Disruptive Innovation is coming – but not from within
It is an interesting truism that disruption rarely emerges out of the innovations of an established industry. The mighty publishing corporations didn’t come up with Amazon; Video retail giants didn’t invent Netflix; Television didn’t create YouTube; Restaurant chains didn’t conceive of Deliveroo; The Four Seasons didn’t evolve into AirBnB. Nope. There are just too many inherent conflicts and competing agendas to overcome for that level of innovative self-disruption to take place. The Gen X fat cats who run most industries today, are simply unable to jettison decades of accumulated, established, Sacred Cows and Received Wisdom. They’re getting ready en masse to cash in their sizeable defined benefit pensions and they’re not about to disrupt the party. Often, they do not even recognise disruptive innovation when it lands in their lap. A few years ago, Blockbuster passed up an opportunity to buy Netflix for a mere $50 million deeming it a harmless, irrelevant upstart. Now worth $43 billion, and Blockbuster worth $zero billion, it seems Netflix was, in fact, a highly relevant start-up.
So, this is the question I ask myself: what is the chance that the pensions & savings industry we know and love, will pioneer and drive the next wave of truly disruptive financial services innovation? Almost zero, I reckon. No, the inconvenient truth is that we are Blockbuster trying to figure out how to sell our VHS cassettes for £3.99 instead of £4.59 and still make a profit. We’re Kodak working hard on how to make our glossy film glossier; Nokia, on how to get our batteries to last longer. And all the time, some broke 19 year old is sleeping in her car working on new technology that will take us all down.
Recently, Mark Zuckerberg was asked what he does when he isn’t working at Facebook. His reply, “I am figuring stuff out“, should send a shiver down the collective spines of all firms in the financial services industry. What stuff do you suppose Mark is figuring out? Here’s a clue:
That’s a lethal three-way cocktail. Lethal, specifically, for an industry like ours that has, at its heart, a set of flawed working assumptions including the permanent requirement of contemplative, mass, human endeavour within separate, highly trusted, 800 pound gorilla, organisations. Mark Zuckerberg is in a space race to destroy that set of assumptions as quickly as he can. Alongside him in that effort are Tim Cook (Apple), Jeff Bezos (Amazon), Jack Ma (Alibaba), and Sundar Pichai (Google), to name a few. Thus, if you honestly believe Facebook is just a convenient place for your teenage kids to swap party pics, you are in for a big surprise and not in a good way. Coming soon to Wall Street and the City of London etc is an existential challenge in the shape of several, vast, technology starships. These gargantuan vessels are everywhere (Apple), they know everything (Google), they know everyone (Facebook), they sell everything (Amazon), they are incomprehensibly huge (Alibaba) and they are coming for you. You, that is, if you subscribe to the LondonBlackCabNokiaKodakBlockbuster School of False Assumptions.
Last weekend, Elon Musk’s Space X Falcon-9 rocket blew up on the launch pad taking with it Facebook’s brand new Amos 6 satellite. Undoubtedly a glitch for Facebook’s ambitions to provide wi-fi to all 1.2 billion people in Africa, the incident nevertheless demonstrates the immense efforts these guys are going to in their relentless quest to achieve their goals. They are throwing the kitchen sink. That’s why Facebook’s share price is where it is – and climbing. Indeed, a recent Bloomberg article explains why Facebook represents a significant and growing holding in the portfolio of many mutual funds.
Now, consider that the world’s largest asset manager currently controls almost US$5 trillion! Apologies for the double negative and split infinitive, but the likelihood that Zuckerberg and his fellow entrepreneurs are not spending an awful lot of time planning to swiftly reallocate the entirety of those assets is, frankly, zero.
They know you don’t think like they do – and they love it that way.
We are worms in horseradish!
One of the reasons our industry is very unlikely to channel the groove into the future of finance is that we only really think about “finance and savings”. It’s like the old Yiddish proverb says:
To a worm in horseradish, the world is horseradish…
And, man, is the finance industry wrapped up in its horseradish. Our conferences are all about finance, pensions and savings and it is clear we are spinning our wheels. Just read this recent angst-ridden blog from a leading industry commentator. Our innovation is all centred on fintech, auto-enrolment, diversified growth funds and saving-made-easy-on-an-app (which is our idea of radical innovation). Of course, it’s good to work on those things but they’re all finance horseradish and that Constrained Thinking will be the end of us. For Mark, Tim, Sundar, Jack, Jeff, Elon et al don’t believe in horseradish. They’re highly allergic to the stuff. They believe in “people”. In that context, they do whatever they think makes sense for people – innovation sans frontiers. This week, Amazon launched Amazon Restaurants – a direct assault on the highly successful Deliveroo model. Amazon doesn’t respect conventional borders and it doesn’t do Constrained Thinking; it just looks at the world outside and thinks “Hey, people need to eat good food at home. We are in the people business; we can do that better than Deliveroo can.” If Amazon is looking at Deliveroo, they’re definitely looking at you and your money-making establishment.
To be more specific, Zuckerberg & Co understand people in immense detail. They look at their client base (everyone on Planet Earth) and they realize that financial well-being is only one part of the algorithm people care about. A single planet in a vast solar system, if you will. People also care about Health, Education, Care, a clean world (Sustainability) and Social Well Being. So the next wave of disruptive innovation is going to bring all of that together in a way we have not yet understood. When that meteorite hits (very soon) it will do for our industry what an earlier one did for the Brontosauruses and the Pterodactyls.
So what’s coming??
Best to ask Mark , Tim, Jeff , Elon, Sundar or Jack. But, in the absence of a reply, I expect we shall soon see a completely holistic, transparent, virtual-reality, artificially-intelligent, real-time, block-chain based system replacing the current set up namely, Superpowers of Finance that each employ several thousand costly humans working exclusively on finance horseradish. In the very near future (less than five years) this is how things will look for the average person:
You will have a deep and detailed understanding of your financial situation and you will have control and management of your personal investments and insurance arrangements at a level you cannot currently conceive.
Where there is currently just a recognition that fees should, and could, be lower but no-one knows how to make it a reality, that’s about to change. These days are drawing to a swift close. Investment management fees will soon be a fraction of what they are today and you will be able to invest in any clean asset class you desire. Competition to manage your personal assets will be fierce and you will have total transparency into who is charging whom what and for what. Not long from now, it will be impossible for firms to pay people hundreds of thousands of dollars a year just because they happen to sit in the right seat. That’s because Millennials (people born between 1982 and 1994) will shortly dominate the outcome of national elections, take power and dictate a new social and political agenda. Since every last one of them is struggling right now to rent (let alone, purchase) a place to live, and generally to make ends meet, they will not be liking those juicy compensation numbers once they discover what they really are. For now, it remains possible to hide what industry fat cats actually get paid. Not for much longer.
Millennials, you see, are all about fairness, equality and open transparency. (Incidentally, that’s why Junior (read “Millennial”) doctors are reluctantly prepared to strike for an entire week, in order to bring about a fairer working system. Gen X doesn’t get this, and believes these Millennial doctors are heartless and bang out of order, but that’s because Gen X doesn’t really understand Gen M’s inalienable principle of doing whatever it takes to make things fair and not giving a monkey’s about authority (aka Baby Boomer Prime Minister May etc).) No – they are not heartless! By definition, Millennial doctors are inherently good people with a social conscience. Otherwise, they wouldn’t be thanklessly slogging their guts out on a miserably insufficient wage. They’d be somewhere else chasing the dollar instead.
As Millennials and blockchain transparency outlaw fat cat salaries, and fat cats become thin cats, watch those asset management, consulting and other fees go into free fall.
Blockchain is coming!
Blockchain technology will shortly herald seamless, trusted, transparent, secure and instantaneous settlement of capital markets transactions and will demolish entire edifices of Middle and Back Office work forces.
As this new, unprecedented trust protocol is adopted we shall move deeper into the Age of Warp Speed Obsolescence.
Blockchain will also enable easy, frictionless, switching between funds and asset managers. Prepare, then, to see huge outflows overnight into another, more compelling, offering somewhere else in the new solar system. Today that’s not possible, tomorrow it will absolutely be. There’s an assumption that financial services are so complex, regulated and sophisticated they can never be automated. Not so! If a 777 can fly itself from London to New York, everything that happens inside our firms can be automated. Read the brilliant Blockchain Revolution for further detail.
At a personal level, if you choose to participate in the Blockchain Revolution, you will generate and gain access to a vast suite of highly accurate “self-data”: medical micro-metrics (your ECG to your endocrine profile, your aural and visual acuity, chemical to enzymatic baselines); financial data (think highly detailed spending & savings analysis, total personal asset value allied with predicted lifetime income and expenditure, based upon aforementioned medical data); social intelligence (who you know, who you should know, who likes what you like, who you can trust and vice versa); sustainability factors (how green you are, how responsible your investments are, how clean or dirty your personal world is); education (exactly what you are worth, how much you need to be earning, what all the jargon means, where all your money goes, what your normal ECG signal is, how you stack up against your peers, what good looks like).
It will be completely normal for millions of microscopic pieces of data about you to be recorded onto a blockchain ledger to which only you have access, recording your finances, all aspects of your health, your genome sequence, your social life, your family, your achievements, your criminal convictions, your habits, your credit score and everything else that is recordable.
The Future of DC
What might this all look like in practice? Well, you will have your assets invested across a plethora of world-class asset managers and platforms, which you will be able to compare 24/7 for cost and performance. “Performance” will be the delivery of exactly what you want and need, given your precise situation. For instance, your medical data and fitness metrics will be powerful indicators of your ultimate life expectancy, and, hence, the risk, return and shape of your ideal investment portfolio. So, you cut out coffee and red meat, eat more nuts and greens, stop smoking and start hitting the gym in a serious way. That means you just added three years to your life, so your portfolio immediately, automatically and subtly reallocates your portfolio accordingly. But your friend, he puts away a bottle of red every night of the week and can’t cut down on his forty a day habit. He watches three feature length movies every week without fail, accompanied by Papa John’s Pepperoni Passion and he only sleeps five hours a night. After his latest visit to his GP (chest pains and breathlessness) his portfolio also readjusts, reflecting the shortened time horizon until his Exit Event and not so much need for those long dated, inflation linked, infra cash-flows.
It transpires that your personal asset portfolio has a Sustainability rating of just 7.8 whilst you discover that your friends’ register a far more responsible 8.9. “Want to up your S Rating and earn more green points?” asks the text to your phone? “Yes!” you reply. “Map it to Doug’s!” (You follow Doug’s portfolio just like you follow his Spotify Lists).
“Done! Here’s your replacement portfolio. Congratulations – you just earned 1,250 Green Points!”
More green points means your insurance premiums will fall. That’s the incentive, of course. Your premia are already at an attractive level, because you have excellent hearing and you are sociable (which are both good for keeping dementia at bay for four more years). All of this feeds directly and accurately into your Life Course Savings (used to be called a “pension”) data which is constantly refreshing and re-calculating second-by-second so that your asset profile instantly molds and shapes itself to your expected personal needs and expenses – all of which will be far more predictable than they are today. The more High Quality Self-Data you generate and record, the more the system rewards you for your good behaviour. The Government provides tax breaks and other incentives to reward this kind of responsible citizenship. It is, after all, now a government of Millennials in 2021.
If you’re not interested in any of this new-fangled technovation, that’s OK; you’ll just pay more than everyone else for the services you receive and for your general participation in this New World. A lot more.
This all sounds a bit fanciful!
Does it? Not so long ago, if I wanted to listen to With or without you, I had to buy the entire Joshua Tree album on a CD in a hard plastic case wrapped in cling-film. No longer. Now, I can purchase that single song on its own. In fact, I can simply rent it on Spotify. Until recently, the idea of temporarily renting music sounded fanciful. Not any more. Until a couple of years ago, I couldn’t simply rock up in Paris and, for the weekend, live in the fully furnished apartment of someone I’d never met. Now, I can and I have.
A few other things that, until recently, seemed fanciful:
- the internet
- driverless cars
- negative interest rates
- wireless earphones
- waterproof smartphones
- other stuff
My friend, the game has changed, and what once seemed fanciful, isn’t anymore. In our industry, the winners will be those who appreciate that the game is changing out of recognition and adapt now. Because by the time this meteorite hits, it will be too late to change.
Once upon a time, Tyrannosaurus Rex ruled the world. At 12 metres and 9,000 kg, he was the baddest creature ever to roam the earth. No one crossed T-Rex. His gigantic neighbour, Apatosaurus, weighed in at a colossal 23 tonnes and was 23 metres long. In those days, it was pretty awesome to be a dinosaur. You ate all the food, killed all your enemies and generally weren’t bothered by competition or innovation. If T-Rex thought you were getting to be troublesome, he just took you out of the food chain.
That was in the Cretaceous Period.
Then, one Tuesday afternoon, it seems a large piece of debris crashed into the Yucatán Peninsula in Mexico. It was a meteorite 10 km wide and, in the aftermath of the impact, T-Rex and all his fellow land-dwelling dinosaurs went extinct. Just like that. Game over. Adios.
If I were a gigantic superpower asset manager, bank or consultant, Big Four auditor or Magic Circle law firm, sitting on vast stores of assets and/or clients in a world in which I utterly dominate the skyline, using my might and power to sweep away all who stand in my way, fearing nothing and nobody and just growing ever larger, I would ponder the Cretaceous-Paleogene Extinction Event and think hard about the Five Key Takeaways, focusing heavily on Takeaway 5:
- T-Rex wasn’t expecting his Tuesday afternoon to go the way it did;
- He had no time to react – at that point, the only options available to him were bad ones;
- His assumptions of invulnerability and status quo were fatally flawed;
- No doubt, when he thought about Threats and Weaknesses, T-Rex believed he had it all covered off;
- Maybe, just maybe, I am an awesome dinosaur that’s about to go extinct.
How would that happen (going extinct)??
Imagine that people are now very up-to-speed on their savings & financial situation; that they want to invest tiny amounts or large amounts – it’s a choice they deem essential; that they require total transparency and 24/7 access to their assets; that they would like to adjust their asset mix continually, with reference to their precise wants and needs even when they’re asleep; that they insist on every single one of your fund offerings synching perfectly with their personal demographic, social and health data, and reacting automatically to changes in that data; that they want to be able to transfer some or all of their assets immediately (i.e. in the next minute) and for very little cost (i.e. close to nothing).
Now imagine that your systems are so complex, so sprawlingly large and so legacy that they cannot deliver those requirements and never will. Despite your best efforts, your firm is not set up for this kind of service. Not even close.
Now think about another platform that is totally set up to deliver all that stuff and more. A platform you’ve never heard of, or haven’t thought much about because you thought it was for chatting online and sharing photographs.
That’s what a meteorite looks like and that’s how extinction happens.
Think of all the outflows that fund managers experienced when the Saudis yanked their cash earlier this year as the price of oil collapsed. That was a very faint picture of what will happen to all those asset management firms that aren’t set up to pivot into the coming post-Cretaceous Period. The same applies to the rest of us in our own niche of the horseradish. Us consultants, banks, actuarial superpowers, accountants, lawyers, hedge funds etc.
So, either we adapt now, or its over.
What is this “Adaptation” of which you speak?
I’ll pick this up in another blog but, put simply, there are four questions to ask yourself and your senior management team:
- Do we accept that rapid advances in technology (e.g. artificial intelligence, blockchain, Moore’s Law, virtual reality, hyper connectivity) are imminently set to challenge most of our basic working assumptions?
- Do we believe that total innovative disruption to our industry is highly likely (or even inevitable) at some point in the next three to five years?
- Do we think Facebook, Apple or Amazon will probably try to eat our lunch Deliveroo style?
- Are we urgently deploying significant resources towards adapting for the new era?
If the answer to any of the above is “not really”, your Tuesday afternoon could be about to get interesting!
Change is upon us! Of that there is no doubt. The only question is how we handle it. One approach is to embrace it full on. To understand that massive disruption approaches and that, if we adapt and get involved, it will be innovative and empowering. This is the means by which we shall dramatically improve the futures of 100 million people and more. Technology cannot do it all. Judgement, Experience, Instinct and Compassionate Sacrifice are inherently human qualities. There will always be room for those.