Is Technology Forcing You Out Of Business?

Tuesday, August 10, 2010 12:46
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Is Technology Forcing You Out Of Business?
This morning when I read the tech article about Financial Engines that Andy posted to the Advisors4Advisors web site, it reminded me of a trip I made in October 1999 to interview Bill Sharpe, the Noble laureate and founder of Financial Engines, and his team just as the web site was going up.

This Website Is For Financial Professionals Only


Financial Engines did not turn out to be what I expected. I wonder if Sharpe expected the result trumpeted in their press release, which says that Financial Engines, “the leading independent provider of investment management and advice to participants in retirement plans,” announced that it has been named the largest RIA in America in the July 2010 issue of Registered Rep.
 
Eleven years ago, I went to the ICFP Master’s Retreat at Squaw Creek, a resort nestled in the valley near Lake Tahoe to participate in the program and to hear Joe Maggioncalda, the 26-year-old president, introduce Financial Engines to the 200 senior planners in attendance.
 
He referred to a cover story in one of the financial planning magazines that featured a caricature of Sharpe riding a big engine, with people falling off the track. The coverline: “Blood on the Tracks: Will Bill Sharpe’s Financial Engines Derail Professional Financial Planning?” He remarked that when he saw it, he thought that this would make his Squaw Creek speech interesting. The advisors in the audience did not laugh at this joke.
 
But Maggioncalda went on to say that the Engines would have a bigger impact on financial services than Amazon had on books. “It will happen in two to five years instead of 25 years,” he said.
 
When I chatted with the senior planners in Lake Tahoe, they didn’t seem overly concerned about the competition from Financial Engines. Their criticisms: the model pretends a precision that is impossible given the uncertainty of the assumptions, it does not use a Monte Carlo simulation for life expectancy, it does not attempt to determine the investor’s risk tolerance, it lacks the human touch, it pretends to be science when investing is art, it’s the ultimate in academic arrogance. Many critics – including Don Phillips at Morningstar – disliked the style-based analysis the model used. (I wrote a separate article for Bloomberg Wealth Manager on methodology.)
 
From Lake Tahoe, I flew to Palo Alto where I spent a day with Sharpe and his team. The group was almost giddy with excitement over the possibilities for their new venture. “We will provide the best advice you can get anywhere, no matter what you pay. Period,” said Christopher Jones, vice president of financial research and strategy for Financial Engines. “It will be some time before a really good full-service financial planner will be out of business. But it would be na├»ve to think financial planning will not be affected in a significant way.”
 
The members of the Engines team were smart – perhaps brilliant – as well as charming and funny. I was mighty impressed with each of them and their model. I did think, though, that the treatment of the payout phase – buying annuities for all participants – gave short shrift to the decisions at that important stage of investing.
 
But back to today’s release. Registered Rep has named Financial Engines the largest RIA in America, with over $25 billion in assets under management in more than 400,000 individual 401 (k) accounts. “We’ve become the largest advisor in the country due to our strict independence and focus on helping the average investor,” Maggioncalda said.
 
So I’m wondering how advisors like all of you have been impacted by the Engines. Have you lost clients? Have you used the web site? Checked it out to see if it’s competitive with your services? I have. Several times. And I have some ideas about where the growth comes from. But I wonder how much it has affected financial advisors in the past 11 years. And what you think about it.

  

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