Creative Destruction of the Investment Industry

The word ‘disruption’ is thrown around these days like confetti.

Every facet of life — political, religious, economic, social, sporting, entertainment — is changing, adapting, or dying due to some form of disruption.

As soon as you think you’ve got a handle on the altered landscape, in comes another wave of disruption…disrupting the disruptors.

The ‘making of better mousetraps’ is not new. Civilisation has thrived and prospered on innovation.

In 1942, Joseph Schumpeter, in his book Capitalism, Socialism and Democracy, described capitalism as ‘creative destruction’.

He described creative destruction as the ‘process of industrial mutation that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one.

Old and inefficient business models are replaced by more economical and faster models.

Technology has changed the pace of creative destruction from a canter into a sprint. Every day something new and disruptive comes along.

Personally, I’ve given up trying to keep up…not that I ever really tried. My world can still function with an ‘old’ phone (one that’s at least five years old), a good book and a real newspaper. However, I must say I’d be a tad lost without internet banking, Google Maps and Trip Advisor.

The reason I mention my less-than-impressive credentials when it comes to all things ‘tech’ is that even I can see massive disruption coming to the investment industry. And I mean massive.

The assault on the industry’s business model is coming from several flanks.

The imminent threat of fee-free advice

Yes, fee-free advice.

I know…‘nobody does nothing for free’.

Well, in this disruptive world we live in, that’s not entirely true anymore.

Do you pay to maintain your Facebook page?

Do you pay ‘What’s App’ or Facetime to stay in touch with family and friends?

Does Google charge you to do a search?

What about when you look up Wikipedia?

How about uploading something on Instagram or Snapchat?

Have you ever received a bill from Hotmail or Gmail for using their email services?


Free. Gratis. Zilch. Not a bean.

Yet, collectively, these businesses are worth hundreds of billions of dollars.

Therefore, in this new world of creative destruction, free is possible.

And in the case of investment platforms, it’s now a reality, and not a possibility.

And this is the face of the disrupter…

The Future of Finance Is Free 23-02-2018

Source: Wealth Management
[Click to enlarge]

This news is hot off the press. The article was published a week ago…16 February 2018.

Here’s an edited extract from the article (emphasis is mine):

M1 Finance lets you automatically invest in what you want and on Dec. 13 [2017], we decided to offer this service for free.

In the digital world of bits, your marginal cost can approach zero. In other words, once we’ve built the platform, it doesn’t cost us any more to serve additional users.

Every day, we sign up hundreds of new users, transfer millions of dollars, and process tens of thousands of trades (all in a matter of minutes) with minimal human interaction.

This is how it works. Mum and Dad investors fill out an online questionnaire. Based on your answers, the robo-adviser can recommend a portfolio designed for your risk profile and/or you can choose to ‘DIY’ your investments. The advice and the investment of funds is all done for…FREE. 

So how does M1 Finance make money?

We do incur costs, particularly in development, and need revenue to support our ongoing operations. To cover those costs, M1 monetizes other services, the same way other brokerages currently do, and in exactly the same way we did before we decided to eliminate management fees. We make money lending the user-owned securities and cash held in their accounts. In this way, we operate identically to a bank. We also are paid to transact on various exchanges that actually improve the pricing our customers get in a trade. In the coming months, we will introduce margin loans, adding an additional revenue stream for those who opt in.

M1 Finance is based in the US. It’s still early days on whether its fee-free model will prosper or not. But you can rest assured that if it gains traction, the big boys — JPMorgan, Charles Schwab et al. — will not sit idly by.

The creative destruction of ‘free or nearly free’ investing is coming. Nothing surer.

The destruction we’ve seen in the retail sector will be repeated in the investment industry.

A good number of financial planning and investment platform businesses are going to fail to adapt, and will therefore die.

But the more imminent disruptor I see coming is one that hardly anyone is expecting.

The investment industry has flourished and prospered from three major influences: rising share markets, falling interest rates, and soaring debt levels.

All three factors have been hugely positive for an industry that, at its core, sells the long-term promise of delivering superior returns (better than money in the bank).

And, over the past three decades or more, it’s mostly delivered on that promise.

But what happens when the next debt crisis hits and shares plunge 60%, 70% or even 80% in value?

And what happens if ‘all the central bankers and all the central bankers’ men cannot put the share market back together again’?

Maybe markets have built up an immunity to being overstimulated and they fail to respond to even greater doses of QE and below-zero interest rates.

What if the next recovery — unlike the recent one — is long and painful?

How long is long?

Using post-1929 as an indicator, it could take two or three decades for the Dow to permanently reach and then pass its recent high.

With the share market in tatters, the investment industry’s promise of ‘outperformance’ starts to face tougher scrutiny…and not just by the investing public.

The third disruptor will come from tougher and tighter legislation.

The 2008 crisis exposed numerous examples of poor and inappropriate advice.

The government’s response to the media shaming and public outcry was the introduction of the FOFA (Future of Financial Advice) legislation in 2012.

More power to ASIC…removal of conflicted remuneration structures…a duty to act in the best interests of clients.

How is that FOFA legislation working out?

Here’s an extract from ASIC’s 24 January 2018 media release (emphasis is mine):

ASIC also examined a sample of files to test whether advice to switch to in-house products satisfied the “best interests” requirements. ASIC found that in 75% of the advice files reviewed the advisers did not demonstrate compliance with the duty to act in the best interests of their clients. Further, 10% of the advice reviewed was likely to leave the customer in a significantly worse financial position.

As fate would have it, the next (and far more destructive) share market collapse could happen smack bang in the middle of the Financial Services Royal Commission.

And, if that’s not bad enough for the big end of town, we could well have a Labor government (which pushed for the Royal Commission) in power.

I can see it now… PM Bill Shorten on TV lamenting that what has happened to ‘hard working Australians’ is unacceptable, and that the government will hold those responsible for these losses accountable.

The industry is facing a ferocious three-pronged attack.

The coming ruination of this decades-old business model is a combination of creative and self-created destruction.

With the best 20/20 foresight I can muster, my guess is that the investment industry is going to be radically different in five years’ time.

If you want to stay informed of what’s happening in the investment industry and how to benefit from the coming creative destruction, please go here.


Vern Gowdie,
Editor, The Gowdie Letter

Vern Gowdie has been involved in financial planning since 1986. In 1999, Personal Investor magazine ranked Vern as one of Australia’s Top 50 financial planners. His previous firm, Gowdie Financial Planning was recognized in 2004, 2005, 2006 & 2007, by Independent Financial Adviser (IFA) magazine as one of the top five financial planning firms in Australia. He has been writing his 'Big Picture' column for regional newspapers since 2005 and has been a commentator on financial matters for Prime Radio talkback. His contrarian views often place him at odds with the financial planning profession. Vern is is Founder and Chairman of the Gowdie Family Wealth advisory service, a monthly newsletter with a clear aim: to help you build and protect wealth for future generations of your family. He is also editor of The Gowdie Letter, which aims to help you protect and grow your wealth during the great credit contraction. To have Vern’s enlightening market critique and commentary delivered straight to your inbox, take out a free subscription to Markets and Money here. Official websites and financial eletters Vern writes for:

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