The word ‘disrupt’ is from the Latin ‘disruptus’ — meaning ‘to break’.
Modern technology has given us the word ‘disruptor’ — the breaker.
Digital photography was ‘the breaker’ of Kodak.
Google ‘broke’ the Encyclopedia Britannica door to door sales model.
Technology drives margins lower and increases volume.
The Australian banking sector is ripe for attack due to its high margins.
The multi-multi-billion dollar profits from our big four banks are too juicy to ignore for the likes of PayPal, Google, Apple and Amazon. Increased competition for your banking business is coming to Australia in the not too distant future.
Banks, in turn, are a real threat to the accounting profession. The ability to collect financial data from client bank accounts and electronically feed this information into tax returns has a few of my accounting friends a little concerned.
Most suburban accountants generate a reasonable level of revenue from preparing wage and salary earner tax returns. The loss of this revenue would threaten the viability of some practices.
Theranos, a US based medical testing company, has turned the medical laboratory business upside down with its $4 blood cell count test.
Technology is threatening all industries where processes can be automated.
Attacking margins with automation — removing labour costs and the need to rent space, etc. — is only going to increase in the coming years.
Increased capacity leads to smarter programming. Robotics are no longer a sci-fi dream.
That leads me to the financial planning industry.
The financial planning industry in Australia evolved in the early 1980s primarily from the insurance industry.
Sales people were paid by way of commission.
As we’ve witnessed with the financial scandals involving Commonwealth Bank, Macquarie, and AMP, the only thing that’s really changed from those early days is terminology.
Instead of being an insurance salesperson, the title is now planner or adviser. Commissions have been relabeled as fees and bonuses.
The sales culture remains deeply embedded in the industry. You still pay fees based predominantly on a percentage of funds under management (FUM). Therefore, the name of the game is increasing FUM.
In the wake of the planning scandals, my two-fold recommendation to restore public confidence in the financial planning industry was:
Ban all institutions from direct or indirect ownership of financial planning firms.
Pay the newly independent planners for their advice on an hourly fee basis (similar to accountants and solicitors).
These two steps would cause disruption within the industry. However, the consumer would hopefully feel more confident in the independence and impartiality of the advice.
Below is an email from a reader (this is indicative of the public response to the articles written on the financial planning industry):
‘I read with interest your reports and note your factual assumptions regarding the markets/economy/SMSF etc. For a number of years I have had a similar view but have been busy building a business and had no time to digress. That now needs to change.
‘Do you have an advisory service/business outside the PPP fold that you are able to offer structural and investment advice on a charge basis? While I find the reports from PPP very informative, I do not have the skills myself or the faith in the various providers of these services (including my current accounting firm) who clearly do not have the same conservative views/thought process.
‘Any comments/thoughts/directive would be appreciated.
The public are unsettled. There are a lot of good planners out there. However, the bad apples have spoiled the bunch.
For the record, I do not have an advisory business outside of Port Phillip Publishing.
The level of public discontent suggests there’s never been a better time to launch an independent, professional fee based financial planning business. But old habits die hard.
Due to the reluctance to move away from the sales culture and percentage based fee model, paves the way for a disruptor to the financial advice industry.
The disruptor I envisage would take the shape of an online DIY financial planning tool.
Initially, the planning tool would assist at least 70% of people looking for impartial financial guidance — how to pay off home quicker, level and type of insurance covers needed, basic savings tools, estate planning, superannuation contributions, etc.
A lot of this advice is by and large ‘cookie cutter’.
Currently, a financial plan for this type of advice costs anything from $1000 to $3000.
An automated advice service could do it for maybe one or two hundred dollars.
In due course, as technology becomes smarter, the disruptor would become more intelligent, providing guidance to those with slightly more sophisticated planning needs — for example retirement planning strategies, SMSF assistance, borrowing to invest.
Robotics could see the advent of the virtual planner — adding another layer of intelligence to the disruptor.
Granted, some people will want to deal with a person. However, we have been conditioned to do so much of our business online that one more impersonal interaction won’t be such a huge leap for most people.
Some situations will be too complex for a computer model (no matter how sophisticated) to deal with. Therefore, demand for quality planners to provide specialist advice will still exist.
The disruptor would break the existing financial planning business model.
A fully compliant, independent and automated planning system (available 24 hours per day, seven days a week) that leads people through a process of inclusion and exclusion to determine the optimum outcome for their situation would make hundreds, if not thousands, of planners redundant.
Empowering the public with a low cost, high quality alternative could create the much needed change in the financial planning industry the regulators are loathe to undertake.
Planners with knowledge and skill would survive, but their business model would need to change.
The next major downturn in markets could be the catalyst for the disruptor to be developed. The investing public may only have one more significant loss left in them before they (the majority) decide to take matters into their own hands.
Forward thinking planners had better get their houses in order, because if a limited visionary like me can think of the disruptor, you can bet your fee based dollar someone much smarter will turn it from a concept into a reality.
For The Daily Reckoning Australia