytical approach that leverages predictive intelligence around market behavior. In this way, advisors can provide their clients not just with reports from the data, but with actionable insights to inform investment decisions.

Big data and analytics simply provide another way for wealth management firms to provide more personalized client advice to high-net worth investors, thereby optimizing client portfolios based on individual circumstances.

Taking Lessons from the Robo Advisor

While a rapidly rising trend, “robo advising”–which uses technology to deliver tailored investment recommendations–has its own limitations, and there remains significant room for growth. Human advisors will continue to be invaluable, but can leverage the areas in which robo advisors fall short, such as accurately judging risk tolerance or helping weather the storm during volatile market conditions. Doing so complements the technology in ways only humans can.

Technology will consistently be able to provide greater access to data and generate more precise financial models that can meet a client’s needs for both reliability and level of risk. Technological capabilities in the coming years will underscore the changing landscape of trust in and expectations for financial advisors and wealth management.

The existence of robo advisors, especially those that have been implemented at major financial companies, signifies that with or without the fiduciary rule, changes are already underway to ensure clients’ needs are met in the most appropriate way.

At Lake Street Advisors, we already practice highly-personalized wealth management for our clients. Today’s technological climate offers broad investment capabilities that consider your financial and life situations, and short- and long-term goals, and narrow them into even more precise directives to meet your needs through customized investment strategies.

Financial advice today goes far beyond asset allocation. Investors expect customized and holistic financial planning that utilizes mechanized advice, such as robo advisors, comprehensive models based on personal situations and needs, and deep consideration of the future. It is safe to say these practices are already being executed within the wealth management industry, even without the DoL’s fiduciary rule yet in place.

When are Robo Advisors an Effective Option for Investors?

Posted by Joseph W. Chase, CFA®

The Benefits and Drawbacks of Utilizing a Robo Advisor for Your Wealth Management Strategy

Choosing a financial advisor is an important and often difficult decision. Certain situations call for certain solutions; however, in today’s financial landscape there are more options than ever, including robo advisors. We dug into the robo advisor trend to explore the benefits and drawbacks of this investment option.

What Are Robo Advisors and Where Are They Offered?

Robo advisors are online portfolio management tools that allocate client capital to a diversified mix of exchange traded funds (ETFs). ETFs are typically low cost index tracking vehicles that trade throughout the day on exchanges, much like a stock. Some ETFs invest in stocks, some invest in bonds, and others hold alternative assets such as commodities or real estate. Robo advisors determine the right mix of stocks, bonds–and, in some cases, alternatives–for their clients’ portfolios based on their risk tolerance and time horizon, which is often determined by an initial survey conducted when opening an account.

There are several robo advisors in the market today. Betterment and Wealthfront are two of the leaders, with others such as WiseBanyan and Personal Capital also growing their assets under management. Fidelity and Schwab, well-known as low-cost online brokerages, have also recently begun offering robo advisor solutions.

While robo advisors are a relatively new solution to wealth management, the conceptual framework has existed for decades. Vanguard and other fund families have offered balanced mutual funds, which provide a similarly diversified mix of stocks and bonds, with varying levels of risk and expected return to match the preferences of the client.

These solutions can be effective for some investors, particularly young professionals with smaller portfolios, who are looking for a solution that will require less maintenance and allow them to focus on their career rather than managing their investment portfolio. However, there are some drawbacks to this solution as well.

As the Name Implies, Robo Advisors Lack the Human Element

While some robo advisors offer the ability to discuss your portfolio with an actual human, they do not typically have a physical office available for customers to visit or a team of experienced experts that are available to discuss the portfolio. This solution works for some investors, especially during strong bull markets, but it is much more difficult to stay invested and maintain, or add to, your portfolio during difficult markets.

Having a trusted advisor help you through difficult markets can mean the difference between a successful long term outcome and a discouraging experience. When establishing risk profiles for accounts, robo advisors ask questions like “The global stock market is often volatile. If your entire investment portfolio lost 10 percent of its value in a month during a market decline, what would you do?” When establishing an account, it can be tempting to say that you would buy more, as we are all taught to buy low and sell high. In reality, it can be difficult to execute this strategy without the guidance of a trusted advisor.

Robo Advisors Don’t Offer Active Management Strategies

Robo advisors typically invest solely in passive index ETFs, which have the benefit of low costs and performance that is consistently aligned with the overall market. This approach tends to work well for many segments of the market, but it can also mean that investors are missing out on alpha generation opportunities in less efficient markets, such as small cap international equities. At Lake Street, we believe a mix of active and passive strategies results in the optimal risk/return profile for investment portfolios.

A Robo Advisor is Unable to Oversee Your Entire Portfolio

Many investors who use robo advisors also have savings invested in 401(k)s or other employer-sponsored plans. Having an advisor oversee and understand the entire picture can improve returns and reduce risk by ensuring the proper overall diversification and allocation.

You Don’t Get the Benefit of Financial Planning Services

Having an advisor that can oversee your investment portfolio, tax situation, and estate plan can add significant value. When all components of a family’s financial picture are managed in a coordinated manner, investors benefit from a cohesive strategy. Using a robo advisor for your wealth management doesn’t provide that type of holistic financial planning.

A Robo Advisor Won’t Take Advantage of Additional Asset Classes

While some robo advisors offer alternative asset exposure through commodities and real estate, there are no options to include potentially higher-returning asset classes such as private equity and venture capital. While not available to all investors due to portfolio size and liquidity constraints, these asset classes have historically outperformed traditional asset classes (as measured by Cambridge Associates US Private Equity Index against S&P 500, MSCI AC World, Bloomberg Barclays Aggregate Bond Index, Wilshire REIT, Bloomberg Commodity Index and HFRI Equity Hedge over the 20 year period ending 12/31/2016) and can add a meaningful benefit to a portfolio.

Robo advisors are an easy-to-use and low-cost tool that are a great solution for many investors. However, there are limitations and drawbacks that should be considered before choosing to use a robo advisor rather than a team of trusted experts.

The Repeatable Investment Approach of Robo-Advisors

Posted by Emmett Maguire III, CFA®

Rules-Based Decision Making and What Wealth Advisors Can Learn from Robo-Advisory Solutions

A lot is being made of robo-advisors these days. Custodians and brokerage firms like Charles Schwab, TD Ameritrade, JPMorgan, and Goldman Sachs have joined the likes of Betterment and Wealthfront in offering low-cost, automated solutions to rebalancing and tax loss harvesting. The growth in robo-advisory solutions and the AUM in them is impressive and makes sense–as the millennial demographic enters the wealth accumulation phase of their careers and lives, their familiarity with and preference for technology-based solutions points to this trend continuing.

For advisors, the ability to leverage these tools to automate transactions and processes will lend scale and efficiency to their investment management operations.

Following the Investment Algorithm

One common thread among robo-advising solutions is the usage of rules-based decision making, or algorithms in computer science terms. An algorithm is a process or set of rules to be followed in calculations or other problem-solving operations. So, given a certain level of risk tolerance, robo-advisors set an asset allocation, rebalance over time to the asset class targets determined in the previous step, and harvest tax losses–all based on a set of pre-determined rules and inputs. They all have simple, highly-repeatable investment processes. And a repeatable process is exactly what you want from your investment manager.

This approach may sound perfectly reasonable at face value, but it begs the question as to why. The answer lies in the field of behavioral science where decades of research into probabilistic reasoning have exposed the extent to which people routinely base their forecasts and judgements on flawed rules of thumb as opposed to careful examination of evidence. In other words, everyone’s brains are subject to what are now commonly referred to as cognitive biases. What a repeatable investment process helps to do is “de-bias” some of these flaws and improve the accuracy of judgements and forecasts, sharpening one’s decision making.

Overcoming Cognitive Bias in Real Life

Long before receiving the Nobel Prize in Economics, Daniel Kahneman was a psychology officer in the Israeli Defense Force, where some might argue he made his first big discovery. In this role, he and his team were charged with the task of predicting those soldiers who would make the best officers in the Defense Force, as well as which recruits were best suited to the different branches of the military. After tracking the intuitive predictions of himself and his team, he found them to be worthless, so he tried something different.

Kahneman went on to create a “personality test,” listing the traits to be evaluated, with specific questions to ask for each trait, and a predetermined system for rating each characteristic one at a time. He made his best attempt to create an algorithm; a structured process for forecasting a future outcome. The results of this approach? Despite the strong distaste from those doing the interviewing, the predicted likelihood of success in any branch of the military was increased. In fact, this approach has proven so successful that the Israeli military continues to use it today, with only minor adjustments1.

Additionally, these results, where algorithms (rules-based decisions) outperform raw human intuition and judgement, have been replicated many times over in a variety of fields. Studies have shown that more structured approaches outperform in hiring employees2 for your business, for example. In fact, research on this phenomenon goes all the way back to the 1950s, where Paul Meehl’s book Clinical versus Statistical Prediction showed 20 cases of algorithms outperforming unaided expert human judgement.

Combining the Strengths of Human and Algorithm

By building and adhering to a repeatable investment process, an advisor, robo or human, will produce better results with higher consistency over the long term. This does not mean that robo-advisors and rigid algorithms are a silver bullet solution to investment management problems. Understanding and measuring causal factors, finding historical data, and assessing how well the current state of the world resembles the past are still the job of human advisors and investment managers. The lesson is to take one’s accumulated expertise and ensure that it is systematically applied in a uniform way over time.

So while the future of robo-advisors and their impact on the industry continues to be a popular topic in the financial media, the underappreciated aspect of their approach is the integration of highly repeatable processes. Traditional human advisors would be well-served to apply these lessons throughout more segments of their investment efforts. Combining the strengths of both human and algorithm is the way ahead for forward-thinking advisors.

Here at Lake Street, we continue to emphasize investing client capital according to a continuously improving, repeatable investment process grounded in evidence-based decision making. This involves a bias toward cost and tax efficient rules-based passive allocations, a continuous search for highly process-oriented active managers in markets with clear opportunities for attractive returns, and systematic portfolio rebalancing/loss harvesting. For more on our approach, visit us at or contact us directly.




1. According to Reuven Gal’s comments in The Undoing Project by Michael Lewis, the Israeli military tried to change the system once but it turned out to be worse, so it was changed back.