The rise of automated financial advice—essentially, computer programs that rebalance your accounts—has been a hot topic in the investment industry. Blockchain technology, which could automate many functions now handled by securities exchanges, is another one. Just this morning, a colleague sent me an article about a start-up that looks to make transferring money essentially free, undercutting PayPal, which is already undercutting banks.
Sounds like a revolution on the way.
I have friends investing or working in many such businesses, and I’ve had the chance to sit down with several start-ups looking to do similar things. So I can see both sides of the picture. There are real value propositions here, but in many respects, this trend is neither new nor particularly revolutionary.
Rather, this is just the next step in the ongoing drive toward greater efficiency. Finance can be broken down into three different businesses, which I broadly label as operational, expertise, and trust, each of which offers radically different opportunities for disruption.
Plenty of room for operational disruption
Let’s start with the operational aspects of the business, which are indeed ripe for disruptive disintermediation. PayPal was the first to the punch here, and it succeeded in many ways. Uphold, the company I mentioned earlier, is now attempting to do to PayPal what PayPal did to the banks.
Closer to home, look at Vanguard, which has been getting more efficient and cutting costs for decades. You could argue that this isn't the same as the newer tech-focused companies, but I would disagree. At core, both are making operational improvements that reduce costs to the benefit of users and, of course, the companies’ bottom lines.
Operationally, there are clear and continued opportunities for increased efficiency. But for many companies, operational improvements make their business models harder to justify. If a big part of your value is how efficient you are, then the spread of efficiency erodes your edge. The other two components of the investment business (expertise and trust) may be less susceptible to technology-driven erosion—a fact that points to how companies can continue to add value.
The limitations of robo-advice
Robo-brokers can work very well in a mechanical sense, potentially reducing operational costs. In difficult market environments, though, can they really provide the expertise and trust that a troubled investor needs?
I’m not sure. I do know that the previous iteration of this idea, exemplified by the E*TRADE baby encouraging people to do their own investing, came of age in the dot-com boom and disappeared shortly thereafter, when markets got more challenging. Much of the value added by a real live financial advisor comes from that trusted relationship and the advisor’s ability to coach the client through difficult times.
From an investor perspective, of course, the question is how to get the best of both worlds. From a company perspective, the question is how to best deliver that mix to clients.
This is what we constantly strive for at Commonwealth, and the result, in my opinion, is positive for everyone. We spend a ton of money on exactly the kind of operational improvements that reduce costs and improve efficiency. At the same time, the company and our advisors keep working to maintain our edge in the trust and expertise components. The results, in client surveys and awards, speak for themselves.
Trust and expertise: the most valuable differentiators
As technology continues to evolve, efficiency and low costs will be taken for granted, and companies will have to distinguish themselves on trust and expertise. The companies that stand to benefit most from today's tech trends will be those that can offer all of those things.
It’s also worth considering that many tech-driven companies tend to take root in supportive financial environments but do less well when things get tougher. PayPal, after all, has not replaced banks. Indeed, as an operational enabler, it is susceptible to exactly the same kind of disruption it originally brought to the party. Ultimately, as technology continues to improve, fees will be driven to essentially zero. Value will be in trust and expertise.
I would argue that it has always made sense to choose partners on the basis of trust and expertise, rather than cost. Increasingly, we will be able to take low cost as a given, and that should be good for everyone.