In the first part of our discussion, we covered what it means to be commoditized, as well as the areas of financial services that are currently experiencing commoditization.
So given this context for what it means to be commoditized and the trends in the overall financial services industry, what is the outlook for financial planning in particular?
Overall, it’s difficult to see how financial planning itself is in any danger of being commoditized in the foreseeable future. The primary reason is simply that the nature of customized, personalized and comprehensive financial advice is itself not conducive to being commoditized; to the extent every client’s situation is different, and the circumstances for applying advice vary too, it’s difficult for commoditization to take hold (although arguably planning firms still have a lot of room for more standardization of process and deliverables).
This is quite different than a service like tax preparation, where TurboTax was able to gain momentum both because everyone must go through the process annually, and because ultimately everyone must follow and implement the exact same rules. With financial planning, though, the client needs, services rendered, expertise of the planner provider, and tools for implementation, are all so unique from one client-financial planner interaction to the next, the reality is that getting financial planning services in today’s marketplace is actually the antithesis of undifferentiated and interchangeable!
In fact, ironically the greater challenge for financial planning may be that the services provided vary so much from one firm to the next that consumers have difficulty identifying a good planner in the first place or knowing what factors to prioritize when making a choice; to say the least, this isn’t a marketplace where the only difference from one planner to the next is the price for an identical service and outcome!
Notwithstanding the fact that financial planning itself isn’t being commoditized, though, it’s important to realize that many other services provided by financial planners or as a part of the financial planning process most definitely are becoming commoditized. For instance, as noted earlier, the execution of trading to the implementation of index portfolios is becoming rapidly commoditized; while few advisors still provide basic stockbroker execution services, this still puts a great deal of pressure on those advisors who provide little more than the implementation of passive, strategic portfolios, which can now be done for almost nothing from a wide range of online providers at an ultralow cost.
Similarly, providing basic financial planning projections for retirement or other goals, accounting for a client’s net worth and cash flow, or providing information on performance reporting, is also under commoditization pressure from a wide range of online computer- or tablet-based tools that are providing such information at little charge or entirely for free, from the RetireLogix financial planning “app” to the services of Mint.com to the more in-depth reporting options becoming available thanks to a wide range of “account aggregation” tools available for consumers. The end result: to say the least, there’s no longer very much value in just gathering information and being able to report it back to clients the way that perhaps there once was.
Nonetheless, this doesn’t mean that financial planning itself—the integration of these various points of financial data, client needs and goals, planner wisdom and advice, and subsequent implementation—are being commoditized, even though technology is certainly impacting many of the component parts. To the contrary, the opportunity is that as technology permeates the financial planning world, it will improve the planning experience and augment planners, not replace them. Ultimately, the value of financial planning is about changing a client’s behavior, and as human beings we simply don’t feel accountable to change from a computerized, commoditized service the way we do to another human being.
On the other hand, the pressure is on for those who are masquerading as financial advisors without really providing valuable financial planning advice. If the goal is to get paid for just gathering a client’s financial information, providing financial planning projections, executing investments and implementing passive portfolios, etc., the threat of robo-advisors is real, and business will not be sustainable as commoditization decreases the profitability of those services down to nothing.
Yet, ironically, in the end the reality is that as we enter the digital age, financial planning is not only not being commoditized in a manner that would make financial planners irrelevant, but the reality may be that it’s about to get even more competitive with more financial planners than ever, as an increasing number of advisors realize they must step up to provide a deeper, higher quality of financial planning advice and services for their businesses to survive and thrive.