Technology As The Driver
Many of the changes occurring in the financial services industry have been driven by technology. While automation does threaten some incumbent players in the industry, Kitces said that the impacts of technological change have usually been more “subtle and pervasive” than any displacement that might be caused by things like robo-advisors.
Technology has been commoditizing financial services for decades, said Kitces. Fifty years ago, most advisors were really stock brokers who were paid for arranging trades, but that business model was displaced in the 1970s by discount brokerages who used technology to place orders for investors. Advisors responded by going into the mutual fund distribution business, connecting investors with the most talented and skilled—and the luckiest—stock pickers. Their compensation was mostly in the form of commissions, he said.
“Then the internet showed up, and online providers made a market where you could buy a mutual fund at low cost,” said Kitces. “Technology started offering zero commission funds in a world where every financial advisor was paid entirely by commissions. Technology eventually won that battle as well. We’re 20 years into that cycle and commissions are still ratcheting down—and now mutual funds themselves are ratcheting down.”
Advisors moved from the mutual fund distribution business towards asset allocation. Until recent years, the software that made accurate and tax efficient rebalancing possible was only available to advisors and financial institutions, but roboadvisors have changed that, said Kitces.
“I didn’t view robo-advisors as a disruptive threat,” said Kitces. “They just took rebalancing software and offered it directly to consumers. The only people who want to buy something like that are the same people who want to be responsible for managing their finances themselves.”
Kitces argues that robo-advisors have helped financial planners by introducing technology that makes their jobs easier, especially streamlined onboarding and account opening processes. However, the costs and other barriers to accessing investing and asset allocation services have dropped considerably, requiring advisors to turn to financial planning as their primary value proposition.
Referrals Break Down
Technology is also disrupting financial advisors’ main source of new business: peer-generated referrals.
This is mainly because not as many people are asking family and friends for advice on their finances. Instead, many are turning to the internet, just as they do when they have a health problem or any other issue that needs to be solved, Kitces said.