Embrace change — or be its victim

Financial advisers, beware. Change — probably change of the gut-churning, soul- searing variety — is coming. The question that all advisers — in fact, every company associated with the advice business — should be asking is whether they are going to be agents of that change or victims of it.

Apple Inc. totally upended the music industry when it launched the iPod and iTunes. The company, once dismissed as a failure, then unleashed the same havoc on the mobile-phone industry a few years later with the release of its now-ubiquitous iPhone.

Facebook Inc., Netflix Inc. and Wal-Mart Stores Inc. are other examples of companies that have forced each and every one of their competitors (if they had them in the first place) either to embrace change or perish. The list of disruptors goes on and on.

If nothing else, InvestmentNews reporter Andrew Osterland’s Page 1 article in this week’s issue, “Digital disruption,” highlights the fact that the financial advice industry is on the cusp of similar turmoil. The article shines a spotlight on companies and individuals who are determined not to be swamped by a sea change in how financial advice is delivered and consumed.

It may seem like this change is slow-moving and far off, and it may be. Nobody can say for sure exactly when that disruption will come or what it will look like when it does. But rest assured, it is coming.

Advisers and planners of all stripes must keep a close eye on industry developments and the innovative ways in which people are finding new clients, managing their businesses and providing financial advice. That means being open to new ways of doing business and constantly challenging the assumptions that helped make them successful in the first place.

One of the assumptions that will be tested: There is no way to provide unbiased, high-quality financial advice to the middle class and still earn a living, so there’s no need even to try.

Because of that assumption, the vast majority of middle-income Americans are underserved, if not completely ignored, by financial advisers. Indeed, most advisers will not work with — or more accurately, cannot afford to work with — investors with less than $250,000 in investible assets.

As a result, baby boomers earning between $30,000 and $75,000 a year are woefully unprepared for retirement or any other financial challenge that comes their way.

In 2012, the Insured Retirement Institute reported that only 45% of middle-income boomers had determined how much money they would need to save for a decent retirement. Meanwhile, 60% believe their security in retirement will be the same or worse than that of their parents.

This chasm between middle-income Americans’ need for high-quality financial advice and the ability of advisers to provide that advice at a profit paves the way for “disruptive innovation.”

This is a term coined by Harvard Business School professor Clayton M. Christensen in the mid-1990s to describe an innovation that reshapes an existing market or establishes an entirely new one. Often, a disruptive innovation is technological and presents itself to the lower end of the market before quickly — and ruthlessly — moving upmarket and disrupting larger, more established players.

So who will the disruptive innovators in financial advice be?

Will it be Ric Edelman, who, through his mass-market initiative, Edelman Online, hopes to appeal to households with as little as $5,000 to invest? Will it be Wal-Mart and American Express, which last fall launched Bluebird, an alternative to debit and checking accounts designed to help consumers better manage and control their everyday finances?

Will it be Google Inc., which quietly entered the online financial advice business in 2011 with the launch of Google Advisor? Right now, users can merely compare the rates and features of credit cards. But what’s to keep the aggressive innovator from building out that platform with more-robust offerings, including advice?

Or will it be you?