Swift: Let’s talk a little bit about ETFs. Do either of you see a problem with ETFs?

Booth: It’s not so much that there’s a problem, but ETF’s are a different type of mutual fund. Many investors may not understand what or how they’re paying for an ETF. When you buy an open-end mutual fund, you get to go in at the net asset value at the end of the day; that’s the fair price—you go in at what it’s worth. You are not paying a commission or a dealer spread. When you buy an ETF, you are buying it from a dealer, and it shouldn’t come as a shock that the dealer is doing this to make money. You don’t know how much they are making—but you’re paying something for that privilege. If you want to sell your ETF shares and that dealer isn’t making market that day, you are out of luck. The spread may be very wide; they may be charging a lot that day to get out. Whereas if you are getting out of a mutual fund, you will get out at net asset value. What can be better than that?

Potts: Whether you own a mutual fund or an ETF, it’s like owning a house, which should be a long-term investment. Imagine having the price of your house on the garage door. If you kept seeing that price every minute of the day, versus once a day (and even then, that’s still a lot), it can become detrimental to your thinking. If you are not intending to sell, are you really worried about the price of your house? Probably not. I love Warren Buffett’s analogy of the market: Picture the farmer out there working away and doing what farmers do, but some crazy neighbor keeps yelling an offer to buy the farm every day. The wise farmer will just ignore or say no to that crazy guy.

In-House Or Outsourced Money Manangement

Swift: Do you think it’s a good idea for advisors to manage their clients’ money in-house? Or is there something to be said for outsourcing it to professionals who are not emotionally involved with the client?

Potts: I believe most advisors should outsource the non-client facing tasks. There is the cost of establishing all of the advisory services: from establishing portfolios, trading, you have to be your client’s technology officer, you need a staff, a manager that manages that staff, etc. All of those tasks takes advisors away from their clients. That is an opportunity cost that an advisor needs to weigh; if that works for them, then that’s great. But there are a lot of firms, such as Loring Ward, that are happy to help. We exist because of advisors understanding they can leverage our services to better serve their clients. Those are the advisors with whom we look to work. Advisors who manage client’s money in-house may tend to complicate their practices and not spend as much time with their clients as they would ultimately like.

Robo-Advisors: A Real Threat?

Swift: There is a lot of talk about robo-advisors. Will the automated advice model ever really replace the more traditional client-advisory experience?

Booth: At Dimensional, we talk all the time about the technology needed to help financial advisory firms be as efficient as they can be. I think that, long term, the advisor is going to meet less frequently with clients. The idea that you need to sit down quarterly with your client and talk to them, well I think it’s boring to the client. I think the use of technology to aid communication with clients will be a big plus. Advisors will use tech-messaging tools more than in-person meetings. I wouldn’t put that in the area of robo-advisor; I just think it’s doing what they do now, but doing it more efficiently.

Potts: I agree with that. But I worry about a lot of do-it-yourself investors. They are at a disadvantage because they may not understand how to really do things right. One, they may not set up good goals or a viable plan. The value of an advisor is not just setting up the client’s portfolio, but helping clients implement the plan, avoid pitfalls and stay invested when things get bad. Think about doing your taxes. Turbo Tax makes it easy, but I would much rather be sitting in front of a CPA who knows what I might have missed. There will certainly be room for robo-services serving do-it-yourselfers, but anecdotal research suggest that once an investor has a portfolio worth more than $250,000, he or she is likely to turn to a human advisor for guidance. Even with robo-advisors, managing your financial life yourself is hard. And mistakes can have major long-term consequences.