The TD Ameritrade Institutional Conference, held at the Manchester Grand Hyatt hotel on the waterfront in San Diego, attracted so many attendees that you could see the curvature of the Earth in the main ballroom, and the Veo Village environment of technology vendors literally stretched as far as the eye could see.
Prominent among the announcements was the revamped VEO One, the re-rollout of TDAI’s trading platform. Most of the highlights were described in the opening article: the marketplace of model portfolio providers, the upcoming benchmarking capabilities and the integrations that make custodial data available to vendor applications. But the conference attendees were shown some additional enhancements: an increasingly transparent workflow integration with their service teams, allowing them to see the status of all client paperwork in real time (and most importantly whether it’s in good order or not); and an improved version of VEO Open Access, which gives the growing ecosystem of tech providers a platform to self-create integrations without having to rely on the (sometimes scarce) TD Ameritrade Institutional staff to participate in the process.
There were enhancements to the Playbook, which makes it easy for advisors to get into the 401(k) business by leveraging marketing tools, TPA relationships and the TDAI brand.
And an obscure singer/songwriter named Sheryl Crow performed an entertaining concert on the final night.
No Time to Think
In between the announcements and the private concert, there were two outstanding keynote presentations which will have an immediate impact on your business activities. The first came from Lisa Bodell, CEO of Future Think, author of “Kill the Company; Why Simple Wins.” Bodell told the audience that we’re all making our business lives much too complicated, and that aggressive simplification can lead to major improvements in personal and corporate productivity.
“Complexity holds us back from meaningful work,” Bodell told the audience. “When you’re drowning in the mundane, you never get to the meaningful.” Later she added: “Complexity stunts your collective innovation and creativity.”
To see why, imagine that adding complexity is a weaponized strategy designed to kill your firm. This actually happened during World War II; Bodell cited the OSS (formerly the CIA) field manual, which told embedded agents how to use their internal roles to reduce the effectiveness of the Nazi regime.
See if any of these sounds like routine practices in the corporate structure:
Insist on doing everything by rigid channels.
Refer all matters to committee.
Bring up irrelevant issues at meetings.
Haggle over precise wording.
Consistently advocate caution.
These natural tendencies, Bodell said, is precisely how we unconsciously undermine our own companies. She said that surveys reveal that 45% of the average corporate executive’s time is spent in meetings, 25% goes toward answering emails, and another 18% is devoted to doing various other kinds of unimportant busywork.
That leaves just 14% of their time for important work on behalf of the company. Bodell called the phenomenon “presenteeism”—absenteeism while actually occupying your office.
What causes all this creeping complexity? One contributing factor is the assumptions we make: that more is more valuable than less, that process is more valuable than culture, that doing is more valuable than thinking. If you don’t believe these are common assumptions, Bodell recommended that we all imagine that we’re walking into a colleague’s office, where we find that person looking out the window.
“You ask: what are you doing?” Bodell said.
He says: Just thinking.
“Your first instinct,” Bodell told the group, “is to tell that person to get back to work. Yet isn’t thinking the most crucial activity we do in the office setting?”
Later, she offered a great quote, telling us that the human mind is a restless seeker, constantly active from the moment we wake up in the morning, and it doesn’t stop until you get to the office.” (Cue the audience laughter.)
This is not just an internal issue. Bodell cited research that customers will pay 6% more for a simple-to-deal-with customer experience, and are 70% likelier to recommend you if your product is simple to buy and use. “Simplicity facilitates more customer trust and more employee retention,” said Bodell. “The fact is, all of us resent people who waste our time.”
What can you do to reduce complexity? You start simple, Bodell said, by making simplicity an overt strategic objective of your company. The Google organization, for example, has created “cut the crap committees.”
That means you have to define what you mean by simplicity, which is fundamentally a subtractive effort. How can you reduce the steps in the user experience? How can you make everything you do clear, so you can communicate internally faster and with less effort? How can you make routine activities repeatable, which encourages the creation of best practices, efficiency and thoroughness?
Once you know how to define simplicity, start looking for areas to simplify. For advisors, a good strategy is to list 20 things that you typically do in a day, week, month or year. Circle the things that are truly valuable—and recognize that this will typically be a surprisingly small subset of the total list.
Then ask yourself: How can you stop doing those things that are not circled?
In Step 3, you streamline your internal processes for making decisions, which often means empowering staff to make decisions on the spot. That, right there, will eliminate many of those uncircled items.
In Step 4, you make it a priority to kill stupid rules. Write down two reports, procedures or cultural norms that represent busywork that is holding you and your staff back from maximum efficiency. One company cut down the burgeoning clutter of emails by having each recipient rate each email received on a scale of 1-10 as to how important it was for them to receive it. People who were consistently getting low scores tended to stop sending out wasteful messages.
Another company encouraged the staff to create “no-scroll” emails, where the entire message fits on the email window without the reader having to scroll down. You can also make a habit of putting NNTR in the subject line: No Need To Respond.
Why are these changes so difficult? Because, Bodell told us, most organizations, and most advisors, are not focusing on simplicity in our management decisions. “In our routine habits, we never think of eliminating, only adding,” she said.
The Exponential Future
The second presentation was a bit more complicated. Salim Ismail, the Director of Singularity University and former head of innovation at Yahoo!, walked the audience through a dazzling array of technological innovations that are coming to our society—and showed us how these innovations are going to fundamentally change our society faster than we can react.
“A lot of our training and education and intuition teaches us linear extrapolation,” he said. “We think of past performance, and then we draw straight lines to where things will go,” Ismail added. “But with this computational and informational wave, our world is operating on a very different heuristic, an exponential pattern, doubling patterns like Moore’s Law.”
To illustrate the cognitive challenge, Ismail said that if he took 30 linear steps in front of the audience, he would move roughly from one end of the speaking platform to the other side—and we would all be able to instantly project this trajectory and destination in our minds. But what if he took 30 doubling steps, every step twice the length of the previous one, similar to the exponential growth of new technologies in biotech, energy and computation? How far would that take him?
The answer: he would have walked 26 times around the world. Did your mind see that coming?
The mental challenge is complicated, he said, by the fact that most traditional industries have evolved to deal with physical products, where the value came from moving things around and assembling raw materials.
In contrast, today’s products, like the Kindle and iPhone, revolve around moving and manipulating information. “With the rise of the global Internet, we now have entire industries that are completely digital, with almost no physical manifestation at all.” Ismail told the group. “In every domain we see, we are moving into this information-based world.”
Citing research, he added: “Once you take any domain, industry, discipline or area of product or technology, and you power it with information technology, and it acquires informational flow properties, the price performance begins doubling in anywhere from 18 to 30 months. And most importantly,” Ismail added, “once that doubling starts, it does not stop. It just keeps going. Your smart phone has more computational power than the whole of the U.S. government had in the 1980s.”
Where do you find these doubling patterns? Ismail said that there are now about a dozen areas that are on exponential tracks, including drone technology, 3D printing, neuroscience, biotech and energy production.
“Ten years ago, we had maybe half a billion internet-connected devices around the world,” Ismail said. “We’re today up around 15 billion, and we could be at 50 billion by the end of the decade. Pretty shortly after that we could be up over a trillion.”
Changing the Problem Space
What does this mean for advisors and investors? “In our research, we found that once you digitize a domain, it goes through a very destructive phase,” Ismail told the audience. “When we used film, you were operating from a scarcity model. You could only carry so much film, it cost about a dollar a photograph, it took a few days to get your prints back and so on. When you move to the digital environment, three or four very fundamental things happen,” he continued. “First, the marginal cost goes to zero. I can take a thousand photographs and the cost stays exactly the same.
“Second,” he added, “the domain completely explodes. Film photography: I’m very carefully framing every shot. Today, we’re basically holding the button down on all of our devices and taking many many more photographs.”
Finally, there’s a very important issue for existing businesses: digitizing fundamentally shifts what Ismail called “the problem space;” that is, the type of product or service where corporate providers can charge their customers for solutions.
“In a scarcity problem space, I may offer high-end cameras, and teach courses on photography, and write books on composition,” said Ismail. You charge for film, and print photos or slides.
“In an abundance problem space,” Ismail continued, “we have thousands of photos on ten devices, and we can’t find anything. When you shift the problem space, you shift the business model.” Suddenly something like iPhoto and other photo aggregation services become the prominent ways to make money in the photo industry, replacing the camera and film providers.
Expand that out to countless other industries, and it means that basically every company in the world is going to experience the huge challenge of finding a migration path from its existing problem space to the next one. “Every business in the world right now is operating on a model of scarcity,” said Ismail. “In the past, if you didn’t address scarcity, you didn’t have a business.”
Ismail provided a slide showing the cost of lighting over a 700-year period, from 1300 to today. “Pay attention to the shape of that curve,” he advised the audience. “You can see that light starts out really expensive, then it plateaus for a while, and then in the last 10% of the time it drops to almost zero. We kind of take the lightbulb for granted today, but lighting used to be really really expensive.”
Then Ismail showed a graph of the cost of DNA sequencing, and then the cost of solar modules.
“In all of these technologies, they are following the same shape,” he pointed out. “When the Google car first came out, the cost for the GPS, radar and LiDAR sensors all added up to about $200,000 a car. Two years later, the equipment cost $100,000. Two years after that, $50,000 a car. We are now below $1,000 a car. The LiDAR that sits atop an autonomous Prius used to cost $75,000 five years ago. You can now buy that same unit, more powerful, for $50, and the latest version will get to $10.
“Fifty years ago we discovered the human genome,” Ismail added, “and all of a sudden the scientific world realized that life is actually information-based. In the year 2000, it cost $2.7 billion to fully sequence the human genome. The second one cost about $400 million, the third one about $50 million. Today it costs $800. By next year it will be $100 and by the end of the decade it will cost about a penny. By 2020, it will be cheaper to sequence your genome than it will be to flush your toilet.”
Later, Ismail talked about CRISPR technology that, among other things, allows for the editing of DNA—including human embryos.
“A human being is now a software engineering problem,” he said. “This profoundly changes our entire understanding of life. The Chinese are already editing embryos in the womb today. Three months ago, a Canadian team discovered that you can edit HIV right out of your cells using a capability that is minimally invasive and very cheap to do.”
Where are the biggest disruptions likely to happen in our corporate ecosystem? Ismail started with transportation and autonomous cars. “We have worked out that once you have a 20% penetration or more of autonomous cars, we will increase the traffic capacity of our existing roads and highways by 10 to 15 times,” Ismail told the group. “Not percent, he cautioned; times. You don’t need to leave big gaps between the cars. They don’t have accidents. You can schedule them and so on.”
That, in turn, can impact real estate values. “Housing prices spike in the middle of big cities globally,” Ismail said. “When it’s 10X easier to get in and out of a downtown area, what happens to the real estate values? They start to smooth out a bit. We expect to see a depression in the real estate values in the middle of cities.”
Once you have Uber and drone deliveries, the geographical proximity of retail store locations no longer matters, and bank locations become irrelevant. “About 60% of the land area in LA is devoted to cars,” said Ismail. “With autonomous vehicles, we can now reclaim that, and build more parks or condos.”
Later, he noted that the CEO of Volvo promised, when his firm starts selling autonomous cars, that Volvo will take on all the liability for the car. “Which means car insurance is done,” said Ismail. “If his cars have no accidents, he can afford to do that.”
A new auto-truck, already on the road, will potentially automate the jobs of 3 million people who currently earn their living as truck drivers.
The biggest change that the Singularity University analysts are seeing in the world, and potentially the most impactful, is solar energy. “Solar cells are doubling in price performance every 22 months or so, and have been since the 1970s,” Ismail told the audience. “At this pace, 100% of world’s energy supply will be delivered by solar in 16 years, and the year after that it will be 200%, and the year after that, 400%, and suddenly we will have an abundance of energy. I’ve been yelling at the Canadian government saying the oil sands will never be tapped,” he continued. “Fracking will be done. The Keystone Pipeline and all that, completely useless. We’ll never use it.”
To help us understand this trend, Ismail showed a graph of the relative cost of solar to other fuels. “In November, solar became cheaper than the energy coming off the U.S. grid, unsubsidized, and this is an inflection point,” Ismail said. “Energy has been scarce for the whole of the history of humanity, and now it is going to be abundant. Energy is about a $6 trillion industry globally, and will shrink by about 5x to 7x in the next ten to 15 years.”
The problem space is already beginning to shift to battery technology and energy storage.
The implications extend beyond how we power our homes to how we invest. “Do you want your clients investing in fossil fuels in this environment?” Ismail asked. “Absolutely not. Move them away as fast as possible. By 2023, we’ll have battery technology sophisticated enough so that the business model of every utility disappears. Utility stocks used to be a totally bedrock investment, where you could count on the dividends. Energy used to be safe. Real estate used to be safe. Now we have to be prepared for fundamental shifts.”
Beware the Experts
Of course, by this time most of the audience was wondering why we aren’t more aware of these fundamental shifts that are shaking every industry and business model around the globe.
One problem is the linear thinking that even those who follow these industries can’t seem to get beyond.
Ismail showed a graph of the mobile phone industry’s global adoption rate. “In the year 2000, there were 100 million mobile phones in the world,” he said. “That number doubled every two years. 200 million. Then 400 million, 800 million, 1.6 billion, 3.2 billion today.”
Then Ismail showed the predictions of industry experts, compared to the actual growth. In 2002, the McKinsey and Forrester organizations predicted 16% growth, after a doubling, and right before another doubling.
After missing by a huge margin, what was their prediction two years later? 14% growth.
After another doubling, another exercise in humility, their next prediction: 12% growth.
“In 2008, they had been unable to spot three doubling patterns in a row of 100% growth,” said Ismail. “Their prediction that year was 10% growth. And then it went up another 100%.
“What you see is when you have a domain that is growing exponentially, the experts in that domain all go out linearly,” Ismail explained. “Because all their brains and all their operating models are operating on old assumptions. Peter [Diamandis] has a saying: beware the expert.”
Beyond that, there is the fundamental problem of information filtering—bad news gets in, great news never makes it through the filter. Ismail explained that our news organizations, and our brains, are both wired to process accidents, terrorist bombings, kidnappings and bear markets, rather than energy abundance, the lowering cost of gene sequencing and the fact that markets inevitably recover.
And the two are related. “We all have in the back of our brain this little organ that is constantly scanning for bad news” Ismail explained. “It is purely the product of our evolutionary history,” he added. “When we were walking on the plains of Africa, if you heard a noise in the bushes, you ran. Because in those days bad news could kill you. Good news didn’t kill you. If you missed a piece of good news, you may not get to eat a nice piece of fruit. If you missed a piece of bad news, you’d die.”
The result? “We are actually ten times more likely to listen to bad news than we are to listen to good news,” said Ismail. “This is why Fox News has been very successful. Peter [Diamandis] calls CNN the Crisis News Network, because you can watch every kidnapping and every robbery in high def, in real time. You think the world is in a really really bad place, and then you vote that way.”
Ismail told us that the world is actually in a better place than we have ever had it. “There is not a single metric that you can pick that we are not dramatically better than we were in the past,” he said. “Two hundred years ago, 94% of the world lived in extreme poverty. We are down below 10% today. Infant mortality is down 99% in the last 100 years. Maternal mortality, same thing. The cost of electricity, transportation, telecommunications, all pretty close to zero. We have extraordinary progress today, but you will not see this in the news.”
At the end of his talk, Ismail talked about companies like the TED (as in TED talks), Google, Apple, Amazon and others that have found ways to navigate this new environment.
“The old way to build a business was to get an asset and put legal boundaries around it and sell access to scarcity,” Ismail told the audience. “But these new businesses are doing it differently: they’re tapping into abundance. Airbnb is tapping into an abundance of extra bedrooms. Uber is tapping into the abundance of cars lying around, and so on.
“There are ten externalities that these companies are using to scale themselves very very fast,” Ismail added. He listed four.
1) They typically don’t hire their own staff. Uber does not hire its own drivers. TED uses community. Google uses algorithms. “The mission-critical function of Uber, which matches drivers with passengers, doesn’t happen inside the organization,” said Ismail. “It happens out in the world. They enable that with technology, and scale it as far as they need to.”
2) Very aggressive use of experimentation. Ismail talked about companies that told employees to go off as a team and figure out a way to put their current company out of business. Later he talked about companies that will try a dozen crazy ideas and hope one is successful.
3) Lean startup techniques. (Ismail just mentioned this, but didn’t discuss it.)
4) Decentralized work structures. Ismail cited a 500-person software company out of Seattle that has no CEO, no reporting lines, no job descriptions, no management meetings, no middle management layers of any kind. “They literally operate like a beehive,” he said. “If there is a problem, people get together, go fix it, and disband. Everybody self-selects as to what they want to do. They get more revenue per employee than Microsoft by doing this.” A Chinese maker of refrigerators is organized in a similar structure, and seeing equally powerful results.
“If you implement four out of these ten, your performance improves 10X,” Ismail told the group. “We created a diagnostic survey where we can score these organizations by how adaptable and flexible they are,” he added, providing the list on a slide for the audience. “Most interestingly,” he added, “a business school did an academic research project and found that your stock market performance correlated directly with how flexible your organization is. As the external world becomes more volatile, your ability to adapt will drive market performance.”
Of course, after the presentation I was asked by a number of attendees what Ismail’s talk meant for advisory firms in the future. It seems to me that the implications run in multiple dimensions.
First, for clients, it’s obvious that a LOT of jobs and careers are going to be eliminated, and not by immigrants, legal or otherwise. That will open up new planning challenges for advisors as people are forced out of their jobs and have to retrain for new ones.
Second, if virtually every industry and business is built on a scarcity mindset that will be completely upended—and it seems to be true in the areas that Ismail cited—then investing in those industries and businesses becomes much trickier. Indexing may not be the ideal strategy going forward, since indexing is basically investing in the status quo. But who do you trust to help you navigate the shifts and put money on the disrupters rather than the disrupted?
Finally, the profession itself is likely to experience disruption, but this has been going on for three decades or more, as the profession has constantly shifted its value proposition to higher ground. Implications one and two mean that the advice of an advisor could actually become more valuable, even as basic budgeting advice and financial planning projections become digitized and commoditized.
But the advisors who survive and prosper will be those who fully embrace the idea that their value proposition is their wisdom and ability to navigate through these treacherous waters—and maybe once again picking astute money managers who can see the future disruptions before they fully manifest.
Despite all the technology, we will still have the fear mechanisms in the amygdala, and the tendency to process bad news out of a good news environment, and panic and sell everything when clients hear a stirring in the bushes. Those tendencies, which require an impartial voice of wisdom, will be with us forever—or at least until we start reprogramming our DNA.