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Financial Planning > Behavioral Finance

How to Spot Seismic Shifts in Business Before They Happen

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The savviest investors are looking ever-forward, betting that disruptive inflection points in business they shrewdly spot on the horizon will greatly affect firms in the future. Indeed, noting these early can mean holding a strategic investing advantage. “Opening your mind so you’re prepared for what unfolds” is at the heart of it, maintains Rita McGrath, a Columbia Business School professor and expert on growth and innovation, in an interview with ThinkAdvisor.

Inflection points are big shifts in the business landscape produced by often-subtle trends that have been gestating for a time, McGrath says.

She explains the art and science of discerning inflection points in her new book, “Seeing Around Corners: How to Spot Inflection Points in Business Before They Happen” (Houghton Mifflin Harcourt, September 2019).

In the interview, McGrath, whose consultancy, Rita McGrath Group, serves clients such as GE, LinkedIn and Prudential, discusses the biggest recent inflection point to impact financial advisors.

As for what could trigger a U.S. recession, all the signs are there for “1999 all over again” — that is, a big bust on the heels of a big boom, she argues.

The popular speaker, ranked No. 1 for strategy by Thinkers50, also revealed how spotting inflection points can be helpful in creating specific investing strategies.

ThinkAdvisor recently interviewed McGrath, on the phone from her office in Princeton, New Jersey. The author of “The End of Competitive Advantage” (2013) stressed that anticipating the arrival of an inflection point means observing changes that are “brewing at the periphery.” “Snow melts from the edges” is the analogy she likes.

Here are highlights of our interview:

THINKADVISOR: What major inflection points have occurred recently in the financial services industry?

RITA MCGRATH: The biggest thing is the direct-to-consumer model. It has completely changed the cost structures and assumptions that financial advisors need to operate under. Today,  anybody with a computer can structure a portfolio around a specific interest — and for a very low cost. Robo-advisors are part of this.

What are implications for the future?

Some really big changes in human desires and human needs are happening. People don’t want to sit across the desk from an advisor.

Please elaborate.

I have a big question about the financial advisory business overall. Warren Buffett is very skeptical when he says, “Why do we need to pay all these middlemen to make basic financial decisions when so much information is readily available?” He thinks it’s, kind of, a waste of money.

Do you agree?

Well, what I like about my financial advisor is that he doesn’t do just charts and graphs and tell us, “Your portfolio needs rebalancing.” He forces us to sit down and talk about our lives, which is great. Financial advisors need to get beyond just the finance part. Nobody buys financial advisor services because that’s what they want. They want something else. [FAs] are advising people about their lives. So it’s a whole different ball game.

Was Donald Trump’s becoming president an inflection point?

It was the culmination of an inflection point that took root in the 1970s and 80s, when you started to see corporations being run for their shareholders only and everybody else with a stake in the company losing out. There was the rising cost of things like health care and education. Workers lost out in terms of pay and job security. All that produced the populist movement.

And that’s where Trump stepped in?

Right. He sensed this burgeoning dissatisfaction. He picked up on it and really exploited it. [But] one of the inflection points I think we’re going to see is somewhat of a walk-back of many policies, such as a reversal on [the practice of] stock buybacks, which were legalized in 1982.

With all the talk about a recession en route, should advisors be on the lookout for the inflection point?

Absolutely. We’ve had the longest postwar expansion of the economy. There’s the inverted yield curve. There’s too much stupid money sloshing around in crazy startups.

What could that inflection point be?

I thought it was going to be when Uber’s IPO went underwater, but that didn’t trigger anything. However, there’s WeWork [which just postponed its IPO]; MoviePass, a heavily ventured company, just folded. You’ll see a lot more of that. It’s going to be 1999 all over again [bust after boom]. The signs are there.

How can financial advisors use spotting an inflection point in recommending an investment to clients?

Looking at inflection points isn’t about [making] predictions. It’s more of opening your mind so you’re prepared for what unfolds. But the idea of inflection points can help inform where you put the more speculative parts of your portfolio. If you’re going to take a few risky bets, that’s where it can be really helpful because you can begin to see early evidence of certain things bubbling up.

And then what?

You want to have small investments you can exercise over time so that when the inflection point comes, it doesn’t take you by surprise because you’ve been watching it all along.

How would a financial advisor know that an inflection point critical to their own practice is about to happen?

If the average age of your client base is getting older, that’s one very strong signal. Another is that people stop looking to you for managing as much of their portfolio as they used to; for example, if you used to manage 80% of their wealth and now you’re down to 40%.

You’ve forecast that in India, traditional banking will be disappearing. What about banks in the U.S.?

A lot of traditional banking is being challenged. But disruption comes at you from the corners, from little slices that get disintermediated rather than a wholesale transformation of the entire model. It’s things like robo investing. Banking is [intent] on moving into the payment space. It’s a very rich market that a lot of new entrants have picked as a place they want to focus on.

Please discuss the notion of “get out of the building,” which you espouse in your book.

If you really want to understand what’s happening with your clients and the greater environment, you have to get out there where the changes are occurring. Get out of your email, get out of focusing on your desk — look at what’s actually going on. You might pick up on something. You’ll hear early what the changes are. You’re more likely to see the anomalies.

What should your attitude be, then?

What you want isn’t the right answer. What you want is the right question — seeing something and saying, “That’s funny [peculiar].” It’s a signal that your assumptions might need to be updated.

When one thing shifts, a whole bunch of other things start to shift, too. Things that you thought were true may be less and less so over time.

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