Here today, gone tomorrow: both commission-based brokers and companies that simply weren’t built to succeed in the 21st century, a world driven by innovative, rapidly expanding new technologies. That’s what prominent financial advisor Ric Edelman forecasts in an interview with ThinkAdvisor.
In his new book, “The Truth About Your Future: The Money Guide You Need Now, Later and Much Later” (Simon & Schuster), the executive chairman of Edelman Financial Services argues that exponential technologies — those undergoing fast, aggressive growth, such as artificial intelligence, nanotechnology and bionics — are disrupting investing by enabling the birth of enterprises that are displacing and replacing old-school firms. Think Uber and Airbnb.
In the interview, Edelman, whose RIA manages $18.7 billion in assets, discusses the most promising exponential technologies in which to invest, as well as when free trading — made possible by digital technology — is likely to be a reality (very soon).
Edelman, whom Barron’s has ranked the country’s No. 1 independent advisor three times, also offers his prediction for the fate of the Labor Department’s fiduciary standard rule.
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As for commission-based brokers, he believes that even if the DOL rule fails to be imposed, fully half of them will leave the industry because of the growing prevalence of competing advisors that hold to the fiduciary standard.
Here’s good news: FAs have only a 42% probability of being replaced by automation, Edelman says, quoting an Oxford University study. Meanwhile, in Japan, the Henn-na Hotel is staffed almost entirely by robots. Even the cleaning and food service staffs are androids.
Edelman, 58, is so enthused about exponential technologies that he spearheaded the introduction of BlackRock’s iShares XT exchange-traded fund, which invests not only in technology developers but equally in companies that use advanced technologies to generate growth. The fund is routinely included in all Edelman investment recommendations; 90% of the firm’s clients now own it.
The RIA has 157 advisors in 42 offices nationwide serving 32,600 clients. Edelman’s nationally syndicated radio show has been broadcast for 25 years.
ThinkAdvisor recently spoke with Edelman, 58, who was on the phone from company headquarters in Fairfax, Virginia. He discussed how learning about exponential technologies can indeed lead advisors to make some smart investment decisions. Here are excerpts from our interview:
THINKADVISOR: What do you consider the most promising investment opportunities in exponential technologies?
RIC EDELMAN: The two most exciting areas are companies that develop nanotechnology and those that develop sensor technology. Nanotech, the notion of making things smaller, is at the root of the overwhelming majority of technological innovation — the basis on which all other tech gets built. The smaller you make things, the cheaper and better performing they become.
What’s special about sensor technology, more commonly known as robotics?
In order for a robot — a computer that moves — to be useful, it has to know its environment. Sensor technology’s goal is to give a computer “senses” [e.g., “sight”] so that it’s capable of moving and interacting with the environment. For example, without sensor technology, there wouldn’t be self-driving cars.
“Increased connectivity will result in more volatility in financial markets as more people trade [securities] using their phone,” you write. When will it be free to trade online?
Within the next two years, and that will very likely result in an increase in trading volume, which will lead to increased volatility.
Free trading? What will happen to advisors who work on commission?
They’ll be gone — out of business. They largely are already. You’ve seen the price wars that are going on in stock trades. They’re already down to $5 a trade; pretty soon it’s going to be zero. In fact, it won’t be long before you’ll be paid to open an account. Firms will pay you to do business with them. This is part of exponential technologies: Technology wants everything to be free. It’s called demonetization.
But you write: “Nowhere is there more excitement about exponential technologies than on Wall Street.”
Wall Street recognizes the economic and financial opportunities that exponential technologies afford. The most exciting companies that have been developed over the past 50 years have almost all been technology-based: Microsoft, Apple, Amazon, Uber and so on. In the oil industry, fracking is a technological innovation that’s uncovered vast oil reserves [previously] undiscovered or unreachable.
So where does Wall Street come in specifically?
Such innovative companies require capital. Wall Street is in the business of providing capital. And Wall Street investors generally are the beneficiaries of these investment successes.
The word that best describes the impact that exponential technologies will have on investors is “disruption,” you write. Please discuss.
Innovation brings disruption. There’s nothing new about that. Buggy manufacturers were thrown out of business by the invention of the automobile. But now we’re seeing disruption with much greater frequency and impact. Kodak went bankrupt because [virtually] no one was using film photography anymore. In 2012, Instagram — using technology that Kodak invented — was sold for $1 billion. Craigslist and Monster.com have put newspaper classifieds [virtually] out of business. All that is disruption.
So what does this mean to investors?
If you invest in a company that was built for the 20th century, you run the risk of having that company fail in the 21st century. It’s widely expected that more than half the Fortune 500 companies will not exist in 10 years. On one hand, that’s very scary for investors; but on the other, it’s very exciting because the new companies that come along will replace the old-line businesses.
Why is it essential for financial advisors to keep on top of the new technologies?
Advisors who fail to stay current with exponential technologies are probably not going to be in business within the next 10 years, not only from an investment management perspective but from a practice management perspective because advisors need to be users of state-of-the art technology.
What are some fintech innovations that are applicable to the industry directly?
Payment transfers, digital currency, the blockchain and many more. Financial service companies themselves will be massive beneficiaries by adopting these revolutionary technologies.
You believe that the blockchain will “revolutionize every aspect of money.” How and why?
Because blockchain is an authentication system instead of a trust system. So much of what we buy is based on trust; we’re constantly trusting vendors. For example, we buy a car, and it’s delivered in a month. But the trust-verification element is very cumbersome, time-consuming and expensive. Blockchain eliminates all that because you know when you engage in the transaction that you have 100% certainty it’s a legitimate transaction. This allows it to occur much faster, which dramatically reduces the cost.
Is it the younger demographic that’s driving new companies to replace the old?
Not always. It depends on the product and end user. In the areas of neuroscience and medicine, the end consumer tends to be older Americans in need of health care. They’re the ones that buy the pharmaceuticals or medical implant devices or treatments designed to cure major illnesses and deadly diseases.