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.
Disruption #4: Your Longevity
“If I knew I was going to live this long I would have taken better care of myself.”
—Mickey Mantle
Recalculate your personal financial plan. Add another 10, 20 or even 30 years to have enough money to maintain your lifestyle forever. What business decisions do you need to make today to bridge the gap?
1. Plan to work longer. This is a great business to operate for a long time, even part time. Is now the time to do what you’ve always known you should do to have the business you really want?
2. Focus on ideal clients. Your best clients are going to live longer and want to maintain their lifestyle forever. Kissing the asses of their kids in order to keep the assets on the books isn’t important. It’s much more important that you have a high-trust relationship with both spouses. Seventy percent of widows leave their advisors within a year of their husbands’ dying. That’s preventable.
3. Elevate your client experience and value promise. Embrace true values- and-goals-based financial planning. Your client needs more than asset management or “financial planning lite.”
4. Harness technology. Machines are better at hard skills and they can help you streamline your operational efficiencies. For about $1,000 per month, you can have all the best technology to acquire and serve ideal clients.
5. Improve your “people skills.” The differentiator from other skilled humans and the ever-improving machines is strong people skills. Ask great questions, listen with empathy, make an emotional connection, build high-trust relationships, counsel individuals and couples to establish well-defined goals, elicit core values and other emotional drivers, inspire the action required to achieve their most important goals and fulfill their most deeply held values, coach clients to stick to the plan during uncertain economic times, and hold clients accountable to do what needs to be done, especially when it’s not comfortable.
If you are young or new to the business, it’s vital that you don’t let limiting beliefs about being less experienced prevent you from going boldly into the future. Be careful about older advisors passing down their limiting beliefs to you. You can build a business with higher-net-worth ideal clients right now.
Disruption #5: Your Business Model
“It is difficult to get a man to understand something when his salary depends upon his not understanding it.” —Upton Sinclair
Upgrade from “Financial Planning Lite”: a little retirement planning, a little college funding, asset allocation and a few insurance sales. Most advisors doing financial planning lite give away the planning, charge about 1% of AUM, earn commissions on alts and insurance sales, and sometimes meet their clients in person. The cornerstone of financial planning lite is placing “investable” assets on a platform that pays the advisor a percentage of those assets “gathered.” For about three decades, this has been advisor nirvana. “If I can just get $100 million of assets under management, I’ll earn $1 million per year … forever. Cruise control!” As though the world would never move off of a 1% of AUM model. It’s moving. The movement is happening in two ways: 1. To a lower percentage. 2. To a fixed dollar fee.
Another challenge to this business model is the decreasing perceived value of investment management and performance. Why?
1.) Much high-quality investment management is being done completely or primarily by machines. Even active managers rely heavily on computer programs to implement their investment strategies. Machines operate more efficiently than humans, so this drives down the costs. The transparency of costs is eliminating the consumer ignorance arbitrage that enabled our industry to add a 1% fee without adding much value.
2.) People care more about achieving their goals than beating the market. If you don’t need to beat the market in order to achieve your goals, how relevant is a benchmark? Do you want to be in the controllable goal-achievement business? Or do you want to be in the predict-the-future/beat-the-market business getting whipsawed by all the factors out of your control that determine performance? Have you noticed that you can do everything “right” and still fail to beat the market? Have you noticed how hard it is to predict the future?
Disruption #6: Client Expectations
“Clients have every right to expect personalized, institutional-quality portfolio management plus financial planning. Financial planning will be the distinguishing feature vis-a-vis online advice firms.”
Chip Roame; Tiburon
Transparency will make it impossible to charge a human price for what a machine can do. The opportunity is for smart, nimble advisors to shift to getting paid for the value of what only the human can do. The machine is better at the technical hard skills. Successful human advisors create an ongoing experience that the client is willing to pay for above and beyond what the machines do. These are the soft, or “people,” skills. In the new world, the soft skills are what generate the hard cash.
As clients’ expectations change, be crystal clear about your value promise
in this new and disrupted world.
The human value is: Planning. Advice. Accountability.
Disruption #7: The DOL Fiduciary Standard
“The real worry is that these new rules and regulations create a risk factor or a timidity that is so severe that ... [businesspeople] sit on the sidelines worrying more about rules and regulations than they do about making money.”
Thomas Donohue, president of the U.S. Chamber of Commerce
Doesn’t the fiduciary standard simply mean that we put our clients’ best interests first? Haven’t we always done that?
Yes, that’s what it means. Many advisors are probably not doing this to the degree that complies with the DOL fiduciary standard (at least in part because the rules aren’t final yet).
More disclosure, more transparency, more paperwork, more supervision, more risk, more expense and more uncertainty have many firms and advisors on the back foot.
Our government believes consumers are being taken advantage of by our industry. They believe that most consumers don’t understand what they’re getting and how much it costs. They believe the solution is absolute transparency, full disclosure and the elimination of conflicts of interest. They don’t like bonuses, contests, rewards, trips or perks of any kind. They view financial services more like a profession rather than a typical salesforce with incentives for hitting sales targets or quotas.
To learn more, check out www.fi360.com or Google “Fiduciary Standard for Financial Advisors.”
Given the magnitude of these disruptions, is this a great time to be a financial advisor? Yes! People need help with their money and the universal principles of success have not changed. If you’re willing to adapt and do the work, you can succeed at whatever level you choose. You can adjust your behavior and your business model to be highly successful in our disrupted world. Somebody’s going to do exactly that. Why not you?
This article is excerpted from the new eBook: How to Thrive in the New World of Robo-Advisors, DOL Fiduciary Standard, and the 5 Other Critical Industry Disruptions. Financial Advisor magazine readers can receive a complimentary copy by e-mailing [email protected]; subject: ebook.
To learn more about how Bill and his team can help you be a more direct and candid communicator who helps clients make better decisions, schedule your Business Accelerator Meeting today. 858-558-3200/www.billbachrach.com