What Your Advisor May Have In Common With Toys 'R' UsSubmitted by Silverlight Asset Management, LLC on March 23rd, 2018
It’s being described as potentially “the largest retail liquidation in the country’s history.” Toys ‘R’ Us is closing over 700 stores nationwide.
Earlier this week, I took my 6-year old son to Toys ‘R’ Us to exchange a birthday present. Waiting to check-out, my mind began to drift; I remember what it meant to be a ‘Toys R Us Kid.’ Racing around the store looking for He-Man action figures or the latest Nintendo game. Those were the days!
My nostalgic daydream was cut short, though, when a customer in front of me asked, “Are the prices really the prices? I thought there would be big sales.” A store associate politely replied, “The prices are the prices, ma’am. There won’t be any big sales for a few months, when the liquidators come in, but then it won’t be Toys ‘R’ Us anymore.”
Unbeknownst to the associate, the company had just announced in bankruptcy court that the liquidation sale would begin today.
My six-year old may look back when he’s older and recall what it was like to shop at the store. My 3-year old will not. He will still have plenty of exposure to toys; his experience will just be different.
The last toy I bought was Fisher-Price’s Batbot Xtreme. My boys became obsessed with the toy (a robotic Batman that stands two feet tall, lights up and has a voice changer—among several other features my kids are happy to recite ad nauseum) after watching YouTube videos.
I initially suggested a trip to Toys ‘R’ Us, but my wife insisted it was “cheaper on Amazon.” For me at least, that’s when it became real why Toys ‘R’ Us’ is the latest retailer to fall victim to Internet competition.
The simple economic lesson here is that life is tough as a middle-man. That lesson isn’t confined just to retail. Across the economy, distribution platforms are being leveled and streamlined.
The fate of Toys ‘R’ Us has me wondering about the fate of my own industry—financial services.
The financial advisory industry is comprised of: (i) money managers who create return streams, and (ii) advisors who distribute those streams to clients.
A money manager like BlackRock is akin to Hasbro or Mattel in that they produce a product. Recently, fund management fees have been pressured downward as more capital gets allocated toward passive vehicles. The most popular ETFs typically charge 0.2% or less.
An advisor plays the role of retailer, like Toys ‘R’ Us. They get the product to the customer in exchange for commissions or advisory fees. The shift to passive investing hasn’t been hurting advisors, as their fees have continued to average around 1%.
Toys ‘R’ Us demonstrates why such pricing cannot last, however.
Toys ‘R’ Us has been selling the same products for a higher price than their competition.
Many investment advisors do the same thing. Outside of financial planning advice, they play a simple middleman role selling undifferentiated products. Clients can figure out how to buy an S&P 500 Index Fund on their own. It isn’t much harder than buying a toy on Amazon.com.
Sensing opportunity, financial industry heavyweights Vanguard, Fidelity and Schwab, are all planning to rollout advisory services at approximately one-third the cost of the average advisor. This is not limited exclusively to robo-advisors either. For an annual fee of 0.3%, Vanguard provides a personal advisor qualified to help with asset allocation advice, rebalancing guidance, behavioral coaching and spending strategies.
Scale is winning the price war in retail. An analogous situation may play out in the financial industry.
Only the biggest can be the cheapest. But then again, the cheapest solution isn’t always best. Quality counts for something too.
There is a lot of opportunity for innovation within financial services. Firms that might not win the price war can still prosper if they are creative in how they connect to customers and enrich their experience.
Research firm Oliver Wyman’s 21st annual report on the state of the Financial Services Industry asks: Who will close the customer value gap in Financial Services?
It’s an important question.
Ted Moynihan, Global Head of Financial Services for Oliver Wyman, opines that, “Someone is going to build Google Maps for financial lives with potentially revolutionary implications.”
Although, big tech firms have yet to expand their “data graphs” to encompass information about peoples' financial lives, and regulations may keep them at bay for a bit longer, tech will likely disrupt parts of the financial sector much like the consumer sector.
Automation that helps customers simplify their financial affairs is one trend guaranteed to evolve. Accenture predicts that within three years, artificial intelligence will be the primary way banks interact with customers.
Stanford and Georgetown University already offer “fintech” courses within their MBA programs, as more students are expected to pursue mastery of financial technology.
Across industries, there are only two ways to prevent being the next middle-man to be squeezed out: (1) offer a cheaper product or service or (2) offer a superior product or service. Technology leadership will be paramount for achieving both goals as the investment industry progresses in the coming years.
Originally published by Forbes. Reprinted with permission.
Disclosure: I own HAS in accounts which I professionally manage. This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of the date indicated and may change as subsequent conditions vary. The information and opinions contained in this post are derived from proprietary and nonproprietary sources deemed by Silverlight Asset Management LLC to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. As such, no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions (including responsibility to any person by reason of negligence) is accepted by Silverlight Asset Management LLC, its officers, employees or agents. This post may contain “forward-looking” information that is not purely historical in nature. Such information may include, among other things, projections and forecasts. There is no guarantee that any of these views will come to pass. Reliance upon information in this post is at the sole discretion of the reader.