While the accelerating pace of technological change has many industries buzzing about the risk of disruption – including the world of financial advice – in practice, many forecasted disruptions never come to pass. Sometimes, it’s because the new “innovation” isn’t really all that much better than the status quo – at least, not better-enough to convince people to make a change. In other cases, it’s simply because it’s a new solution that consumers aren’t yet accustomed to paying for.
In fact, often some of the most disruptive business models are the ones that succeed through the use of cross-subsidies – giving away “for free” something that consumers were previously paying for, because there’s an opportunity to make money in other ways instead. Or viewed another way – not every part of every business model must be compensated, as long as there’s at least one component that is valuable to someone who’s willing to pay enough to make it economically viable.
In the context of financial advisors in particular, the rise of technology and the opportunities of cross-subsidy models introduce the potential for numerous disruptions in the coming years. From an RIA custodian that gives away the actual custody services, trading, and execution for free (and gets paid for its technology platform instead), to model management software that makes it feasible to buy index ETFs (or factor-weighted smart beta, or portfolios with SRI tilts) without the need for a mutual fund or ETF itself, and even the possibility that in the future some financial advisors might stop charging for investment management altogether and instead charge fee-for-service financial planning and “give away” the investment management services for free!
Ultimately, the challenge of disruptive cross-subsidy models is that they still require finding someone who is willing to pay for a key component of value, potentially at a cost that is far higher (or at least far different) than what he/she was accustomed to previously. Nonetheless, from Google Maps disrupting Garmin, to Chance the Rapper and other musicians increasingly giving away their music for free (and getting paid for live performances and merchandising instead), the reality is that significant disruption can occur by finding the one most valuable component of a solution… and giving everything else away for “free” to support that core value.
Is it time for the industry supporting financial advisors – and the financial advisor business model itself – to experience such a disruption?
source https://www.kitces.com/blog/cross-subsidy-industry-disruption-financial-advisors-bps-custody-indexing-2-0/?utm_source=rss&utm_medium=rss&utm_campaign=cross-subsidy-industry-disruption-financial-advisors-bps-custody-indexing-2-0
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