Adams Financial Concepts,  COVID-19,  Current Events,  Financial Planning,  Return on Investment,  The Investment Industry

The Economy: BC to AC

It’s time to talk about BC to AC. That is, “Before Coronavirus” to “After Confinement”. The Economist calls it “the 90% economy”.[1] But first, let me take you back in time to give you an example of what may well be in store for some companies in the future.

There was a junior clerk at Rochester Savings Bank in 1878 who decided to take a trip to Santo Domingo in the Dominican Republic. This young man wanted to record his trip by photographing it, however, the camera in 1878 was huge, required a tripod to hold perfectly steady, and the picture was recorded on a heave plate that had to be held in place. He would need glass tanks, chemicals, and a large tent to block all sunlight in order to wet-develop the final photo.

Instead of making that trip, the young man worked in his kitchen to make a photo-development process that could be developed dry. He went on to develop a film that could be stored in a roll. Finally, ten years after he began, he had a camera and a slogan: “You press the button and we do the rest”. That young man, George Eastman, had a favorite letter, the letter “K” – and so the Eastman Kodak Company was born in 1892.

Skip ahead now to 1973. The Kodak company hired a young engineer named Steve Sasson from Rensseler Polytechnic Institute (RPI). Fairchild Semiconductor had invented a charge coupled device (CCD) that made it easy to move electronic charges around transistors. Sassoon was assigned to see if CCRs could be used to make digital photographs. He was successful, although the camera was very crude, weighed 8.5 pounds, was the size of a toaster, and took only grainy black and white photos which had to be stored on an external cassette tape.  It was the very first digital camera, and it had been developed by the Kodak Company.  

By 1996, Kodak had 140,000 employees and their stock had a market cap of $28 billion. The Eastman Kodak Company owned 90% of the film market and 85% of the camera market. Management viewed the digital camera as undercutting their chemical and photographic film business and did not see how a camera that produced a grainy black and white picture could ever compete with the film business. A company that essentially had a monopoly was driven into bankruptcy by a technology they themselves had invented.

The point of the story of Eastman Kodak Company is this: as we emerge from the pandemic, there are going to be changes in lifestyle, demographics, and technology that are going to displace and destroy some of today’s great companies. 15 years ago, before the Great Recession, would you have believed that you would fly into another city, climb into a stranger’s car and be driven to a stranger’s house for your stay in that city? But we do now. The two largest taxi companies in the world own no taxis and the biggest hotel chain in the world owns no hotel rooms.

When we go through these big economic setbacks, like the dot-com bust, the Great Recession, and now the pandemic, companies and industries change. Innosight, a business consulting firm, says half of the companies in the Standard and Poor’s 500 are at risk of going the way of Kodak.[2]

Changes are coming in my industry – the financial services industry. The beginning already seemed to be here before the pandemic, but I believe it will accelerate the process. Robo-advisers have been taking over much of the investment adviser business because they offer the same returns at a fraction of the cost. Investors are paying an average of a little over 1,00% in fees to financial advisors. For what? When I talk to my peers, they believe their value is in hand holding through these meltdowns like the dotcom bust, the Great Recession, and the pandemic. What real value have they delivered? From my observation, which granted is very limited, they deliver mediocre results significantly below the S&P 500 total return. Robo-advisors can do that for a quarter of the price.

Most financial advisors do financial planning, but few, if any, of those financial plans are built to account for the meltdowns we have experienced in the last two decades. Besides that, robo-advisors can deliver a financial plan for most people for significantly less cost than the Certified Financial Planner. Even high net-worth individuals are beginning to use the robo-advisors.[3],[4]

Even the so-called “quant” models did not prevent investors from losing money. I have been in the financial services industry for over 3 decades, and in that time I have seen dozens of models that, when back tested produced superior returns. But when individuals actually invested, they realized back testing is not forward production. In my opinion, some investors will find those model portfolios or methods that were supposed to deliver superior results and keep investors from losing money have instead failed. They, like financial plans, and normal financial advice, have provided mediocre results.

When I began doing fee based discretionary accounts, the normal fee was 3% for the first $250,000 or $500,000. As we experienced the dotcom bust and the Great Recession, investors not happy with both under performance and losing money put pressure on financial advisors, and fees were compressed, for most advisors, to almost 1%. Even at 1%, the large majority of financial advisors probably deliver mediocre results.

I had a client in the 1990s who was a travel agent. When we discussed the internet and the impact it might have on his business, he claimed he was not worried. Planning trips was complicated and his customers needed his hand holding and help with travel agendas. His, like so many other travel agencies, has since gone out of business. There are still travel agents today, but they do best by serving niche markets.

I believe my industry will go the way of the travel business, and only the few of us who deliver superior returns and who stand on their long-term track record will survive because we do better for clients than the robo-advisors.

This has implications for the national and regional brokerage firms that rely on financial advisors to generate revenues. Kodak viewed the digital camera they invented as interfering with their photographic film business. How will the brokerage firms view the robo-advisors and their impact on the financial services business? Will those firms make an adjustment or will they go the way of Kodak?

For my clients, even the contract we sign says I will seek to deliver superior returns. Those of you who read my eletters but have not chosen to invest with me: consider not just your recovery in this pandemic, but future black swan events.

Think forward to 2022. Will you be happy in 2022 if you settle for the status quo?


-Past performance is no guarantee of future performance.

[1] “Life after lockdowns”, The Economist (April 30, 2020), Online.

[2] Anthony, Scott D., S. Patrick Viguerie, Evan I. Schwartz, and John Van Landeghem, “2018 Corporate Longevity Forecast: Creative Destruction is Accelerating”, Innosight (February 2018)

[3] Stein, Jon, “High Net-Worth Investors Are Moving More of Their Money Into Robo-Advisors,” CBInsights (June 9, 2016)

[4] Friedberg, Barbara, “What Robo-Advisors Can Do Better (and Worse) than Financial Planners,” The Balance (June 25, 2019)