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Financial services industry should look to other sectors for clues on the coming disruption
Disruptors Google, Netflix, Amazon are or could soon face disruption themselves. There are lessons to be learned here.
There is a lot of talk about the rapid growth of ETFs and how it is changing the wealth management industry. Clearly passive investing has taken hold as ETFs in the U.S. have stolen over half of the total market share away from actively managed mutual funds.
We think this shift is a huge benefit to investors given that it has not only democratized the landscape, but also significantly reduced the costs of investing. However, for those wondering about the future of the industry and where its headed there are some excellent clues to be taken from other sectors undergoing disruption themselves.
Netflix has been a leader in streaming and no doubt a major challenger to traditional sources of media such as television. Its low-cost subscriber model has taken off to the extent that it now has more than 150 million monthly customers.
However, there was a bit of disappointing news recently when its subscriber growth slipped, clocking in at only 2.7 million in the second quarter of 2019, just over half of the 5 million analysts were expecting. The companys share price fell by more than 13 per cent on the news and concerns over competitive threats by companies such as Disney, Apple, NBC and AT&T WarnerMedia, which are all set to launch their own streaming services over the next year and most likely at a lower cost.
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Similarly, the ETF industry has become a game of size and scale with a huge inventory of content being introduced into a very competitive market that can be overwhelming for the average investor. With behemoths like Fidelity rolling out zero-fee ETFs, one has to wonder if the industry model is sustainable.
We think those companies that keep investing in the quality of their products will win the day. Take McDonalds for example, which invested $60 million in early 2018 to improve their food quality starting with the elimination of frozen meat for its Quarter Pounders. The impact was astounding, with a 30 per cent increase in sales or 40 million more Quarter Pounders in the last quarter than the same time last year.
Netflix has also shown that investing in quality can go a long way, generating multi-million dollar content tied to influential stars. For example, they recently partnered with Dwayne The Rock Johnson to create its biggest film to-date, with an estimated US$130 million production budget.
We believe quality will be a valuable differentiator in the ETF industry, too. Those ETFs that are well managed for liquidity and tracking error and the actively managed funds delivering consistent alpha and/or superior risk adjusted returns will not only win the day but also be able to command premium pricing.
Over the past decade, traditional media had the opportunity of a lifetime to leverage their existing distribution channels and ecosystems by adding more digital products/services. Instead, they rested on their laurels and in came Google and Facebook. Think about this, it is estimated that Google made US$4.7 billion from the news industry in 2018 which is nearly the same amount as the entire U.S. news industry made from advertising over the same period.
What happened in the news industry can happen elsewhere, too. We think Canadas big banks, which have an oligopoly in the banking and wealth management industry, should take heed, as those banks that dont start transforming their practices by layering in more products and services for their clients may face competitive threats from areas that they least expect. For the most part we think they get it, with the best example being RBCs recent strategic alliance with BlackRock Canada.
Finally, while financial products have become commoditized and will have to be adapted to the new model, financial advice has not and therefore will be a more difficult business to disrupt. The good news is that investment professionals can help navigate all of this new content being created, screening for quality and price, while staying on top of exciting industry developments.
Martin Pelletier, CFA is a Portfolio Manager and OCIO at TriVest Wealth Counsel Ltd, a Calgary-based private client and institutional investment firm specializing in discretionary risk-managed portfolios as well as investment audit and oversight services.
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