The Three-Pronged Attack That’s Destroying the Market

23.02.2018 • Australia

Vern Gowdie – Markets and Money (Australia) –


The word ‘disruption’ is thrown around these days like confetti.

Every facet of life – political, religious, economic, social, sporting, entertainment – is changing, adapting, or dying due to some form of disruption.

As soon as you think you’ve got a handle on the disrupted disrupting the disruptors.

The ‘making of better mousetraps’ is not new. Civilization has thrived and prospered on innovation.

In 1942, Joseph Schumpeter, in his book Capitalism, Socialism and Democracy , described capitalism as ‘creative destruction’.

He Described creative destruction as the ‘ process of industrial mutation That incessantly revolutionizes the economic structure from Within, incessantly destroying the old one, incessantly Creating a new one.

Old and inefficient business models are replaced by more economic and faster models.

Technology has changed the pace of creative destruction from a canter into a sprint. Every day something new and disruptive comes along.

Personally, I’ve given up trying to keep up … not that I ever really tried. My world can still function with an old phone, a good book and a real newspaper. However, I must say I would have lost my internet banking, google maps and trip advisor.

The reason I mention my less-than-impressive credentials when it comes to all things ‘tech’ is that even I can see massive disruption coming to the investment industry . And I mean massive .

The assault on the industry’s business model is coming from several flanks.

The imminent threat of fee-free advice

Yes, fee-free advice.

I know … ‘no nothing for free’.

Well, in this disruptive world we live in, that’s not entirely true anymore.

Do you pay to maintain your Facebook page?

Do you pay ‘What’s the App’ or Facetime to stay in touch with family and friends?

Does Google charge you to do a search?

What about when you look up Wikipedia?

How about uploading something on Instagram or Snapchat?

Have you ever received a bill from Hotmail or Gmail for using their email services?


Free. Free. Zilch. Not a bean.

Yet, collectively, these businesses are worth hundreds of billions of dollars.

Therefore, in this new world of creative destruction, free is possible.

And in the case of investment platforms, it’s a reality, and not a possibility.

And this is the face of the disrupter …

The Future of Finance Is Free 23-02-2018

Source: Wealth Management
[Click to enlarge]

This news is hot off the press. The article was published a week ago … 16 February 2018.

Here’s an edited extract from the article (emphasis is mine):

M1 Money lets you automatically invest in what you want and on Dec. 13 [2017] , we decided to offer this service for free .

In the digital world of bits, your marginal cost can approach zero. In other words, we have built the platform, it does not cost us any more to serve additional users.

Every day, we sign up hundreds of new users, transfer millions of dollars, and process tens of thousands of trades (all in a matter of minutes) with minimal human interaction.

This is how it works. Mum and Dad investors fill out an online questionnaire. Based on your answers, the robo-adviser can design a portfolio for your risk profile and / or you can choose to ‘DIY’ your investments. The advice and the investment of funds is all done for … FREE. 

So how does M1 Finance make money?

We do incur costs, particularly in development, and need to support our ongoing operations. To cover those costs, M1 monetizes other services, the same way other brokerages currently do, and in exactly the same way we did it before we decided to eliminate management fees. We make money lending the user-owned securities and cash held in their accounts. In this way, we operate identically to a bank. We also are paid to transact on a number of exchanges that actually improve the pricing of our customers. In the coming months, we will introduce additional loans, adding an additional revenue stream for those who opt in.

M1 Finance is based in the US. It’s still early days on a fee-free model will prosper or not. But you can rest assured that if it gains traction, the big boys – JPMorgan, Charles Schwab et al. – will not sit idly by.

The creative destruction of ‘free or almost free’ investing is coming. Nothing safe.

The destruction we’ve seen in the retail sector will be repeated in the investment industry.

A good number of financial planning and business enterprises are going to fail to adapt, and will therefore die.

But the most impending disruptor I see who is expecting.

The investment industry has flourished and prospered from three major influences: rising share markets, falling interest rates , and soaring debt levels.

All three factors have been hugely positive for an industry, at its core, and are more likely to be delivered than in the bank.

And, it’s mostly delivered on that promise.

But what happens when the next debt crisis hits and shares plunge 60%, 70% or even 80% in value?

And what happens if ‘all the central bankers and all the central bankers’ can not?

They may have built up an immunity to be overstimulated and they may fail to respond to greater doses of QE and below-zero interest rates.

What if the next recovery – the new one – is long and painful?

How long is long?

Using post-1929 as an indicator, it could take two or three decades for the Dow to permanently reach and then pass its recent high.

With the market share in tatters, the investment industry’s promise of ‘outperformance’ is starting to face tougher scrutiny … and not just by the public investment.

The third disruptor will come from tougher and tighter legislation.

The 2008 crisis exposed numerous examples of poor and inappropriate advice.

The government’s response to the media shaming and public outcry was the introduction of the FOFA (Future of Financial Advice) legislation in 2012.

More power to ASIC … the removal of conflicted remuneration structures … a duty to act in the best interests of customers.

How is FOFA legislation working out?

Here’s an extract from ASIC’s 24 January 2018 media release (emphasis is mine):

ASIC has aussi Examined sample of files to test whether advice to switch to in-house products satisfied the “best interests” requirements. ASIC found that in 75% of the counsels reviewed the advisers did not demonstrate compliance with the duty to act in the best interests of their customers . Further, a financial position.

As fate would have it, the next (and far more destructive) share market collapse could happen smack bang in the middle of the Royal Commission Financial Services.

And, if that’s not bad enough for the big end of town, we could have a Labor government (which pushed for the Royal Commission) in power.

I can see it now … PM Bill Shorten on TV lamenting that what has happened to ‘hard working Australians’ is unacceptable, and that the government will be responsible for these accounts.

The industry is facing a ferocious three-pronged attack.

The coming ruination of this decades-old business model is a combination of creative and self-created destruction.

With the best 20/20 foresight I can muster, my guess is that the investment industry is going to be radically different in five years’ time.

If you want to stay informed of what’s happening in the world and how to benefit from creative destruction, please go here .


Vern Gowdie,
Editor, The Gowdie Letter


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