by Ken Haman, AllianceBernstein
There’s a paradigm shift occurring in the financial-services industry. Digital intermediaries are rewriting the rules about the value of a human advisor and acceptable portfolio-management fees. Savvy financial advisors must shift or become obsolete.
In 1905, Albert Einstein blew up the basic fabric of scientific thinking and paved the shift from Newtonian physics to quantum physics as a more accurate explanation for how the world works. Surprisingly, some implications of the new paradigm were too alien and disturbing for Einstein to accept. Quantum physics introduced uncertainty and chaos as essential aspects of the reality we live in. As genius as Einstein was, he couldn’t accept the idea that the world was fundamentally chaotic. In 1926, he wrote that God “does not play dice” with the universe. 1
If Einstein was such a creative thinker that he literally redefined our view of the world, why did he reject one of the basic implications of quantum physics?
What Exactly Is a Paradigm Shift?
Einstein was only human, and resistance is built in to the human brain. This means that we are uncomfortable with major changes. In his book Paradigms, Joel A. Barker observes, “A paradigm shift is a change to a new game, a new set of rules.” 2 He points out that when the rules change, the big winners in the old paradigm are seldom as successful: “When a paradigm shifts, everyone goes back to zero.” 3
A paradigm shift is an enormous process for any industry. Large companies fail and new ones take over: Netflix replaced Blockbuster; Google replaced AltaVista. These shifts happen when a series of innovative steps coalesce into a new set of operating assumptions.
What Am I Missing?
Once a new paradigm becomes dominant, the change is obvious. But in the early stages, some industry giants have difficulty seeing it. Harry Warner, cofounder of Warner Brothers Pictures, asked, “Who the hell wants to hear actors talk?” in 1927—the same year that The Jazz Singer brought sound to the movies. Other notable quotes include “I think there is a world market for about five computers,” which is credited to Thomas J. Watson, chairman of IBM, in 1943. And in 1977, Ken Olsen, cofounder of Digital Equipment Corporation, said, “There is no reason for any individual to have a computer in his home.” 4
These industry leaders were wrong because people who are most successful in the old paradigm are less motivated to see when the new paradigm arrives.
What Does This Have to Do with Being a Financial Advisor?
Paradigm shifts are driven by creativity and innovation. Innovation is attracted to and stimulated by inefficiencies in a big, lucrative marketplace, such as financial services. Recently, our industry has seen a growing number of innovations in how financial-services products are delivered to consumers. These innovations are merging into a new model: sophisticated asset management provided at a very low cost through a digital interface.
The paradigm shift occurring in the financial-services industry is still in the early stages, but it’s already rewriting the rules about the value of a human advisor and how much clients should pay to professionals for portfolio management.
The Pace Will Be Accelerated by Outside Forces
Once people become comfortable with a digital interface, they embrace the change. According to Appnovation, a company that advances businesses through digital means, the COVID-19 pandemic has fundamentally changed how consumers interact with brands: 84% of consumers hope brands will adopt new digital ways to deliver products and services in the coming year, 53% report that they’re completely comfortable with touchless technologies, and 22% say they will become comfortable after they use touchless technologies more often. 5
This is bad news for some full-service advisors. We believe that the pandemic will accelerate the adoption of low-cost portfolio-management solutions. Big, familiar brands are already changing how much clients will pay for financial services. This suggests that many of a full-service, client-facing financial advisor’s “forever” assumptions will shift dramatically and in the very near future. The advisor who wants a productive business can’t ignore these trends.
But there’s good news. Many advisors will ignore the writing on the wall, which presents a terrific opportunity to the advisor who designs a business model that delivers a more compelling and valuable client experience. As Barker reminds us, “A significant competitive advantage lies with those organizations and individuals who anticipate well in turbulent times.” 6
Kodak thought that film was forever, and Yahoo rejected the opportunity to buy Google for just $1 million. These and hundreds of other examples show what happens when business leaders don’t pay attention to the changes and opportunities around them.
We know that anticipating well is easier said than done. Ask your AllianceBernstein wholesaler for guidance on designing a business model and client experiences that will help your business prosper in the new paradigm.
For more resources from the AllianceBernstein Advisor Institute visit http://alliancebernstein.com/go/abai.
The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AB portfolio-management teams.
1Jim Baggott, “God Does Not Play Dice,” Cosmos.com (December 11, 2018)
2Joel Arthur Barker, Paradigms: The Business of Discovering the Future (1993): 37
3Ibid: 40
4“7 Tech Predictions That Were Way Off the Mark,” Techradar.com (April 3, 2010)
5Vanessa Burley, “The Digital Consumer: A 2021 Research Report,” Appnovation.com (March 9, 2021)
6Joel Arthur Barker, Paradigms: The Business of Discovering the Future (1993): 204
This post was first published at the official blog of AllianceBernstein..
