"The speed of disruption will be brutal. Probably 40% of global enterprises won't exist 10 years from now. Probably half the major players in high tech won't exist in a meaningful way in 10 years."
— John Chambers, CEO of Cisco, on CNBC
Mr. Chambers calmly made these comments while being
interviewed by the folks at CNBC early on tax day. Their discussion about how technology is creating massive disruptions in every industry and business highlighted a concern that has been keeping me up at night for months. Why? Because the digitization effect Mr. Chambers talked about has passed the tipping point in our industry recently with a flurry of important developments:
• eMoney
acquired by Fidelity for a rumored $200 million plus
• LearnVest
acquired by Northwestern Mutual for a rumored $250 million
• Schwab launching a
robo-adviser with no fee (and rumored to already have surpassed several billion in assets)
• Vanguard releasing its version of a bionic adviser for
30 basis points (with over $17 billion in reported assets as it exited the beta version)
• Envestnet acquiring both
Upside and
Finance Logix
• John Hancock acquiring Guide Financial (planning technology)
• Several robos close more funding at nosebleed valuations
All of this, and we are not even halfway through the year! Something big is going on and every one of us needs to be paying attention because we are on the steep part of the S curve. We have to brace for change at warp speed and prepare for what's coming.
THE DISRUPTION CYCLE
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Industry disruptions follow a fairly predictable pattern that's visually represented by the S curve chart above. In the beginning, there is disruption that is not widely understood, or viewed as a threat. Typically, it starts working with clients nobody wants and pricing that makes little sense. Then, as we pass the tipping point, the industry revolutionizes and there is expansive adoption and disruption. Finally, there's market saturation and a changed industry.
Think about Uber and Lyft and the taxi industry. You'd probably never heard of those services two years ago; this year New York City taxi medallion values have plummeted 20% thanks to all of us using these services. Is there any doubt taxi values will keep dropping and that the world has changed and is never reverting back to the old world for existing taxi firms?
What will life look like at the top of the “S” for financial advisers? Investment fees as low as 0.3% (plus a small amount for underlying investments) and an additional 0.3% for financial life guidance and planning. Some people will be paying as little as 0.6% annually for a human adviser investing and providing financial life guidance, all delivered in an interactive, dynamic and engaging client experience. Robo-only advisers are already available at 15 basis points. Most every thriving firm will need to become a
bionic advisory firm (people powered by technology) to survive.
The challenge for all of us is that technology and cheap capital are making the S curve evolve quicker than ever. How long the shift takes is anyone's guess. I suspect client age will drive adoption; the older your average client, the more delayed the affect.
CANARIES IN THE COAL MINE
So how will you know when the change has come home to roost? Here are some early warning signs:
• Clients leave you to take care of investing by themselves.
• Clients ask you about the fees they pay and how they can reduce them, perhaps even showing you what they can pay with a lower-cost alternative.
• Clients ask you subtly what you think about one of the lower-priced, more self-directed alternatives (maybe by mentioning the ever-present commercials).
• You see unusually large account transfers. Loyal clients won't fire you, they will probably start by reducing their allocation to you and testing alternatives.
• Your practice struggles to attract clients under 50.
Many advisers think a market decline will kill the trend to digitization. I suspect that regardless of market action, pricing compression and an interactive, scalable client experience will be an unavoidable part of the future. Unfortunately, most independent advisory practices haven't digitized their work-streams with clients and therefore have little scale within their firm. It is why we spend millions of dollars annually on technology and evolving the client experience. I don't think we have a choice.
THE DIGITAL GENERATION
We are the only generation in which children show their elders how to engage with the world. We showed our parents how to use texting and email — our kids show us how to use social media. We independent advisers need to evolve the financial guidance we provide, as well as how we deliver it, to remain relevant with all clients. Digitization of our industry is not a choice. What is a choice is whether you are empowered by it or you are consumed by it. Get ready for the sweep up the S curve!
Joe Duran is chief executive of United Capital. Follow him @DuranMoney.
