Kodak went bankrupt because another company created the digital camera while Kodak stubbornly stuck to its film, paper and chemical businesses, right? Nope. Kodak actually invented the digital camera in 1975 and didn’t realize the potential until it was too late. Were you aware that in 2000 the founder of Netflix approached the CEO of Blockbuster with a partnership proposal? Blockbuster passed. “Victims” of digital disruptions? No. They ignored the signals and failed to adapt. Why should you care? Because disruptions are happening right now in our industry that many may be underestimating.
Disruption #1: Technology
“The technological singularity is an occurrence beyond which events may become unpredictable, unfavorable or even unfathomable.”
—Wikipedia
Technology has the power to disrupt an industry to the point where the old model becomes obsolete—or so unprofitable that the business is no longer viable. No industry is immune.
Powerful financial technologies give advisors the potential to be more effective and efficient. However, low adoption, low utilization and low success rates plague even the most powerful and easy-to-use financial technology.
Right now, “robo-advisors” are primarily digital money managers or TAMPs. As the machines increase their capability, and as user interfaces get friendlier, machines may soon do sophisticated financial planning and give advice without a human interface.
Naïve advisors discount machines as legitimate competitors even though machines are as dumb right now as they are ever going to be. Advisors who try to hang on to skills that machines can do better will likely fail. Technology is much better at the “hard skills” of crunching numbers, aggregating data, automating follow-up, portfolio construction and management, creating reports, etc. Smart human advisors will not compete with the machines.
Disruption #2: Competition
“I have been up against tough competition all my life. I wouldn’t know how to get along without it.”
—Walt Disney
It used to be that once you had a client, chances were that you would keep him or her for life. Competition was not a significant concern because your products, services and pricing were similar to everyone else’s. Even if you didn’t do much more than put your clients’ money in a “set it and forget it” asset allocation, you could collect 1% or more every quarter.
Today, your clients have access to all of the financial information that exists online and the competition for financial planning, wealth management and insurance advice is strong.
How cheap will it get? At the recent Inside ETFs Conference, the CEO of ETF.com, Matt Hougan, displayed his globally diversified, tax-efficient, easy-to-sleep-at-night, set-it-and-forget-it portfolio. Total cost: 8 basis points. Vanguard Personal Advisor Services claims: “We reinvented personal financial advice to help you earn more over time and pay less when you partner with a Vanguard advisor.
“Step One: Get to know you, your goals, and your unique financial situation.
“Step Two: Partner with you to create a custom-tailored financial plan.
“Step Three: Put your plan into action and manage your portfolio, allowing you to be as involved as you want to be.
“Step Four: Work with you to keep track of your plan’s progress.
“Step Five: Rebalance your portfolio as necessary and partner with you to revise your plan when important changes in your life occur.”
Sound familiar? Thirty basis points. Vanguard CEO Bill McNabb reassures advisors that his company isn’t competing with them because Vanguard focuses on the mass market. What do you think? Have you heard Vanguard describe the client it turns away? The minimum is $50,000. What’s the max?
Disruption #3: Client Longevity
“What I’m after is not living to 1,000. I’m after letting people avoid death for as long as they want to.”
—Aubrey de Grey
Most clients would like to have enough money to maintain their lifestyle forever and pass on the remainder to their heirs or charity, right? An important question for them: “How long do you think you’ll live?”
The clients pull a somewhat random number out of the air and the advisor creates a financial plan for them that will almost certainly fail—because the fundamental assumptions underlying these plans are likely to be incorrect. What happens if your plan covers the client up to age 95 and the client lives 10, 20 or 30 more years?
Impossible? Not according to the experts working to extend the length and quality of human life. The Methuselah Foundation says, “By advancing tissue engineering and regenerative medicine, we want to create a world where 90-year-olds can be as healthy as 50-year-olds—by 2030.” Ninety is the new 50? Cool.
Will longevity disrupt our assumptions about generational wealth transfer? The baby boomers and the older Gen Xers will likely control most of the money for much longer than expected. Younger Gen Xers and millennials are going to have to make their money the old-fashioned way: earn it.