I had been a stockbroker a little more than seven years when I bought my first PC in late 1983. The transformation irrevocably changed the way I thought about investing and the investment business. But it wasn't until I bought a little Visioneer scanner 11 years later that I saw the true potential of what is popularly known as creative destruction.
I’ll never forget the first time I sat at my desk, slipped a few pages through the scanner and emailed it directly to a client. The office protocol at that time consisted of the following steps: (1) My assistant would locate the needed document from the client file or elsewhere. (2) Next she would go to the Xerox machine and make a copy of the document. (3) Then she would walk over to the fax machine and wait while the document was faxed to the client (assuming that she didn't have to wait even longer while someone else was using the fax). (4) When that was done she would walk to the branch manager's office and place the photocopy of the faxed document in the correspondence file for his review. (5) Finally, she would go back to the file drawer and place the document into the client's file, hopefully avoiding: (6) Doing it all over again if the client didn't get the fax.
All I needed was that one experience for the light bulb to go off in my head. Instantly I understood just how much time, effort, expense and insanity could be eliminated by that little scanner. I had seen just one tiny sliver of the future and I wanted it bad.
It has been nearly 15 years since I last had paper records. At Jaffe Asset Management there are currently 91,327 documents, 72,944 emails (with 27,046 attachments) representing over 2 million pages of paper weighing nearly 20 tons—that no longer exist. What used to require a significant commitment of space, time, people and money can now be managed almost anywhere with exponentially greater efficiency and some ridiculously inexpensive software. I continue to be amazed at the transformation.
The first recorded instance of creative destruction was the invention of movable type in the mid-15th century. Before the advent of printing, handwritten books were incredibly rare and expensive—affordable only to the very wealthy or the Church. The year Gutenberg published his first Bible (in 1455) the library at Cambridge University had just 300 books. By the end of the century, 1,100 print shops operating in 200 European towns had printed nearly 10 million books. An unintended consequence of this rapid expansion of the written word was a concurrent explosion of literacy—which led to a flowering of innovation and invention that continues to this day.
Few of us know or care much about the scribes whose livelihood was threatened, marginalized and ultimately eliminated by this incredibly positive transformation. However the scribes were not just Luddites. The cost and the time required to keep manuscripts from deteriorating forced scribes to focus on preserving those few texts that held truly ancient wisdom. They knew that the printing press would bring new ideas to compete with the old, and they fully understood that while the ancient texts would no longer be in danger of disappearing, they faced an even bleaker future: The wisdom they possessed would be crowded out and ultimately forgotten.
The scribes’ fears have been borne out. Five hundred years later—despite all the gains we have achieved—the marginalization of that wisdom leaves us poorer in many ways. But I doubt seriously that anyone today would suggest that the nearly unlimited benefits the world has gained from the advent of printing and resulting growth of literacy and innovation were not worth that cost.
This is the built-in trade-off of creative destruction: What we get is better than what we lose. But we still lose something, and sometimes that something is actually valuable. This is the nature of all important choices—and I think a healthy one.
Those of us who have observed the investment world are more than familiar with the benefits of creative destruction because we have had a front row seat as one industry after another transformed itself, and still others arose out of the sheer imagination of successful entrepreneurship. It has been a wonder to behold—unless of course, you found yourself directly in the path of the next wave.
My dad was a pharmacist. When he had saved up enough money he opened up his own business. Unfortunately for him it was just around the time that discounting started to change the nature of the retail business—and drug stores were an easy mark. Everyone liked my dad and he knew all his customers and their doctors on a first name basis—giving out our home number in case of an emergency. But ultimately enough of his customers decided that whatever value they gained from having a personal relationship with him was not worth the money they could save by shopping at the discount drug stores.
The transition didn't happen overnight, but it was clear which business model was more popular—and my dad was forced out of business.
Today the investment advisory industry finds itself in the crosshairs of new forces of change. Much like the old corner drug stores, and despite the strength of our personal relationships with clients, the advisory industry model is fragmented, cost inefficient and vulnerable. The looming change has generated a huge amount of passionate discussion and debate—primarily about the nature of current competition and how advisors should respond.
What led me to write this column was the obvious need to reframe this issue squarely within the context of creative destruction, the paradoxical process that Schumpeter identified as “the essential fact about capitalism.” Only within that paradigm can advisors clearly and dispassionately observe and evaluate the sweeping changes that are just beginning to unfold.
An important thing to remember about creative destruction is that it is good—and we are its continuing beneficiaries. It represents the natural ongoing application of intelligence, imagination, innovation and enterprise to the world of business. Sometimes we notice it, sometimes we don't. But it's always there, whether we like it or not.
We definitely liked it when creative destruction made it possible for advisors to establish independent practices without the previously enormous costs associated with such an endeavor. But now we don't like it because it's created an entirely new kind of competition—built on a foundation of innovation and using some of the very same tools that have benefitted us.
Even in their current incarnation what are derisively referred to as “robo-advisors” deliver a competent, systematic and inexpensive service. I am not the only one impressed; this is really a wonderful opportunity for investors—especially those small investors who, perhaps for the first time, can feel confident that they are receiving solid and sensible advice without being skewered with exorbitant fees.
And while many of you may not agree with me, I believe this is a positive development for our industry. It may not be a comfortable development, because change is never comfortable. Like my dad, some of us may be forced out of business. But at the end of the day the only reason we are advisors is because enough investors believe that what we do for them is both valuable and well worth the cost.
It all boils down to a simple choice: Do you want to be a scribe or do you want to be a printer? Your clients will tell you what they’re looking for—all you need to do is listen. What could be better than that?