Earlier this year, I wrote a column about strategies that are overhyped to consumers. I got some great feedback and ended up writing two additional columns on the same theme. Consumers aren’t the only ones that receive overhyped pitches. We financial planners get them too. So this month, I thought I’d talk about a couple of items I think are overhyped.

For these purposes, my definition of “overhyped” is something that gets a lot of attention but probably doesn’t have as big a positive impact as is touted, is likely to have a negative impact, or for which there are very few advisors who can or will attempt to execute the strategy or use the product. 

Services To Match Clients With Advisors

Almost every day I get hit up by outfits that offer to pair me with clients looking for an advisor. I’m sure these have worked for some advisors but I have yet to see any that haven’t been blasted on the message boards of the associations I belong to as a waste of time and money. The issues are consistent and center around when and how much the advisor pays.

For the programs that charge for doing little more than giving prospective clients an advisor’s contact information and advisors a prospective client’s contact information, the value is low and the services can’t get advisors to pay a whole lot. They must make money through volume and the quality tends to be poor.

I’ve seen a few over the years that charged once a meeting with a prospective client was held and to save the advisor time, they will set the meeting up for you. This costs more and sounds a little better but the operation was still volume based. The schedulers clearly go out of their way to book meetings and the quality suffers accordingly. There were many complaints of no-shows and advisors would have meetings with people that were not good fits for their practice. 

The varieties that rely on high volume also tend to give the client’s information to multiple advisors. This means if you do not have the time and skill set, or personnel with the time and skill set, to “work the leads” that are now being hit up by multiple advisors, you are likely to just end up paying for leads that aren’t a good fit. Add the low-quality matches with the high cost of marketing and these outfits do not last long.

The latest twist is groups that you only pay if the prospective client becomes an actual client. They are legally structured as solicitors and gear their operation to drill down to assure good fits. As you would expect the fee for this effort is appropriately higher than other flavors. Nonetheless, we are passing.

The going rate seems to hover around 20-25% of your fees. You may think that’s great. They do all the advertising and a lot of work up front to assure a good fit. Shouldn’t they get a significant fee for that? Yes, they should.

Our problem with the arrangement is the same one we have with the referral programs from the retail side of our custodians—they want fees in perpetuity. Once we sign on a new client, we do all the work. The client is our responsibility and we are fairly compensated for that role. We neither need nor want a solicitor involved.

Beyond that philosophical issue, the perpetual fee is unattractive for another significant reason. For years, the benchmarking studies have shown that many firms have profit margins below 25%. If your firm doesn’t have a 25%+ profit margin, it is losing money on these deals. Even if margins are higher, paying a 20-25% cut severely undermines the profitability and valuation of the organization

All these services tend to rely heavily on online marketing and social media. True, people are gathering information differently now than 10 years ago but for our clientele, at this point, they don’t select advisors like this. They are still overwhelmingly relying on word of mouth from friends, family and other professional advisors and then researching behind the scenes on their own.

So far, we find matchmaking services to be crowded, distracting from our core operations, and expensive in hard dollars or labor. We believe we are better off letting our work do most of the talking and maintaining good relationships with our clients and centers of influence.

Financial Planning Software

Clearly, my issue with financial planning software isn’t that few advisors will use it. In fact, we use it every day and with every client at various points in the relationship. What is my beef? Financial planning software is often misused and in many cases, it is simply not necessary for me to give good financial planning advice.

What do I mean by misused? A potential client has printouts of some beautiful charts and access to an online dashboard. Data has been collected, entered into the software to produce a plan, and products are sold based on the output. Yet, the client does not feel their financial affairs are in order and we can see plenty of gaps in their finances.

The problem is that the “plan,” whether obtained through some sort of an advisor or done themselves, is simply an exercise in using software to justify the investment selections. The client feels uneasy because there’s a lot more to their finances than portfolio structure.

Many times, financial planning software is not necessary to give good advice. I don’t need it to tell a 50-year-old client that has no savings and can only save $200 per month that they need to save more. Giving them a savings number they can’t reach isn’t helpful. What they need is more granular. They need to implement tactics to increase their savings. Right now, planning software isn’t very good at that.

I also don’t need a Monte Carlo simulation (MCS) to tell me that the 65-year-old new retiree with $2 million dollars and a withdrawal need of $80,000 a year is in pretty good shape if they have a decent portfolio and don’t do anything stupid. That’s been studied to death. What they need is help identifying ways to mitigate the risk of potential shocks to their cash flow like dumping too much into a second home, helping a kid get out of a bad marriage or taking care of a special-needs grandchild.

We find far greater analytic value from specialized software packages than financial planning software.

For instance, one of the workhorses in our practice is the professional tax software. We can produce mock tax returns and the precision that comes with that makes our tax planning very valuable.

The biggest thing that is needed to give good advice that the software is completely incapable of doing is caring about the client. Planners must take the time to get to know the client, and well, if they are going to give good meaningful advice. If it were just about sound mathematics, people wouldn’t have financial stresses. But, because they are human, they don’t necessarily behave as the math suggests.

These behavioral issues are the factor that causes us to use financial planning software more than anything else. Software can really help us paint a picture of how a client’s finances can work. We see clients getting value from interactive tools used in collaboration with us to assess trade offs and what ifs. Love that.

Some of the other aspects though don’t do much for me. Do clients really need to have their Monte Carlo Simulation updated daily? The theory behind this is that when the market takes a tumble, the client will see that their success rate hasn’t declined as much as they thought and be less prone to panic. That may be true for some, but we didn’t see an updated MCS result stem anxiety much in 2008/2009 because it still showed the numbers going in the wrong direction. The software didn’t keep my clients from panicking in the great recession, I did, and I suspect most planners reading this can say the same.

Nonetheless, I see great potential for software generally but particularly with respect to behavioral issues. It is the most interesting frontier for technology to me because I think it can help me help my clients. I’m also keenly interested in using AI and data analytics to draw insights from my client base and other technology to improve efficiency.

As I said, we are regular users of our financial planning software but to give good advice, much of the time, we don’t need it. For many cases, I can outline the basic actions needed on a napkin. Planning is strategic after all. Financial planning is supported by technology but it is driven by wisdom, born from expertise and experience. Let’s not elevate software to a seat of higher importance than that of a qualified, caring professional doing real financial planning.

Dan Moisand, CFP, has been featured as one of America’s top independent financial advisors by Financial Planning, Financial Advisor, Investment Advisor, Investment News, Journal of Financial Planning, Accounting Today, Research, Wealth Manager, and Worth magazines. He practices in Melbourne, Fla. You can reach him at [email protected].