An advisor should always seek discretion over a client’s account, says Chris White, a Boston-based wealth management advisor and investment strategist and author of “Working with the Emotional Investor.”
“If the client refuses to do that, then the advisor needs to propose an investment program for their approval and request that they act on it within a specific timeframe so it doesn’t sit on some client’s desk and gather dust,” says White. With full discretion, advisors can create structural solutions to client inertia.
Structural solutions to client inertia that set default courses of action already exist. Automatic enrollment and automatic escalation have become commonplace features of retirement plans. Several states have also recently explored enacting voluntary or mandatory retirement savings programs for residents who cannot access a workplace plan. Many investment products, applications and services automate rebalancing.
Structural solutions take advantage of participant’s status quo bias—once a decision is made for then, they’re highly unlikely to opt out. Advisors can take advantage of these tendencies by automating clients’ plans.
A robo-advisor can both exacerbate and alleviate client inertia, Lottridge says. While roboadvisors do successfully segment emotional decision making from investment allocations, they do not provide users with sufficient behavioral backstops.
“On the robo-advisor side of the world, it’s going to be interesting to see what happens when the markets are really bad,” says Lottridge. “It’s good that people have options that allow them to start investing early and regularly, but human behavior has so much impact on the return you see from the market, I’m not sure that robos are going to be capable of managing that.”
In recent years, many firms have created hybrid robo-advisors that are backed by an advisor, a firm or call centers of financial planners to help keep clients invested during volatile markets and progressing towards their financial goals.
Human advisors, on the other hand, can follow up regularly with clients to make sure they’re taking appropriate action.
“Most advisors have a great tool for spurring their clients to take action: quarterly and annual meetings,” says White. “[Counselors] should have built enough of a bridge between the client and themselves to automate saving, escalate saving, invest and build wealth. Otherwise you’re in a wasting situation. Technology makes most of this possible, but it can’t really create that relationship.”
As more individuals interact with their finances via passive and/or technologically driven means, they may also become alienated from their financial lives.