According to Clayton Christensen’s book, The Innovator’s Dilemma, and his recent article in Harvard Business Review, “What is Disruptive Innovation?” (as well as his speeches you can view online), a pattern emerges when a disrupter initially enters an established industry.
Practice Makes Perfect
In this early stage, the incumbent firms are only happy to give away the low-end (and unprofitable) customers. The incumbents gladly move up a notch, focusing on profitable and more desirable customers. Meanwhile, though the innovator’s technology is still quite crude and far from perfect, it does not stand still. The innovator continues to perfect its technology and moves up another step in the market hierarchy ladder. The incumbents are, again, glad to give up those less profitable customers and move up yet another step.
This pattern continues until the innovator finally perfects its technology and can compete directly and effectively with the incumbents for all their customers, not only the lower-end ones. Worse, by this time, the innovator can do it far more efficiently, by extension, deliver products and services at lower prices, with minimal friction.
The Innovator’s Dilemma
Consequently, the dilemma for the incumbent — once hailed for its management team for the successes it created — is that it is suddenly faced with a difficult choice to make. Hence the innovator’s dilemma. The incumbent can choose to:
Thus, the dilemma for the incumbent is that doing the right thing is the wrong thing, doing the wrong thing is the right thing.
That is, continuing with the current business model — though fabulously competitive, successful and profitable thus far — will ultimately bring about its demise. Conversely, to make changes to its business model and infrastructure that have brought so much success to the business is the right thing.
In a sense, the incumbent must fix what isn’t apparently broken (but in fact IS broken).
Stupid Management Team
There are numerous examples of the pattern. Digital Equipment Corporation resisted embracing the reality that personal computers (“toys”) were rapidly becoming viable business computing equipment. RCA is another example of an incumbent that continued to pour millions into research and development of vacuum tube technology oblivious to Sony’s obsession with transistor technology. (To be fair, Sony’s first transistor radio was a crude, static-y miniature AM radio — not exactly a Walkman.) Blockbuster Video is yet another example.
Suddenly, the management teams of these companies, once celebrated for their successes, have become fools for their inability to read what was coming.
Was the management team truly incompetent? Did they one day collectively decide that it was time to fail? No, they were not incompetent — hubristic perhaps, but not incompetent. They had a track record of success in building and running successful and productive businesses, and were deeply admired for it. And, of course, they never made a decision to one day run their businesses to the ground.
Implications for the Wealth Management Business
It’s not difficult for even a casual observer to see that automated investment advice has already made strides to capture the lower end of the market by offering low (or no) minimum asset size for low (or no) fees. In other words, the robos are capturing people who are less affluent, and many who customarily wouldn’t have considered becoming (or weren’t qualified to become) clients of traditional wealth management firms. We, the incumbents, gladly give away this segment of the market because, well, they are unprofitable — and unworthy — of our effort to modify our business model, fee model, service delivery process, operational infrastructure and so on.
While we may dismiss the robos as unsophisticated--Betterment halted trades after Brexit and was belittled for it — they will continue to evolve. They are far from perfect, but let’s remember that the robos are in their crudest form today. They will only get more sophisticated, not less. Once they move upstream, they will perform many tasks better than humans can, but more cheaply, more accurately, more consistently and more efficiently (processing mind-numbing volumes of data) — all without complaining or calling in sick.
The founders and owners of successful wealth management firms are smart people. They are conscientious and hard-working. Yet they are not immune to fatal mistakes that overtook and eventually sunk enormously successful companies like Digital Equipment Corporation, RCA and Blockbuster Video. If the pattern observed by Christensen holds true, the robos will eventually catch up to human advisors in sophistication and ability. It will deliver its services more efficiently and more cheaply.
It’s probable that the robos will eventually resemble traditional firms by hiring more human advisors. I would argue that they will have to add human advisors if only to help clients simply navigate through the nuances and complexities of being human. Artificial intelligence may well eventually learn empathy and become “perfectly” human. But that may further evoke our desire to embrace the mysteries of life even more — the joy of welcoming your child into this world, the stress of applying for colleges and jobs, the euphoria from your team winning the gold medal, perhaps even disappointments and losses, mood swings and wrinkles.
Conversely, the traditional firms that survive will start to resemble robo adviosrs because, for starters, the next generations of clients will be brutally unforgiving of any friction in client experience — account opening, communication, service delivery, mobile access and the like.
Thus, there will be a convergence of sorts between the robos and the traditional firms.
That being said, we should note that because of the non-legacy technology and non-legacy infrastructure advantages, the robos will be able to deliver services more efficiently and more cheaply and more smoothly with minimal friction than the traditional wealth management firms. Will this also result in superior client experience and higher customer satisfaction?
Time for Deep Thinking — and Action
The emergence of robo advisors calls for a deep analysis of your business — thoughtful, humble and honest reflections without a dismissive attitude. It will inevitably entail making adjustments to your business model and re-examining and refining ideal client as the world around us changes.
The good news though is that while the world around is changing rapidly, the basic human needs remain the same — among them, the comfort of knowing that we will be secure financially. Technology trends notwithstanding, that’s the need that wealth management firms are ultimately striving to address. It’s just the expressions and delivery methods that will be different.