John Lefferts' Blog

Thursday, February 12, 2015

Robo-Advisors and Robo-Cars...on Sundays!

For over 20 years, I have been a loyal big benz sedan customer buying into the “best or nothing” advertising mantra. Every three years like clockwork, I’d turn in the old leased one and got the new and improved black on black from the local dealership. This past June when the lease was up, I decided not to re-up for the first time in decades since I was in the process of moving my family from Dallas to San Diego. Besides, with my triplets heading off to college, I could drive their cars as needed and save a few bucks in the process. Though my son’s ’08 GMC Yukon with 90,000 miles on it is far from a luxury car, it did the trick. That is...until one Sunday when I went to the local shopping mall for clothes.
I was at the mall to update the closet and as a hunter, not a shopper, I’m usually out of there in 30 minutes. But on the way to my go-to shop for clothes, I “happened” to be walking by the Tesla store. Looking at the shiny things inside the window, it was as if I was cast under some sort of spell and I could not resist the gravitational pull of being drawn into the door. That day they “happened” to have an S85 sedan out back for a test drive and “happened” to have an opening for me to drive it. So I drove it…done deal. Within minutes, I was in front of a computer at the store building my own car online that was to be assembled and ready in about 45 days, just in time for the 2014 tax benefits afforded Californians for electric cars. When I got home with a folder in hand and without a bag of clothes, my wife asked, "what did you get at the mall?" I knew I would have to tell her at some point, so I sheepishly murmured, “umm…a car?”. Then in a puzzled and slightly angry voice she blurts “YOU WENT TO THE MALL FOR SOME CLOTHES AND YOU GOT A CAR?!!!”
Ever since moving to California I’ve become more curious about Tesla’s since it seems like every 3rd or 4th car I pass is a shiny new S85. But when I was in Texas, it wasn’t so. Texas is one of the states that is protecting their dealership model by requiring cars to be bought through a dealer which Tesla does not do. Tesla-Texas link here I always thought it strange that you can’t buy booze or cars on Sundays in Texas due to “blue laws” that have been in existence since before Texas was even a state. Of course, us heathens out here in California can buy booze and cars on Sundays…and even cars directly from the manufacturer. There is no doubt that the Tesla is a unique vehicle for a number of reasons. But as great as the car is (it rocks!) it’s as much the seamless internet driven no hassle customer experience in buying a new Tesla that sets it apart.
If you want to make enemies, try to change something. ~Woodrow Wilson
Our business is going through a great deal of change in a sense like the car business is enduring. The Texas laws for buying a vehicle are protecting an outdated way of doing business and it’s only a matter of time before the old guard will have to yield to a more current way. For the financial services business, we’re seeing similar change fought on two fronts. The first, much like the Texas dealerships, is a fight against new regulations. RIA’s are fighting being supervised by anyone, in particular FINRA. This while brokers are fighting being held to a strict fiduciary standard. The second fight against change we're seeing in the business, similar to Texas dealers keeping the tech driven Tesla model out, is a battle against the threat of the “robo-advisor”.
Faced with the choice between changing one's mind and proving that there is no need to do so, almost everyone gets busy on the proof ~John Kenneth Galbraith
Like many of you, I’ve read a great deal about the robo’s and have been in the camp that believes they will never fully replace a qualified human advisor. But, whether we like it or not, it isn't our call about how it plays out. It’s up to the customer. Whether you’re an insurance producer living off 6% annuity and 90% insurance commissions or an advisor charging 1% plus on top of investment management fees, new methods of distribution including the robo-advisor will dig into your margins. To survive much less compete in the future, you had better focus on building strong client relationships to justify them working through you for yesterday’s margins while today they can as easily go direct and bypass you altogether…for far less. I also think robo’s will force the current prevalence of advisor as asset manager to diversify into alternative revenue lines and activities that require more of the human element. Comprehensive financial planning and life insurance are two areas in financial services that are complicated, process driven and more often require human interaction than slapping a fee on top of an ETF. In a strange unforseen way, the robo’s and new regs may in fact help both financial planning and life insurance segments of the industry rise to a level of professionalism they both seek as the old is driven out and the professional advisor is forced to diversify outside of the silo of asset management.
If nothing ever changed, there'd be no butterflies ~Author Unknown
I suspect that while Tesla may be the first for cars, they won’t be the last to build out a direct distribution model bypassing the dealerships that have made a bunch of old goofy-assed white guys who make gawd-awful TV commercials, a boat load of money over the years. (and yes, we’ve got a similar variety in our business too!), Are robo’s the Tesla of our business? Will robo’s put human advisors out of business? None of us really know the answers to these questions. I really don’t think professionals in our business will be put out much like medical doctors were not made obsolete by WebMD. But then again, when you look at what happened to travel agents once the internet got traction, it causes me to think that we aren’t immune to any change at all. As a profession with the average age pushing retirement, there is a strong tendency to wax longingly for the good ‘ol days rather than change for the long haul ahead. The laws in some states that protect dealerships from the competition of direct models like Tesla are certain to fall in time because frankly, they were put in place for an era gone by. Likewise, the regulations RIA’s and brokers cling to are sure to fall in time as well. And with the emergence of new methods of distribution, the next decade in financial services is certain to look very different than it does today. Robo-cars and robo-advisors...I'll drink to that...on a Sunday!