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Surviving the Great Disruption—A Framework for Investment Professionals with Fee Compression

Surviving the Great Disruption—A Framework for Investment Professionals with Fee Compression

When Amazon announced its acquisition of PillPack—signaling its seriousness about entering the drug prescription delivery business—shares of the major drugstore companies plummeted by more than $12 billion. The loss of the stock is the same as an investment professional will see due to fee compression.

It will be up to future historians to name this economic era, but my suggestion would be “The Great Economic Disruption.” We see evidence of this all over: Amazon, Airbnb, Uber and—lying in wait—any number of fintech companies.

Join me in this quick thought experiment. What if Amazon decided to get into the investment management business? It’s not such an outlandish thought. Imagine for a moment Amazon executives meeting to discuss their 10-year plan. They conclude that after capturing a substantial share of Americans’ spending activity, perhaps it can win their investments as well. Would it be so difficult to start an investment advisory business using model portfolios and inexpensive index funds … and charging only 25 basis points?

Consider what that would do to the sustainability of your current business model and the value of your practice. If this unsettles you, it should. My hope is that it serves as a catalyst for change that I believe is essential if advisors are to survive the profound disruptions our industry will soon undergo.

Fee Compression Works Its Way to Advisors

In every disrupted industry, prices fall and margins get squeezed; we already see this happening in our space. Index fund providers compete for investor dollars through fee cuts until they’re offered at zero cost. Who know, perhaps one day we’ll see an index fund provider pay individuals to invest in their funds.

This price compression is also rippling out to custodians and broker/dealer service providers. Advisors will not be able to escape this fee-compression freight train. Surviving it involves one of the thornier challenges for any business—transitioning away from what has always worked to a new paradigm for changing times. It is called the innovator’s dilemma, and it has tripped up companies for years, from Eastman Kodak to AOL.

Thriving in a Low-Fee World

No advisor wants to think about earning less, but fee compression is as unavoidable and inexorable as it was when fixed commissions were eliminated in 1975 and the discount brokerage business was born.

I believe that investment professionals can do more than simply survive this emerging era of shrinking margins. Indeed, we’re confident that advisors can thrive, provided they find ways to create operational leverage, scale and high-value services.

  1. Facilitate Client Involvement—Americans, especially the younger ones, are comfortable with self-service: we book our own airline tickets, check out our own groceries and schedule appointments online. In fact, many prefer the direct involvement as it saves time and increases transaction accuracy.
  2. Continue Development of Platforms and Programs—Continuing to develop valuable, low-fee or free platforms that appeal to the needs of the investment professional or desires of the clients is essential, such as no-frills platforms for UMA management or a virtual assistant program.
  3. Scale Money Management—Managing client accounts on an individual basis is simply not scalable, making it an ill-suited approach in a fee-compressed world. To offset fee erosion, investment professionals need to leverage technology—e., managing client accounts using three or four portfolio models—to increase new client capacity and generate additional revenues.
  4. Don’t Compete with the Internet—Investment professionals must focus on services that can’t be done over the Internet to create competitive distinction and justify fees. Any robot can invest in index funds, but they are a long way from creating a charitable remainder trust strategy or building an integrated retirement income plan.

Change is always difficult, but there’s no reason for investment professionals to immediately and fully abandon their current business model. One practical approach for adapting to this changing landscape is running a parallel practice that incorporates a low-fee disruption strategy for new business, while maintaining current clients where they are. As the new model finds success, investment professionals can then slowly transition their account base to this future-state model and become the advisory practice that survives “The Great Economic Disruption.”

See referenced disclosure (2) at 

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