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Ripe for Disruption: Investment Services

Updated: Mar 13


Do you know a company that is too big to fail? Think again. We have a tendency to believe that the large corporations of today will live on indefinitely, but the fact is that every year giant corporations die. In fact, if you look at the original Fortune 500, fewer than 12% still exist today. That’s an average of seven of the biggest businesses in the world collapsing every year. Still more shocking is the fact that this is occurring at an increasingly rapid rate. At the present pace, about half of the current S&P 500 firms will be replaced in the next 10 years.

In some industries, the signs of impending disruption are hard to ignore. One of these at-risk industries is that of investment services.

The Problem for Investment Services

The investment services world, as well as financial services on the whole, is in a state of rapid change. Underneath the traditional approaches to serve investors there are a plethora of innovative upstarts trying to disrupt this stagnant field. Traditional financial services businesses have some huge challenges to overcome the innovation onslaught. Just a few of the issues include:

Relationships

Investing is a relationships business. The most successful financial advisors are highly skilled at establishing personal relationships and can leverage those relationships to open up doors with new clientele. When an advisor changes firms, most high-value clients are more inclined to stay with their advisor than their firm. As a result, firms compete ruthlessly to bring in established financial advisors, who they then may monitor to ensure that their advisor, and client base, won’t walk away from the firm with valuable assets. This dependency on already successful financial advisors is a huge vulnerability for large brokerages.

To understand why this dynamic exists we have to understand what makes a financial advisor so important. Ultimately, it all comes down to trust. Investing is complicated, and as a potential investor I don’t trust my ability to jump into the market and make the best decisions with my money, so I trust an expert, my advisor. This creates a state of dependency in a similar fashion to the relationship between a doctor and patient. I don’t diagnose my own health issues because I trust a trained professional more than my own knowledge. The moment I come to trust my own experience with a health concern is the moment that I no longer seek out a physician to advise me. Similarly, as soon as I trust my own understanding of investing, I no longer need my financial advisor.

It's Not Really That Complicated

Investing is frustratingly difficult to get into. Options, Margins, Shorting, Mutual Funds, Bonds, ETFs... this is a jargon-loaded and complex field that routinely scares away unseasoned investors. Now take the complexity away, make investing easy, and you have an entirely new industry, and that’s exactly what we are starting to see happening. The company that makes investing accessible to the average everyday American is the one that will take a spot on the Fortune 500 throne from today’s incumbents, ala Netflix displacing Blockbuster.

Consider the examples of Wealthfront, Betterment and others, which are commonly referred to as a “Robo-Advisor.” Wealthfront’s marketing is loaded with terms like “couldn’t be easier,” and they live that messaging in their offering. It’s a minimum-viable product that is simple, clear, well designed, and provides just enough information to the consumer while shielding them from the jargon and complexity that otherwise frightens customers away. Robo-Advisors like Wealthfront haven’t taken over completely just yet for one simple reason: trust.

"Investing is frustratingly difficult to get into... The company that makes investing accessible is the one that will take a spot on the Fortune 500 throne."

The Client of Tomorrow

Perhaps the larger underlying implied threat to financial firms is that the nature of relationships are changing, and will continue to face significant change. The attitudes and behaviors of today’s wealthy are far from those of the affluent of tomorrow. Firms tend to favor clients with greater assets, and many even actively encourage their advisors to drop small accounts in favor of larger accounts that can yield the greatest financial rewards. The problem with this approach is that these large accounts often come from an aging population. The accounts that are deemed less valuable are very likely to include young investors who have yet to accumulate enough wealth to be attractive. These young investors are shuttled off to call center-based advising centers or young unproven advisors who will take what they can get until they grow their own book of business.

The unfortunate consequence of failing to cater to the customer of the future is that these young affluent individuals already have comfort -- even a proclivity for -- non-human, digital interaction. It has even been shown that these younger investors have significantly greater trust in Robo-Advisors than their fleshy counterparts.

The Reality of Regulation

The reality for large financial institutions is that government regulation can be crippling. While determining how to best handle ever-changing oversight, it’s hard for financial institutions to maintain a balanced investment in innovation. Naturally, this exposes these businesses to a threat from smaller innovation-minded startups. That can be a hard reality for leaders in the field, but losing sight of upcoming threats will be a much harder reality.

Failure to Diversify

Perhaps the greatest (and most ironic) failure of large investing firms is a failure to diversify. Take the example of Scottrade; Scottrade once disrupted the investment world with $7 trades, a price point that no other firm had previously been able to offer. When Scottrade grew into a Fortune 500 business, however, they struggled to find a new competitive advantage. Scottrade focused on optimizing their core business, and ultimately lost all competitive advantage as other firms found ways to offer cheaper and cheaper trades. Scottrade never found a new differentiator, and were eventually acquired by a competitor.

What could they have done better? The obvious answer is a bit cliche, but still true: Innovate, but that's easier to say than to do. Perhaps the more valuable lesson to learn from Scottrade is to diversify. Take Google for example, a company that has successfully optimized its core offering to the point of virtually eliminating all competitors, but has also diversified its portfolio of products. Google has explored a wide range of services, including digital and physical products. Google has also been responsive to market reactions -- when one product or service hasn’t yielded results, they’ve been willing to kill it and try another. Scottrade never successfully looked beyond the one note that made them a difference maker in the investment world. Unsurprisingly, they lost their status as an innovator, became a commodity, and died.

The Silver Lining

For the time being, a large number of customers still trust larger brands. Every day that advantage erodes, but brand strength is tied to trust, and the human element is still incredibly important. Simplify. Diversify. Innovate. Make it easier. Make it transparent. That’s the last hope for traditional financial services firms.

Interested in learning more? Reach out to Shift to schedule a conversation, we’re always happy to chat.

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