Is your service model and strategic planning flexible and creative enough to provide for your survival through a life threatening shift in the economic or regulatory environment?
Last weekend I went to see Jurassic world with my daughter. It was a nice diversion for both of us. For me because I like spending time with her. And for her because recently she has been working long hours preparing her applications for medical school. The movie got us talking because her work-study program involves doing genetic research in the biology department at school. Isn’t it amazing that these creatures, much larger, faster and more powerful than humans, suddenly all died out and we did not?
About 66 million years ago, a comet or asteroid crashed into the earth and triggered the Cretaceous–Paleogene extinction event. It is famous because it wiped out all of the nonflying dinosaurs and took out three quarters of all plant and animal species. How is it that our ancestors were among the 25% that made it through that period and enabled us to be here today? Because they could adapt. They had strategies for surviving 3 to 6 months without sunlight and a long period of very cold weather. Of course, it would be silly to say that these adaptive behaviors were deliberate or some sort of a contingency plan. The point is those talents enabled them to live while most things around them died.
Extinction level events happen in business, too. My offices is in Rochester, New York, the home of Eastman Kodak Company. In 1976, Kodak had an 89% market share of photographic film and 60,000 employees in Rochester alone. Even as competition heated up, it still had 74% of the film market as recently as 1999. Then the Earth was struck by a meteor called digital photography.
Many accuse Kodak of falling victim to its own complacency and there is a lot of truth to that. The full story must also include all of Kodak's attempts to innovate and build new businesses. It experimented in developing new companies and new products through an initiative called New Opportunities Development. It bought companies in other industries. (Ironically, Kodak actually even invented the digital camera.) In the end, management ultimately lacked leadership or vision or flexibility or whatever it needed to survive the demise of film. It declared bankruptcy in 2012. It is a small remnant of what it once was much as the only thing that remains of the flying dinosaurs of the Mesozoic are the Finch, the Blue Jay, and the chicken.
There are other examples. Blockbuster video. Royal Typewriter. Bethlehem Steel.
Most asteroids that come our way miss. Some thought the end was nigh when brokerage commissions were deregulated in 1975, believing that price competition would starve everyone of income. But we only need one to land for your business to be at risk. What are we watching though our telescopes now?
- Proposals from the Department of Labor affecting revenue from IRA accounts. Many practices I know derive a majority of their income from trail commissions on retirement accounts. What will happen to them if 12(b)1 fees are regulated out of existence for IRAs?
- Declining interest in in-person meetings. Generation X clients are comfortable meeting virtually and Milleniums question the need for most personal contact. What will happen to your business if you demand clients come into your office as the Boomers die off?
- And, of course, the one that is on everyone’s lips – robo-advisors. Here’s a thought experiment: Let’s say robo technology developed a little farther than it is today and your primary competitor installed one, fired their research and trading staff, and converted from an AUM model to a flat $5,000 per year retainer. How would your prospect with $5 million to invest compare you with them and how would that affect your business?
Sometimes we see what’s coming and sometimes we aren’t aiming the telescope in the right direection. Although Kodak invented the digital camera, it did not see it as a major player in the consumer photography market until it was too late. What is out there that we do not see yet?
Computers have been writing sports coverage for several years in some publications, and they are gradually making inroads into other kinds of writing. What will happen when they start writing financial plans? Your staff CFP may miss the opportunity to recommend an obscure tax strategy to a qualifying client, but a computer constantly updated with the latest rules from the IRS won’t.
What skills and resources do you have that you could call on in the event of your own extinction scenario? Smith Corona now makes electronic devices. IBM is primarily a consulting company. What do you offer beyond number-crunching and asset allocation that you can adapt to survive an unexpected ice age?
Keep on Sparking!