When both the Twitter-sphere and mainstream business media start
blowing up with news of an industry behemoth like Charles Schwab embracing digital advisory services, you know it is not a typical week in adviser-land.
Make no mistake about it. When an industry leader decides to jump headfirst into the disruptive pool and make its own splash by offering its investment services for free, the industry needs to take note and begin planning for a drastically altered landscape.
Ultimately, I believe Schwab's plan will succeed in attracting a lion's share of assets. Because of its size, Schwab is able to offer a “free” solution due to the advantage of harnessing economies of scale. Schwab can sustain a long period as a loss leader by leveraging the underlying ETF product profitability that is being driven by its automated advisory services.
Additionally, if history is any guide, this strategy will lead to the generation of additional revenues by stealing market share from flat-footed competitors – which, by the way, does include us human advisers. Schwab has proven over the years to not care about who they disrupt in their insatiable appetite for asset growth.
(Related read: Robo-advisers say they aren't worried about Schwab's online platform)
The challenge we are facing here is not
a client segmentation issue. Automated investing services most likely will appeal to both the next generation and do-it-yourselfer investors – two segments that typically have not been the sweet spot for advisers. However, what many advisers are missing is that the disruption Schwab is bringing to the industry is not about taking your small and emerging clients – it's all about pricing.
The downward pressure on investment management fees that has been in the works for the last decade will not only continue, but gain momentum. Combine this trend with Schwab's massive marketing budget and strategy to bring more transparency to the investing process in its fight against the wirehouses (including offering money-back guarantees), and it means the light shining on management fees will only continue to get brighter.
(More on automation: 4 ways automation technology is changing investing)
Thus, advisers who charge their clients AUM fees for an offering of primarily garden-variety investment management services need to immediately reassess their business model and determine what other valuable services they can provide. 1 or 2% fees will blaringly stand out and be difficult to justify when stacked up against “free.”
Ultimately, advisers will need to unbundle investment management fees from their overall service offering and charge separately for them at new, lower market rates so that clients and prospects will clearly understand what they are really paying for and why a human adviser warrants a premium fee.
(Related: Advisers need to examine and explain costs of service)
When a technology challenge to existing business models comes along, the forward-looking and wise professionals don't fight the change – they embrace it. I'm actually a strong supporter of this type of change. Investors should and need to understand what they are paying for and what they are receiving. In fact, in my own advisory firm and in my coaching programs we offer to advisers, we are actively building out new services and pricing models, while creating new talking points and communication materials to embrace this change.
Those who choose not to evolve can perhaps take a lesson from the travel agents, booksellers, video store operators, music stores and taxi drivers on how staying with the status quo worked out for them. In the final analysis, I think we human advisers should thank Schwab for helping to force change on the industry. We need to continually up our game and focus on the compelling things we can do to materially improve our clients' lives beyond offerings of commoditized services, while helping to advance one of the most important and rewarding professions.
Deborah Fox is a 30-year financial adviser and CEO and founder of Fox Financial Planning Network. She can be reached by email.
