Making Sense of Financial Innovation

This analyst blog is part of our coverage of the 2017 Morningstar Investment Conference.

Closing out the first day of the Morningstar Investment Conference, Tricia Rothschild and Don Phillips of Morningstar, Ritholtz Wealth Management's Josh Brown, and IBM Watson Financial Services' Paolo Sironi explored how innovation is disrupting the financial industry

Not Everything New is New What exactly counts as innovation in financial services? Brown thinks a lot of what we call innovation is just repackaging. For example, in the '30s we would have been talking about the disruptive force of open-end funds, but really they were just a slightly different version of the then-dominant closed-end fund structure.

He sees that extending to today. Robo-advice is, functionally speaking, a different user interface on top of a lifecycle (target-date) fund that you could have bought for years. People like that they can see it on their phone and want some customization, but in the end it is just repackaging.

Phillips said what qualifies as innovation isn't always a positive. He thinks what investors want is simplicity in a financial world that is designed to deliver complexity. But instead things get over-engineered. The example was indexes. An idea that started out very simply has exploded to the point where some index families now have over one million indexes.

Sironi thinks the primary transformation the financial industry needs to go through is moving from delivering financial transactions to being more focused on services. He expects this is where most of the innovation will come from in the coming years.

Who Benefits? Brown thinks many the primary beneficiaries of recent innovation have been practitioners and advisors more than investors. He doesn't see this as being necessarily a bad thing as advisors are needed for any given solution to scale. Most individuals just aren't plugged into investing enough to be following the changes in the industry.

Phillips sees the importance of widening the community of investors so they can take advantage of new tools. Most of the new services today are targeted toward HENRYs (high earnings, not rich yet) who were already being well served by the financial industry. This isn't a surprise given that the investment community doesn't look like the world at large, so they tend to focus products on people that have similar profiles to themselves. Phillips advocated for a broader representation of women and minorities into the industry to help find the best way to benefit more people.

You Need to be the Bouncer Where does that leave advisors trying to help their clients? Brown thinks their role in a world of rapidly proliferating products is to be the bouncer willing to say no to a client who wants to buy an unsuitable product and to narrow down the mind-boggling number of choices to something more manageable.