Morningstar Magazine - April/May 2018 - 7

Letter From the Editor

Hard to Be Human

Jerry Kerns

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@jerrykerns

Earlier this year, Vanguard CEO Tim Buckley
told a conference of financial advisors
that Vanguard had found that advisors spend 40%
of their time being a portfolio manager. That's
a valuable task, Buckley told Inside ETFs attendees,
but robo-advisors, and Vanguard itself, can
easily do the same job with code at a fraction of
the cost. "You're not going to get paid for it
anymore," he said. "It is truly commoditized."
How should advisors respond? By focusing their
time on "uniquely human tasks," Buckley
said. "Think about how difficult it is to code
behavioral coaching."
True. It's difficult for a computer to do behavioral
coaching. But it's also true that it's difficult
for humans to do it-at least successfully. We've
been warning against behavioral bias for
decades, yet investors still buy high and sell low.
Still, like Buckley, we believe coaching is
where advisors can best spend their time. Those
advisors who do it well will gain an edge
on the future as automation continues to gobble
up the rote tasks many advisors spend
time performing.
In this issue, we give you a blueprint of the human
side of financial planning. The Spotlight articles
are written by members of Morningstar's
behavioral science team, led by Stephen Wendel.
In "Better Than an Algorithm" (Page 31), the
team discusses the challenges advisors are facing
as technology and new regulations are putting
the onus on them to adapt to an automated,
low-fee world. But within the challenges lies
opportunity. "What remains unchanged," the team
writes, "is the psychology of investing. One
of the greatest sources of value an advisor
can provide to clients is to help them navigate the
emotional ups and downs of investing."
The authors show how the best advisors do it.

on the teacher aspect. If you're teaching clients
financial concepts, you're probably doing it
wrong. A lot of research has shown that the effect
of financial education on behavior is minimal.
Any knowledge gained is quickly forgotten. What's
needed, Newcomb argues, is a change of
technique. Advisors should use concepts more
aligned with coaching than with teaching,
and she shows why these are psychologically more
successful in changing investor behavior.
Finally, in "Coaching to Mitigate Panic" (Page 37),
Wendel dives into the financial value of behavioral
coaching for advisors. In a study, Wendel
observes the devastating impact investor panic has
on investors' portfolios. He argues that taking a
behavioral approach to managing clients' emotions
during times of volatility can add 170 to 225 basis
points per year in returns.
As these articles imply, automation is coding
away the easy stuff. Portfolio construction,
rebalancing, and tax efficiency are rules-based
functions that software programs can perform in
seconds. What's left are the hardest tasks-
getting clients to act in their own best interests
during the booms and busts of the market
cycle. This requires advisors to spend more time
with clients, getting to know their families
and dreams, their concerns and fears. In the end,
maybe the machines will allow us to be
more human.

Next, in "Stop Teaching, Start Coaching" (Page 34),
behavioral scientist Sarah Newcomb focuses

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Table of Contents for the Digital Edition of Morningstar Magazine - April/May 2018
