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  • Home>Research & Insights>Gray Matters>A Hurricane of Disintermediation

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    A Hurricane of Disintermediation

    Advisors, mutual fund managers are in a dangerous season.

    Ralph Wanger, CFA, 04/03/2017

    The views expressed here are those of the author and do not necessarily reflect the views of Morningstar.

    In January, Paul Reilly, CEO of Raymond James, announced a robo-advisor platform. He said, “While many industry alternatives seek to disintermediate advisors, Connected Advisor will support advisors and their commitment to serving clients.” Translating from PR-speak to real-speak, he means, “We are going to disintermediate you.”

    My career was in the mutual fund industry. Mutual fund managers are in a hurricane of disintermediation, and it is disconcerting to see lovingly built businesses melt away like Colorado snowbanks do in April, reducing a beautiful winter landscape to a few puddles of muddy water. As a financial advisor, your skills at asset allocation, or picking great stocks, or finding the latest mutual fund genius, are all going to be done faster and better by the computer, and your only value will be as an asset gatherer. And because your customer will not do any better or worse than anyone else’s customer, the amount of fee that you can earn for asset gathering may be under pressure, too.

    Several decades ago, I found myself at a party talking to a woman who had just moved back from Alaska, where she had worked on a fishing boat. I asked her what that was like. She replied that it was not a good way to make a living. The fish business was controlled by the Japanese, who had enormous floating fish factories offshore. They were required by treaty to process only fish caught by U.S. citizens, so the small fishing boats were allowed to net the fish, and then had to motor to the fish factory where the Japanese would attach and crane the net, swing it onboard, empty the fish into tanks on the factory ship, and return the net to the trawler. This meant that 90% of the economic value of fishing went to the Japanese factory ship and only a minor amount to the fish catcher, even though the crew on the trawler was subject to all terrible risks of finding no fish on a bad day and being drowned in a storm on a really bad day. So, the woman had decided to find a different career. The poor financial advisors are going to have to work really hard to bring in new fish, I mean clients’ money, but the big factory that processes the money will make most of the profits and take none of the risk.

    From the point of view of Raymond James, which is a very fine firm, it can improve the way it operates in a highly regulated but very competitive industry. The new client will be asked a few questions about her target, timeline, and risk tolerance. That will allow an asset-allocation algorithm to select an appropriate portfolio, which will meet all compliance rules. All the portfolios will be right on the risk-return curve.

    I wrote about regulation of our industry in the June/July issue of this magazine when the biggest problem seemed to be the Department of Labor rules extending fiduciary responsibility. These rules seemed designed to prevent financial advisors from using anything but exchangetraded funds in retirement accounts. At that time, Hillary Clinton appeared to be a shoo-in for the presidency and the new regulations certain to take effect. Donald Trump’s victory changed this. I am writing this on Feb. 1, and my current expectation is that the DOL changes will be canceled.

    The stocks of mutual fund management companies have rallied on the news. I now believe that the changes in the industry toward disintermediation of financial advisors will continue regardless of the DOL rules. The Raymond James Connected Advisor program has been under development for a long time and reflects what industry practice will be in the future. This seems to be one of the frequent cases in which regulation follows technology and public opinion, instead of the other way around.

    Your disintermediation is nigh, and I don’t think that reintermediation is even a word, let alone a career path.

    CFA, is a trustee of Columbia Acorn Trust.