Is there an Uber or Amazon of wealth management?

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“Even well-meaning gatekeepers slow innovation. When a platform is self-service, even the improbable ideas can get tried, because there’s no expert gatekeeper ready to say ‘that will never work!’ And guess what – many of those improbable ideas do work, and society is the beneficiary of that diversity. I see the elimination of gatekeepers everywhere.”

Jeff Bezos, quoted in The Everything Store: Jeff Bezos and the Age of Amazon, page 315.

“Spend the vast majority of your time thinking about product and platform. Many large, successful companies started with the following:

  1. They solved a problem in a novel way.
  2. They used that solution to grow and spread quickly.
  3. That success was based largely on their product.

In the Internet Century, all companies have the opportunity to apply technology to solve big problems in new ways … if you focus on your competition, you will never deliver anything truly innovative.”

Eric Schmidt, CEO of Google from 2001 to 2011, quoted in How Google Works, pages 91-93.

——–

I recently read ‘The Everything Store’, ‘How Google Works’, and Walter Isaacson’s biography of Steve Jobs and Apple. The creation of these three extraordinary companies in a short time from the vision of a few individuals left a nagging question in my mind at almost every page: can any company do to the Australian wealth management industry what Amazon did to Borders, what Apple did to Nokia, what Google did to all other search businesses? They are all remarkable stories of redefining how business is done, breaking the traditional rules and in the process, destroying much of their competition.

Markets where anything seems possible

It’s the same with Uber, the ride-sharing service with operations in 53 countries and a market value of about US$40 billion. There are 5,500 taxi licences in Sydney worth about $400,000 each or $2.2 billion. In Melbourne, metro licences have fallen in value from $515,000 a few years ago to $290,000 on a combination of new licences and Uber drivers given access to the market. Uber has fought legal battles all over the world, as it is in NSW, but there’s no denying the public demand.

It’s a good example of a change in the way the global economy operates. It’s a platform business that matches customers with drivers, turning employees into ‘entrepreneurs’, in a similar way to the thousands of businesses run from home using ebay as a distribution platform. And there are ‘ubers’ for all types of services such as cleaning and massage, and of course human resources with sites like Freelancer and Elance.

Amazon is portrayed in the book as a brutal competitor. When diapers.com (owned by a company called Quidsi) was gaining market share among mothers but refusing a takeover offer, Amazon reduced the price of diapers by 30%, and then launched a new service called Amazon Mom, with additional discounts. Quidsi executives estimated that Amazon lost $100 million in three months on diapers. Then Wal-Mart made a bid for Quidsi, and Amazon threatened to drive prices to zero if Wal-Mart won the bidding. The diapers.com founders sold to Amazon out of fear.

“The money-losing Amazon Mom program was obviously introduced to dead-end Diapers.com and force a sale, and if anyone had any doubts about that, those doubts were quickly dispelled with by Amazon’s subsequent actions. A month after it announced the acquisition of Quidsi, Amazon closed the program to new members.” The Everything Store, page 299.

Of course, the Federal Trade Commission investigated the deal but gave its approval. If Amazon and Uber can take such actions in the face of legal hostility, anything seems possible in the age of the internet.

Australia has its home-grown examples of severe market disruption, the most public being the turmoil created for newspapers from the success of realestate.com.au, seek.com.au and carsales.com.au, almost bringing the once mighty Fairfax to its knees.

Unlike Facebook and Twitter which have invented new ‘social media’ activities, companies like Uber and Amazon are killing off competitors. When Jeff Bezos convinced publishers to allow him to put their books on the Kindle, they thought he would charge a margin over the usual wholesale price of books of around $16. But by retailing books online for $9.99, Amazon reinvented the price point. It did not take long for booksellers like Borders and Angus & Robertson to go out of business. Despite the fact that Amazon made a loss in 2014, the market has spoken: its market cap is about USD170 billion.

The defining characteristic of these great American companies moving into retailing, mobile communications, social media, search, taxis, employing contractors and booking B&Bs is that they break the mould for the way business is done. New methods are often not appreciated by the incumbents until it is too late, and it is fanciful to predict what future disruptions will occur. When Mark Zuckerberg developed Facebook, he did not have a notion that it would become the way a billion people shared their most intimate secrets, and he certainly he had no idea how to make money from it.

What is major disruption in Australian wealth management?

By disruption, I don’t mean somebody developing an online ‘robo-advice’ model (such as GuidedChoice, eMoney, Betterment and Wealthfront in the US or Stockspot and BigFuture in Australia) and collecting $1 billion in funds in a few years, although that would be considered a great success and will happen. With $2 trillion in superannuation, real disruption is at least $100 billion within a few years, which is only 5% of the market. Such numbers would worry the four major Australian banks, which are not only almost 30% of the market capitalisation of the ASX200, but wealth management is significant to them all. They also control the majority of financial advisers in Australia.

GH Chart1 130215Where can disruption happen in the value chain?

Wealth management is usually broken into at least three parts:

* financial advice
* administration platforms
* asset management

Let’s consider what happens if an investor uses a platform such as Colonial First State’s (CFS) FirstChoice Wholesale, the most popular among financial advisers. It requires a minimum of only $5,000 so it is a retail product. On a typical and popular fund such as the Schroder Australian Equity Fund, CFS charges a fee of 1.02%, and splits it with Schroder. Call it 0.5% for CFS administration and 0.5% for Schroder asset management. CFS also has an Australian share index option for only 0.40%, where the asset management costs only a couple of basis points (0.02%). So we can generalise that major platform administration costs about 0.4%-0.5% with asset management on top of that. Financial advice costs are additional: it may be fee for service, say $350 an hour, or a percentage of funds, say 0.5%.

In simple terms, there’s the Australian wealth management value chain. If a market disruptor comes in, they can easily remove the asset management cost by using index funds; they can automate advice based on an internet-based, self-service model; and investments can sit on a simple and inexpensive administration platform. Would it be the equivalent of Amazon charging $9.99 for a book that previously retailed for $30, and destroying other booksellers?

I’m not looking here for the disruption of SMSFs holding $600 billion or one-third of all super. They are serviced by thousands of advisers, accountants and administrators as well as being users of the products of major banks, fund managers and the ASX. My focus here is on a single company coming in with a game-changing, disruptive product offering.

What will the disruptor do or look like?

1. It will not attack one part of the value chain, it will be end-to-end with a complete investment solution. For example, it will not be sufficient to only offer ‘great asset management’, as plenty of companies claim that. A disruptor could hardly ‘out-Vanguard’ Vanguard (or State Street or BetaShares) and provide cheaper and better asset management through ETFs. Broad-based domestic or global equity portfolios can already have negligible costs, less than 0.1%. These ETF providers are successful, well-capitalised companies with overseas parents or partners who already have the capacity to take large shares of the Australian market. Although their growth has been impressive, they only have $15 billion, less than 10% of the money managed by CFS.

2. It will be price-led. I cannot see how anyone can convince enough people that a superior product is worth paying up for because that will depend on a promise (guarantee) of outperformance over time. Amazon can set up systems to deliver a book next day and Telstra can have the best phone coverage in Australia but nobody can promise to outperform the market consistently, whatever their resources. This ‘game-changer’ will be index-based or with some type of ‘beta’ engine, not a bunch of superb stock pickers making company visits all day. They are too expensive.

Similarly, the portfolio will not include alternatives or unlisted investments, as they have higher fees and are more expensive to manage, even if done internally. The portfolio is likely to be dominated by cash and term deposits where the ‘fees’ can be hidden in the product margin.

(Of course, Apple’s success is far from price-led, its phones are the most expensive on the market. They have achieved this through beauty of design and creating massive desirability and arguably the best product. But in my wildest dreams I cannot see people queuing up around the corner to invest in a managed fund based on its beauty and desirability).

3. It will need to be well-capitalised and carry a great deal of market trust. This is not like buying a book with a secure credit card charging system. People will be handing over their future, their life savings, and the company must be beyond reproach. Whatever they do, they will need to buy time and spend a lot of money on marketing and disrupting and delivering results, plus ongoing R&D specifically for the Australian market.

4. It will be technology-based and self-service. Investors will input their own characteristics into an engine and it will recommend a portfolio of investments, selected according to the risk appetite and demographics of the client. This ‘robo-advice’ (a large part of ‘fintech’) is already being embraced by major players in the US, such as Charles Schwab and Fidelity’s acquisition of eMoney.

5. It must break established distribution networks. An estimated 70% of financial advisers are already ‘tied’ to the four major banks, AMP and IOOF. At the moment, eight out of every ten people default to the super fund selected by their employer and $10 billion a year automatically flows into default super funds. Whereas everyone selects their own phone, most people do not engage with their superannuation.

A new winner would need to capture the hearts and minds of investors in the way no financial product has done before. The only alternative to making the product ‘sexy’ is ‘fear’, but how would that gain traction? As David Blanchett, Morningstar Head of Retirement Research, said:

“We all know most people aren’t on track for retirement. I think surveys that talk about poor savings in the US, or the fact that people haven’t saved enough for retirement, are relatively worthless. Kind of like saying, ‘The sky is blue'”. (Yahoo! Finance, 8 February 2015)

Severe disruption is unlikely

The growth of superannuation assets in Australia is assured by the Superannuation Guarantee regime, making it a highly desirable industry to be in. It must attract new competitors. There’s no denying wealth management will change significantly over the next ten years, just like every industry driven by technology. There will be surprises, developments nobody has yet thought of, perhaps from a couple of young computer geeks in the proverbial garage. Some will do well and drag in a few billion. But that’s not disruption like the executives of Kodak, Blockbuster, Nokia and Borders experienced.

Based on the short and glorious histories of Amazon, Google and Apple and their impact on established businesses, how can anyone conclude that wealth management will not face a similar massive overhaul from a new competitor? Yet that’s my conclusion: I don’t see how any company can make wealth management sufficiently exciting for enough people to grow a market share of 5 to 10% in the next few years. To use Google’s test, what problem will the disruptor solve in such a novel way that hundreds of billions will divert from incumbents? I hope I’m wrong because it would be fun to watch.

 

Graham Hand has worked in banking and wealth management for 35 years and is Managing Editor of Cuffelinks.

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72 Responses to Is there an Uber or Amazon of wealth management?

  1. Rashmi Mehrotra February 20, 2015 at 6:58 PM #

    I don’t think we need robo-advice or optimised asset allocation, since most people don’t invest all their wealth in that portfolio anyway. What we need is trust. Investors trusting someone (or more) and that someone doing the right thing. I reckon disruption could come from not technology, but an old fashioned honest person who has the guts to be on the investors side.

  2. Steve Blizard February 21, 2015 at 1:10 AM #

    I can’t wait. UBER investment advising is what many clients really want, but bitterly opposed by the taxi drivers of our Industry, the Union Super Funds. UBER would return us to the period 20 years ago, when we were all a lot more productive. The solution is to reduce the sophisticated investor limits down from $2.5 million to $50,000. Then you will get rid of all of this cumbersome regulation “According to ASIC, if a person is certified as a sophisticated investor or a wholesale client, they do not require a Statement of Advice (SoA); the advisers’ best interests duty and related obligations under FoFA; and the bans on some forms of conflicted remuneration introduced by FoFA.”
    http://www.afrsmartinvestor.com.au/p/market-intelligence/how_to_be_sophisticated_investor_F6p205BJ2HOMNBxqcj3RXL
    Bring it on.

    • Felix Huxley January 3, 2019 at 9:43 AM #

      Steve, so you are suggesting that the impediments are Industry funds which score higher on trust that retail funds, and which largely have delivered superior performance and lower fees, as well as exposure to unlisted assets such as commercial property and private equity that retail funds and most SMSFs do not have the capacity to match.

      And the solution to this success is to water down legal protections for clients so that advisers can provide dodgy, conflicted advice that will deplete their client’s retirement?

  3. John February 22, 2015 at 6:14 PM #

    The future is hazy; see this link in particular about the banks; disruptive technologies (e.g. Uber)
    where they say “Disruptive business models in the US are three to four years ahead of Australia”
    http://www.afrsmartinvestor.com.au/p/shares/how_to_make_money_betting_on_disruption_AlLZEgu8QLGoR4ybkiPg4M
    As follows: Banks boast the largest profits in the country, they are also walking around with targets on their backs, as the next generation of upstarts bring a fresh eye and new systems to customer engagement not bogged down with yesterday’s technology.

  4. Alex Lee March 9, 2015 at 9:18 PM #

    Hi Graham, whilst I agree with most of your assertions about what FinTech disruption in Wealth Management will look like, particularly that it will be driven by self service propositions offering better value for money, I think gamification also offers the potential to engage and educate people on the need for long term saving in a way that traditional providers find hard to do.

  5. Graham Hand March 9, 2015 at 9:19 PM #

    Hi Alex, Good to hear from you. I sincerely hope you are right. If you know anyone who is developing a ‘game’ which can compete with ‘Call of Duty’ or ‘FIFA 2015’ for the hearts and minds of anyone under 30, it would be fun to look at it. Certainly don’t know any traditional providers going anywhere near that space, but could be promising.

    • Felix Huxley January 3, 2019 at 9:49 AM #

      Superannuation is a legal obligation for the employer. You don’t need the under 30’s (or any age) to be “engaged” or find it fun. What for? Their employers are going to still direct the contributions into the super system regardless. Wealth managers don’t care, and they will get engaged as they get older and see their balance rise to something significant.

      There seem to be an awful lot of solutions looking for a problem nowadays.

  6. Alex Lee March 10, 2015 at 9:07 AM #

    These folks are working on a prototype at the moment.

    (Link removed in 2019 as it now goes to an unusual site). GH

    • steve January 5, 2019 at 3:17 PM #

      Alex, is this link correct?

      • Graham Hand January 5, 2019 at 3:41 PM #

        Hi Steve, since the article was written almost four years ago (although still regularly cited), I think that ‘prototype’ did not develop, so we have removed the reference.

  7. Sean McNulty March 11, 2015 at 9:17 PM #

    Very good article Graham, interesting read. Personally I don’t see there being an Uber of wealth management, instead an Uber of personal finance. That is where the battle will be won.

  8. Glen Frost March 11, 2015 at 9:18 PM #

    Robo-advisers predicted to take min 10% of wealth advice sector in next few years; check out a Mac Bank Research report from 2014 that said 30% Aust banks top line revenue ‘at risk’ form fintech startups; from P2P to wealth advice, it’s a confronting stat (for bankers), a huge opportunity (for fintech startups)

  9. Darren Heathcote March 12, 2015 at 8:04 AM #

    Great article Graham,

    I do believe there is a place for rob-advice to take a large part of the Australian Market, but where I perhaps differ from you is I do not see the immediate path as going from B2C.

    Its all about the economics. Its about Costs, Time and Scale.

    As you quite rightly point out trust is a major issue. Hence B2C will be just too slow and cost of customer acquisition will be too high. I dont think any investor in their right mind would be prepared to back this approach in Australia and expect to get a return on their investment in a reasonably comparative time frame

    However, clearly there is a need for it and it can and most likely will come in time, especially given the “Älways On” generation but for now the route is almost certainly B2B, and I will explain.

    In my view its not a matter of trying to quickly disrupt the incumbents with a platform that immediately wins the hearts and mind, and very importantly trust of the individuals.
    Its about working B2B with the incumbents, leveraging off their reputation (whatever that might be worth) and distribution networks to help them realise the benefits.

    What I’m suggesting is any fully automated platform that can cater to providing independent personalised robo investment advice (with a fully automated SOA), based on taking into account a clients big picture (irrespective of where assets are held), managing these investments whilst reducing fees and tax in the process will allow them to build scale and one would hope, reputation.

    In other words what is now becoming a commoditised service and currently taking an average adviser several hours to do can be done in a split second by a complex algorithmic system. The result is significantly reduced costs (god help the paraplanners) whilst increasing the time available to enhance potential revenue by concentrating on the more lucrative aspects of advice such as tax structuring and ultimately one cold expect serving many more clients.

    Of course any such platform must eventually be able to head down the B2C route if it is to have the reach to become a true Uber of robo investment advice, but without significant financial backing to be able to sustain some trench warfare in the long road to acquiring clients it must first find favour B2B.

    There are platforms (actually one i can think of) coming out of the states that have this capacity and I believe its only a matter of time before the incumbents embrace this revolution.

  10. Gordon Scott March 12, 2015 at 6:10 PM #

    Iress just snagged CBA wealth, who says the old dinosaurs are out the picture?

  11. Anthony March 13, 2015 at 7:35 PM #

    With Graham Hand’s article on the March 5 2015 issue there was a comment about a 2nd part to this article. Has this second part been published yet? Thanks for your help…Anthony

  12. Graham Hand March 13, 2015 at 7:36 PM #

    Hi Anthony

    Thanks for the follow up. With 61 comments at last count, lots of LinkedIn chat and new developments every week, this is not an easy subject to put your arms around in a thousand words. Part 2 has not been published but aiming for the next two weeks.

    Cheers, Graham

  13. Carlita Buchanan March 19, 2015 at 9:48 AM #

    My opinion is the new entrant should not compete with the existing players rather show the market why it should look at them in the first place – what is the point of difference? Robo advisor is an online wealth management service that provides automated algorithm based portfolio management advise WITHOUT the use of HUMAN financial planners. It’s ears are pricked and guaranteed busy tweaking it’s functionalities and as mentioned will head this way – when there’s money to be made those who will benefit the most will FOCUS. Investors and particularly the SMSF trustees should take caution as I would imagine there will be no recourse for mistakes.

  14. Ben Smythe April 10, 2015 at 8:52 AM #

    Thanks for the thought provoking article Graham.

    I have always been of the believe that the further you are “away” from the client (no matter what the business), the more fee pressure you will be under. When looking at your 3 components and Australia’s financial services sector, you would then conclude that the funds management and administration piece would be most under threat of disruption. However, given that the banks + AMP & IOOF control give or take 80% of the whole food chain, they have been able to manage this quite nicely and effectively “give away” the advice piece in order to protect their sizeable funds management/admin platform margins.

    While this tight arrangement continues I think it will be difficult for someone to make a significant difference to this space. Importantly though their “sandpit” is only 20% of the marketplace, and the 80% is most definitely up for grabs.

    In my experience the next generation clients coming through (who will also inherit a lot of $$ from the baby boomers) will not be buying from the current model. They see through the conflicted advice, over priced platforms, and cookie-cutter approach. To that end, I believe there is a major opportunity for a reputable player to offer a technology focussed, well priced service with optional contact with some quality independent advice. This could capture a big part of the 80%!

  15. Craig Racine May 12, 2015 at 1:28 PM #

    A very enjoyable article and structure to provide a solution.

    One of the major issues has been highlighted recently by Glenn Stevens, and in the Murray Report, is the search for capital stable retirement income in a world of historical low ‘risk free’ rates.

    Mr Stevens indicates that retirees would be forced to make more risks than in the past.

    Are other solutions available? Can advances in technology and deregulation provide the impetus for financial innovation to offer what those investing in conservative assets want – to generate a predictable income without the volatility and without the constant fear of losing their capital? I believe it can.

    The public policy requirements for a solution are:
    – A straight-forward business model with minimal capital at risk at all times
    – Financially strong counter-party such as the ASX for hedging activities
    – Exchange traded for transparency of mark to market valuations
    – Robust in all market conditions
    – Flexibility of the investment manager to use business judgment rather than “black box” trading

    One alternative is to buy and hold ‘blue chip’ high yielding stock and generate income from the dividends and franking credits. The ASX listed stock and index options can then be used to protect capital at least cost by managing option positions continuously.

    The theoretical knowledge to protect a portfolio dates back to Fisher Black and Myron Scholes publishing their 1973 paper, “The Pricing of Options and Corporation Liabilities”) the basis of work for which Black and Merton received the 1997 Nobel Prize for Economics.) Since then, it has been known that it is possible to protect share capital. The issue has always been the cost of that protection.

    Advances in technology have enabled the sophisticated systems to compare live ASX pricing of options and construct a risk-return profile that always has downside protection in place and participates in the upside, whilst deregulation of the industry has seen substantial reductions in fees to implement the strategy.

    The investment manager would continue to make a business judgment on market outlook and protects capital from price decreases to predetermined limits, and participates to varying degrees in stock price increases, rather than a ‘black box’ solution.

    It is time to broaden the debate to consider if financial innovation can produce a solution rather than investors moving out on the risk curve and become more fragile to adverse market conditions.

    This would meet the framework that Graham has set out of applying technology to solve big problems (the cost of protection) in an end to end solution for investors seeking peace of mind.

  16. Eugene October 16, 2015 at 12:48 PM #

    Recently came across this. It is probably the best piece I ever read on innovation in wealth management.

  17. Peter Worn January 9, 2019 at 2:08 PM #

    Four years on and still little evidence of progress or a sustainable disruptive business model. Perhaps the innovators have been focused on solving a problem that doesn’t exist, or the wrong part of the problem.

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