The local bookstore was once a quiet gathering place for browsing and getting recommendations from the knowledgeable owners and staff. They could steer you to something perfect for a day at the beach or a rainy weekend. There were never a lot of bookstores, but every small town had at least one or two, so there was at least some profit to be made. Still, it hardly seemed like a situation ripe for exploitation.
But Robert Haft looked out at the book business and he saw opportunity. Haft knew that the bulk of bookstore sales and profits came from a fraction of the titles available even in a small store: the bestsellers. Despite the high-touch appearance of most bookstores, the reality was that most customers who walked in already knew what they wanted, and even if they didn’t they would likely buy one of the bestsellers.
Haft started to sell bestselling books at deep discounts in the late 1970s and his creation, Crown Books, was an instant success. Barnes & Noble and Borders quickly followed and by the early 1990s, Crown, with its smaller, less attractive stores, couldn’t compete. Borders & Barnes & Noble covered the country with large and attractive stores selling cheap books. It was an unfair fight from the outset. Independent bookstores could not compete and within a few years most of them disappeared.
The fierce competition between the two book chains led them to attempt to replicate the traditional bookstore experience, adding more staff, large areas for reading and even cafes. But the underlying reason for their success (and the basis of their business model) was that bookselling was a commodity — and like groceries, drugs and clothing before it – price was the biggest factor in their success. And that put them at risk.
The Beginning of the End
In 1998, at the height of the big chains’ dominance, “You’ve Got Mail” with Tom Hanks and Meg Ryan was released – with Hanks playing the manager of the successful but soulless book behemoth, and Ryan the perky owner of a charming but doomed children’s bookstore. It turns out that this very popular movie was channeling the infamous 1982 Business Week cover story “The Death of Equities” (which appeared a few months before the start of the largest bull market of the century).
At the same time the movie was portraying the big box bookstores as unstoppable predators, Jeff Bezos and his three year-old company Amazon.com looked out at the same world and saw Borders and Barnes & Noble swimming in a barrel. So Bezos started shooting. It was an unfair fight from the outset. Borders has disappeared and Barnes & Noble, while still viable, has struggled with profitability for years. Amazon’s current market value is 260 times larger than Barnes & Noble’s.
It appears that some smart and insightful businessmen are looking at our industry and concluding that its business model is inefficient, expensive and vulnerable. They have begun to offer a much cheaper, highly scalable, self-service version of an investment advisory practice. Their early success has led some of the larger firms (Schwab and Vanguard) to respond with their own offerings.
We call them “robo-advisors,” a pejorative label that appears (for the moment) to have stuck. The financial blogosphere is full of opinion on this issue. The vast majority of the commentary I have read appears to frame the new competition squarely within the context of “technology,” and all the social, generational, and psychological implications that seems to follow from that term.
This is a huge mistake.
What is technology? The Oxford English Dictionary defines it as: “The application of scientific knowledge for practical purposes.” On my desk are the following practical products of technology: paper, a clock, a laptop, smart phone, stapler, ear buds, eyeglasses, eyeglass case, tissue box, a few books, a desk lamp, some pens, sticky note pads, highlighters and stereo speakers. Someone had to think them up, someone else improved it, until I bought them — and now they are all scattered on my desk helping me to do stuff.
To say that the robo-advisor industry is a technological phenomenon is redundant. Everything we do relies in some way on technology – so while digital advisors (or whatever you want to call them) seem to be more tied to technology than the traditional model, the discussion is beside the point.
Just a User-Friendly Environment?
The reason chain stores drove small merchants out of business was that they were all selling the same products, and so price became the determining factor in demand. John Bogle’s brilliant insight (index funds), aided by an investment management industry that charged too much and delivered too little — has led more and more institutional and individual investors to conclude that active management doesn’t work.
Securities investing has started to be perceived as a commodity — so cost is rapidly shaping demand. In business terms, there is really nothing new going on. Investors already know what they want. Robo-advisors are just providing them with a user-friendly environment.
Now that Borders and Crown Books have disappeared, the traditional bookstores that survived their onslaught are thriving, and even a few new ones are starting to open. Charlie Munger’s observation about investing, “It’s not supposed to be easy,” suggests that despite what is drawing investors today or even tomorrow, the need for personal investment advisory relationships will never really disappear.
Our job, through what could be a very challenging environment, is to be clear about who our clients are, provide them with honest value-added service and steer clear of barrels. That’s how to avoid going the way of the neighborhood bookstore.