Our Perspective on a Market Correction and the Emergence of the “Robo” Financial Advisor Service Model

Our Perspective on a Market Correction and the Emergence of the “Robo” Financial Advisor Service Model

Given the pedagogical origins of our firm, as our Managing Principal taught at both West Point and the University of Texas-Austin, we enjoy educating our community in the areas of financial planning and investments. We are monitoring and watching indicators climbing to new highs this year, volatility picking up, and technological advances challenging the financial planning industry and individual investors alike. We will first address our perspective on the inevitable (if not ongoing) market correction as a natural follow-on from our May prognostication piece, and then provide our insights on the emergence of “robo-advisors,” (automated asset allocation tool advancements).

Don’t Fear the Correction

At of the end of June, the Standard & Poor’s 500 index completed 32 full months without a correction of 10% or more. Some may be surprised to learn that we are living in a remarkably long bull market for U.S. stocks; the average time span without a full-blown correction is just 18 months.

Today, as the S&P moves near the 2,000 level, and the small cap Russell 2000 and the NASDAQ index have both reached record highs, it may be a good time to prepare for a correction. It may take the market down 10% or, worse, reach the technical definition of a full market correction, which is a downward move of 20% or more.

It helps to recognize that every market has pullbacks, and that these are a normal part of stock market behavior. Since the Great Recession lows in March 2009, the S&P index has experienced nine different corrections, ranging in magnitude from 6% to more than 21% (prior to the aforementioned 32 months). Note also that diversified portfolios will not likely experience the same aggregate downward move, as asset classes don’t generally correlate.

Second, we believe that these pullbacks are nearly always unpredictable. Knowing there will be a pullback doesn’t tell us when the correction will occur. If we take money out of the market today, on the certainty that a pullback is coming, we believe one is just as likely to miss another year or two of upward movements, as they are to sidestep an immediate downturn. Furthermore, we won’t know how long the downturn will last. Add in trading costs and taxes, and the decision to guess when to step out of the market, and back in, is not likely to add value in the long run.

Third, recognize now that the next unpredictable correction may appear obvious in hindsight. You’ll likely hear reports of people who confidently predicted that a downturn was imminent. In fact, it’s more likely that the financial press was quoting the same few people over and over again. Look a bit more deeply than the sensationalism of these reports and you’ll likely find that this small number of market prognosticators had been calling for a correction repeatedly for years. They were bound to be right at some point.

Finally, realize that inaction is actually taking strong and unusual action. People who simply kept their money in stocks during each of the market downturns have observed indices reach new highs once the correction has run its course. Strong long-term investors benefit from the incremental daily, weekly, monthly efforts of millions of workers who come into the offices, factories and warehouses and build the value of their companies.

Financial Advisor Service Models and the Emergence of the “Robo-Advisor”

The advancement of the “robo-advisor” is the financial planning world’s version of what TurboTax has accomplished for the tax industry. From our perspective, automated financial advisors are an appropriate solution for basic asset allocation advice alone. One way to think of this technology is with a physician’s analogy. Robo-advisors enable some clients to perform a limited self-diagnosis and then proceed with a packaged protocol. For some, this is adequate, however, for others, it is like asking a layperson to perform surgery on oneself or to self-select their needed medication.

In fact, a well-respected academic, Meir Statman of Santa Clara University, refers to advanced wealth managers as “financial physicians.” You don’t go to a doctor simply to get medicine. You go first to get an expert and accurate diagnosis, and then you receive appropriate treatment. The primary value-add of financial planners is first helping clients to diagnose, and then to craft customized solutions to meet their financial challenges. As our clients have experienced, it often involves a rigorous 6 to 18-month process requiring considerable commitment from client and planner alike. Applying a professional financial planner’s expertise and judgment to the otherwise private lives of individuals and families can be emotionally challenging as well. It forces clients to make many personal decisions that might otherwise be deferred or ignored. We often tell clients that one of our roles is to ensure that inertia or avoidance does not decide critical matters for them.

What the robo-advisors do well, however, is provide technology. Wealth managers will be wise to keep up. The robo-advisors excel in overall website experience, account aggregation, and real-time access anytime, anywhere. Stodgy, out-dated-before-even-delivered traditional reports will not suffice for long.

As you know, technology has been and will be an area of focus for us as we blend what we believe is the best of both worlds. Bringing together knowledge, accountability, complex financial planning and communication with state-of-the-art technology and security will provide an optimal client experience. We welcome your suggestions as you are able to see your “all-in” picture near real-time now in our planning tool. (www.pauleyfinancial.com/clients).

We look forward to keeping in touch with you via a number of different means (newsletters, quarterly reports, speaking engagements, conference calls, and, of course, in-person meetings). All the best to you and yours for an enjoyable finish to your summer.