Financial Times They are A-Changin’: Rise of the Robos

Under pressure

Every so often the industry conversation returns to the threat of margin compression; fancy language for the fact that maybe you won’t be able to charge so much in the future.

For Financial Planning businesses, the 1% p.a. fee model has been the bedrock. What if that comes under pressure?

I’ll be honest, I’m torn on this issue. There’s lots of talk about margin compression, but I’m not yet seeing it. It’s still industry chatter, not consumer driven. However, I can see places where that pressure could come from, and I believe it’s something every forward-thinking business owner has to be thinking about periodically.

Rise of the robos

In the US, major and credible industry players like Schwab and Vanguard are building their own direct-to-consumer advice offerings. These approaches are what is termed ‘cyborg advice’, a mix of robo and human adviser.

For now, the full-service Financial Planning model adds more value than these other approaches. Nothing to worry about, right?

I’m not so sure.

Clayton Christensen described the situation we might be facing in his book The Innovator’s Dilemma: When New Technologies Cause Great Firms to Fail, first published in 1997.

“Christensen demonstrates how successful, outstanding companies can do everything ‘right’ and yet still lose their market leadership – or even fail – as new, unexpected competitors rise and take over the market.”

Toyota vs The Big Three

One example of an unexpected success was Toyota entering the US car market in 1957. GM, Ford and Chrysler were the big three car makers. Were Toyota a threat?

Not at all, in the minds of the established players. Toyota made small fuel-efficient vehicles for the Japanese market. The big three made much larger vehicles for the US market where fuel was cheap.

Toyota came in and dominated the small car end of the market, with no resistance from the big three. In fact, it would have been silly for the big three to compete in that space.

However, once Toyota owned the small car space, they could work on competing in the mid-sized vehicle space, which they did. They eventually launched premium brands, like Lexus, and competed there too. In 2008 they became the number one carmaker in the US.

You can see Christensen’s premise at work. It was the ‘right’ decision not to compete with Toyota and their small cars. However, failing to do so gave Toyota their foothold in the market.

Are we missing something?

Are we facing our own innovator’s dilemma in Financial Planning? It makes no sense for us to compete in the low-value spaces, small accounts (robo advisers) or Millennial clients, when the baby boomers still control 85% of the wealth. The at-retirement market is still too tasty.

Yet one can see these other players gaining a foothold. How long before they start to move up the levels, and threaten our cottage industry made up of comparatively  unproductive smaller firms?

Why we need to get better

At the Insiders Forum in San Diego Mark Tibergien, CEO of Pershing, said that “after the last downturn in 2008, we had an imperative to get better operationally and to dramatically increase our productivity”.

Revenue per adviser and revenue per staff might be a couple of those metrics. However, we haven’t generally done that. Some firms have, but many haven’t. He went on to say that, “when the next downturn comes many firms will pay a big price for this.”

Mark believes that high-margin players will get squeezed. Look at funds management as an example; Vanguard is taking something like 75% of new assets, and it’s driven by low cost. Surely there are lessons here for advisers too.

New model advisers

If you’re a business owner you have to be experimenting with new ideas and new business models if you want to position yourself for the future of Financial Planning. That doesn’t mean you have to stop doing what you are currently doing; it’s profitable, high-quality work.

Christensen suggests some things incumbents can do to stay relevant and remain competitive against disruptive technology:

• Develop your own disruptive technology with the ‘right’ customers. Not necessarily your current customer set.
• Place the disruptive technology into an autonomous organisation that can be rewarded with small wins and small customer sets.
• Fail early and often to find the correct disruptive technology.
• Allow the disruption organisation to utilise all of the company’s resources when needed, but careful to make sure the processes and values are not those of the company.

Source: The Innovator’s Dilemma: When New Technologies Cause Great Firms to Fail

Here are some further questions to consider around pricing and productivity:

• What would happen if you couldn’t charge anything like what you currently charge? What if your pricing was forced to halve?
• What does your business need to look like for the next decade? Are you positioned for the next 10 years, rather than the last 30?
• Where could you get much more productive?
• What are the sticking points in your current approach and processes?

Financial times they are a-changing

We have to add more value than we’ve done in the past, and we need to deliver it more efficiently than we’ve done in the past. There are no metrics for the things we do other than investment and, to be honest, I’ve always believed it’s the other things advisers do that add the most value.

You can buy a cheap life insurance policy from Tesco Life. However, if you own it incorrectly,  when you die you’ll give half of it away in government tax. What adds more value: the policy or the advice on how to own it effectively?

Industry expert Mark Tibergien suggests three keys to building the great advice model for the future:

a.) Is it easy to navigate the process?
b.) How does it make the client feel?
c.) Does it generate success for the client?

We’re approaching the most exciting, and yet the most challenging, times in our profession. Good businesses will survive because they are deliberately positioned to do so. Others might not be so lucky.

Watch this space.

Bob Dylan The Times They Are A-Changin’ (1964)

Good businesses will survive because they are deliberately positioned to do so.