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WealthTech Insights #31 with Jerry Michael: Financial Advisors Moving Towards Life Coaching

Within our series of interviews with industry experts, I was happy to talk to Jerry Michael, cofounder of Smartleaf. Smartleaf was created to automate a lot of the mundane aspects of portfolio management, enabling financial advisors to deliver customization and expert tax management, at scale.

Jerry Michael
Cofounder and president at Smartleaf.

Jerry Michael holds BA degrees in mathematics and in computer science. Before launching Smartleaf, he founded Crimson & Brown Associates (which was later acquired by Kaplan Educational Centers, a Post Co. division). Established in 1999, Smartleaf has become a leader in rebalancing and tax-management services.

With Jerry, we discussed how robo-advisory solutions impact the services that financial advisors offer and why robos will never replace human advisors. Jerry also shared some insights into the logic of the rebalancing strategy that Smartleaf provides and explained why calendar-based rebalancing are becoming inefficient.

Advisors will not be paid to do anything that can be automated

Jerry thinks that most financial advisors are not very good at rebalancing portfolios.

“Advisors spend something like a third of their time rebalancing, and most don’t have the resources to do it well.”

Jerry suggests that handing the rebalancing task over to a centralized group within their financial firm, or even outsourcing it, can be a better option for many advisors. Although many people think that centralized rebalancing leads to a cookie-cutter solution, Jerry believes the opposite.

“When people take this approach—when they hand [rebalancing] over to a centralized group—the level of customization in tax management goes way up, not down. And the reason is that, from the perspective of the advisor, the cost of customization tax management goes to zero.”

Advisors should focus on activities that can’t be automated, such as financial coaching, financial planning, life coaching, or designing a customized solution. But services that can be automated—e.g., rebalancing and tax management—should be handed over. Jerry believes that in this way not only will advisors free up a lot of time, but the level of customization will go up.

“We think that’s the larger underlying trend. We think that an advisor won’t be paid to do anything that can be automated. Advisors shouldn’t do whatever a robo-advisor can do just as well.”

As president of Smartleaf, Jerry sees the primary challenge of the industry as reinventing the client experience, not the technology.

“Most reports are still very much centered on performance relative to a benchmark. They’re not really tied to ‘what does this mean for me?’ Many advisors are trying to move towards goals-based investing, but their reporting systems haven’t kept up.”

Cost–benefit score in contrast to calendar-based rebalancing

As an example of how technologies improve the client experience, Jerry shared some insights into the logic used by the company. Smartleaf analyzes each portfolio every day and generates a cost-benefit score that helps determine the system’s suggested trades. Jerry explains:

“Benefits are getting closer to your target asset allocation, your specific securities, holding securities that you rate more highly, [and] tax-loss harvesting. Costs would be commissions, bid–ask spread, taxes, and drift.”

Advisors can use the cost-benefit score as guide to rebalancing. Instead of rebalancing by the calendar–e.g. every quarter–advisors rebalance portfolios when the system’s suggested trades have a cost-benefit score above a predetermined threshold.

“The problem with calendar-based rebalancing is it is both too frequent and not frequent enough. You can miss multiple opportunities if you just rebalance quarterly. On the other hand, some portfolios are fine for seven months without trading.”

By replacing the crude calendar-based rebalancing with this cost–benefit approach, Smartleaf achieves a reduction of the average dispersion by 60% and, at the same time, the reduction of the average tax bill by 60%.

“It’s not one-size-fits-all People will, for example, commonly have different workflows for small accounts, medium accounts, and large accounts. But whatever they come up with, whatever they develop, they’ll apply the same programmatic workflow every single day.”

Robos move financial advisors towards life coaching

Jerry does not believe that robo-advisory solutions may someday replace financial advisors. However, a shift in their role will definitely take place.

“An analogy is [that] tax software, like TurboTax, has not put accountants out of business. If all you were [doing] as an accountant is filling out tax forms, you’re out of business. But what has happened to accountants is they’ve become far closer to business consultants.”

Something similar applies to financial advisors. If everything they do can be done by robo-advisors, financial advisors may lose their business. But those who provide additional services (such as financial planning and financial coaching), they will never be replaced by robos.

“I think [robo-advisors] do open up the market for advice to people who never had advisors in the first place. People who just have less money. They have pointed the way of the possibility of things that can be automated. I don’t think they’ll get rid of advisors. It’s just pushing advisors to stop doing things that machines can do just as well.”

Expected changes in the industry

As one of the biggest changes in the future, Jerry believes that large asset-management firms and mutual fund firms are going to become solution providers.

“They are successfully going to become forms of TAMPs [turnkey asset management programs]. They will offer to manage SMAs [separately managed accounts] as an alternate way of delivering their intellectual capital.”

Their services will be significantly automated, which will enable scaling.

Moreover, customization will become available. And creating a new, customized strategy will cost almost nothing since it will just be a new data file.

“You’ll see a proliferation of very customized micro-strategies. It’s really a form of customization. It will get down to the level where everyone can have their own strategy, possibly customized for risk.”

Jerry is confident that product-oriented value propositions will continue to decline. And as they decline, financial advisors will delegate CIO functions to firms who do that cheaper and better, and the advisors can then provide more customized financial planning and coaching.

 


Interviewed by Vasyl Soloshchuk, CEO and co-owner at INSART, FinTech & Java engineering company. Vasyl is also the author of WealthTech Club, which conducts research into Fortune and Startup Robo-advisor and Wealth Management companies in terms of the technology ecosystem.

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