2017 – The Year Ahead

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Many of you won’t know this, but my father used to sky dive. He’d stopped by the time I was born (reportedly because my mom had a natural aversion to life threatening hobbies) but in many ways his hobby would be a reoccurring source of guidance for life lessons.

For instance, whenever I was nervous about doing some BIG THING, my dad would let me know that once you were doing THE BIG THING, your anxiety would drop considerably. Sky divers know this, as they are only nervous until they jump out of the plane, and then get very calm. The fear is in the anticipation, not the actual doing.

2016 had a lot of anticipation, but not an actual lot of doing. Brexit happened, but hasn’t really happened. Donald Trump has been elected, but hasn’t been sworn in. The Canadian housing market continued its horrific upward trend and news stories began to abound about the looming robot job-pocalypse. 2016 was full of anticipation, but little action.

donald-twitterbot2017 will begin to rectify some of these issues. Next week we will see the arrival of President Donald Twitterbot™, finally ending speculation about what kind of president Donald Trump will be and seeing what he actually does. So far markets have been reasonably calm in the face of the enormous uncertainty that Trump represents, but his pro-business posture seems to have got traders eager for a more unregulated market with greater earnings for the future. Right now bets are that Trump might really jump start the economy, but there are real questions as to what that might mean. Unemployment is already very low and inflation looks like it is actually beginning to creep up. Housing prices (amazingly) are back to 2007 levels and the economy seems to be moving into the later stages of a growth cycle.

2017 will likely not be the year that the Canadian housing bubble/debt situation comes crashing down, but its also unlikely to be the year that the situation improves. Economically the short term outlook for Canada is already kind of bad. The oil patch is already running second to a more robust energy story from the United States. Canadian financials had a very healthy year last year, but as we’ve previously written while the TSX was the best returning developed market over 2016, in a longer view it has only recently caught up with its previous high from 2014.

2017 may be the year that automation starts being a real issue in the economy. Already much of Donald Trump’s anger towards globalisation is being challenged by analysis that shows its not Mexico that steals jobs, but robots. But as robots continue to be more adept at handling more complicated tasks there is simply less need for humans to do much of that work. Case in point is Amazon’s new store Amazon Go, currently being opened in Seattle.

While many point to this as Amazon’s foray into the world of groceries (and a better shopping experience) Amazon’s real business is in supply management. The algorithms they use and the new technology they’ve developed are not designed to be one offs, but ways to handle high volumes of business traffic with as few people, and as low a cost as possible. Combined with driverless cars (currently being tested in multiple cities & countries)and our growing app economy, we will be pushing more people out of steady work across multiple sectors of the economy in coming years.

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2017 will also be the year that Brexit will begin, though it will be two years before it is complete. Many people will be watching on how Teresa May’s government handles the Brexit negotiations, how confident England looks on its position, and how hostile or open Europe seems to be to conceding to Britain’s views. Either way it should provide lots of turbulence as it unfolds over the coming years.

But despite all this, there is a kind of calm in the markets. We’ve crossed the line on these issues and there’s nothing to do but continue ahead. Trump will be President Donald Twitterbot™, Brexit will happen, regardless of how many people remain opposed and markets will either go up or down as a response. Perhaps the new normal is a great deal more similar to the old normal than we all thought.

Then again…

 

The Robo-Advisor Cometh

 

roboadvisorAs proof that the robot revolution will spare no one, even our industry is feeling the intense weight of cheap human alternatives in the form of “robo-advisors”. Given some glowing press by the Globe and Mail over the last weekend, robot advisors now represent a real and growing segment of the financial services markets and are forcing many advisors, including us, to ask how they and we will live together and what our respective roles will be.

200To say that robo-advisors are a hot topic among financial advisers is to understate the collective paranoia of an industry that has come to see itself as besieged with critical and often unfair press. We haven’t been to a conference, meeting or industry event that doesn’t at some point involve financial advisors attempting to rationalize away the looming presence of cheap and impersonal financial advice. While there are some good questions that get asked at these events, there is a whiff of denial that must have given false hope to autoworkers in the 80s and 90s in these conversations.

For the uninitiated, robo-advisors are investing algorithms that provide a model portfolios based on a risk questionnaire that people can complete online. Typically using passive investment strategies (ETFs), these services charge lower fees than their human counterparts and offer little in the way of services. There isn’t anyone to talk to, no advice is dispensed and you won’t ever get a birthday card. But you can see your portfolio value literally anytime you like on your iPhone.

Looking past the idea of reducing your lifetime financial needs down to a level equivalent to a Netflix subscription, the concern around robo-advisors illustrates everything that our industry gets wrong about what services we provide that are most valuable. The pitch of automated cheap portfolio alternatives revolves entirely around the cost of the investments and has little to say about what it is that leads to bad financial self management.

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The distinguishing feature between what we do, and what a computer algorithm can offer extends well past the price of the investment. Time and time again investors have shown themselves to be bad at investing regardless of their intentions. Financial advisors do not exist because there haven’t been cheap ways to invest money, they exist because there is an existential struggle between planning for events decades away and the fight or flight responses burned into our most reptilian brains. When times get tough investors make bad choices. Financial advisors are there to stop those decisions before they permanently define or destroy an investor’s long term plans.

That multi-decade struggle between an advisor and their client’s most primal instincts is an intangible quality and takes many forms. Genial conversations about new investing ideas, gentle reminders not to overweight stocks that are doing well, trimming earnings and investing in out of favour sectors and sometimes just being there to listen to people as they make sense of their problems and financial concerns is an ongoing roll that we, and thousands of other advisors, have been happy to fill. These qualities can be difficult to quantify, but can be best expressed in two ways. First, by the independent research which has shown that Canadians who work with a financial advisor have 2.7x the assets of investors who didn’t and second, by the number of our clients who have remained clients for the near quarter of a century of our family practice.

Fees, by comparison, are very tangible and as a rule people hate fees. And while bringing down costs is a reasonable expectation in any service, there is a snarky cockiness to proponents of robo-advisors that see the job of financial management as both straight forward and simple. Robot champions are quick to say that financial advisors must adapt to the new world that they are forging, but it is unclear just how different and liberating this world will be. Far from creating a new utopia of cheap financial management for everybody, what seems more likely is that they will have merely created a low cost financial option for low income Canadians, a profitable solution for banks and other large financial firms but not for their investors.

The proof of the pudding is in the tasting, as they say. When the markets suddenly collapsed in the beginning of the year, bottoming out in mid-February, robo-investors did not sit idly by and let their robot managers tend to their business unmolested. Robot advisory practices were swamped with phone calls and firms relied on call centres and asked employees to stay later and work more hours to deal with the sudden influx of concerned investors wondering what they should do, whether they should leave the markets and what was going to happen to their investments. As it turns out, when times are bad people just want to talk to people.

Most Canadians started saving with an adviser when they had few assets. Start saving for your future now by sending us a message!

The Robot Revolution Will Cost $15/hour

The future is already here – It’s just not very evenly distributed

William Gibson

Back in August of 2015 McDonald’s started rolling out self serve kiosks into it’s “restaurants”. McDonald’s was quick to point out that the arrival of the touch screen ordering stations would not endanger jobs, and that McDonald’s as you know it will continue on; producing sub-par food that you will regret eating 20 minutes after you’ve finished.

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This is patently false (not the food bit, but the employment bit), but that doesn’t mean McDonald’s is lying. They too may think that speeding up ordering won’t impact jobs. But this is what the robot revolution looks like. Not a mass movement to unemployment, but a gradual reduction in the number of jobs available.

Typically when people think about job loss they tend to think of blue collar, formerly middle class factory work that has been outsourced to overseas production. That makes sense because it is one of the most visible forms of improved productivity. But people didn’t move factories to China because they had the most advanced robotics. They moved to China because they (initially) had the cheapest labour. The productivity increase was not one of improved output through advanced manufacturing, but a much older standard of fundamentally cheap human labour.

Factories that have stayed in North America and Europe have largely been the beneficiary of more robotic improvements. But these robots, despite improving consistency, wiped out thousands of jobs. In towns like Flint Michigan, where GM once employed 80,000 people in 1980, they employed fewer than 8000 by 2010. But the scars left by yanking thousands of jobs from a community are hard to shake and they may have sculpted our modern thoughts on what the robot revolution will look like. But it is wrong.

If you want to see what the revolution will actually look like, look no further than the airline industry. Around the same time that General Motors was starting to outsource suppliers or introduce new robotics to the factory floor a subtle shift in technology effectively began to eliminate 1/3 of the jobs from airlines. Because starting in the 1980s airplanes no longer needed a flight engineer.

People don’t often think of a flight engineer, but as once the third person in a cockpit on most commercial jets his job was made obsolete by better computers. Today, out of fleets and fleets of aircrafts there are no flight engineers, but nobody is launching into long winded speeches in congress about it, no protests have been scheduled and Michael Moore has yet to make a movie about their job loss. The reason for this it is obvious, flight engineers were phased out as new technology was brought in, not let go on mass. Over time there were simply fewer jobs until there were none. Students didn’t study to become them because they knew the job was unlikely to exist, and pilots, while the loss of the flight engineer might have been initially unnerving, became attuned to more computers handling stuff in the cockpit. While new pilots didn’t miss what had never been there.

How many flight engineers do we not have? That’s a hard number to come up with, but assuming that an FE was necessary person in all airplanes means that American Airlines employs roughly 7000 fewer people than it would have needed to otherwise. If you are looking at the number of flights per day globally, including all the cargo and travel flights, that’s 100,000 flights. Assuming that a crew only does one flight a day (shut-up, I know that’s not accurate) that’s 100,000 fewer people who don’t hold a job because it doesn’t exist.

In the retail space then, we won’t see people laid-off, so much as we will simply see fewer people hired. As minimum wages continue to creep up in a vain effort to try and improve living standards (and yes it is in vain and I don’t have time to explain why in this article) the value in adding a robot that can fold t-shirts becomes far more appealing. It won’t mean firing every person who works in the GAP, but it will likely mean that each GAP store employs fewer people over the long term.

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This is the abandoned Packard factory in Detroit, at its peak employed 6 times as many people as the future Tesla factory 

 

That’s what the robot revolution looks like. A gradual, but persistent reduction in the needed number of people to fulfill a set job. It’s why when Bernie Sanders or Donald Trump talk about unfair trade practices they really can’t undo what has already been done. Even as “good paying factory jobs” return to the United States, fewer and fewer of them reach the shore. Tesla’s Gigafactory 1, the largest building by area on the planet, will only employ 6500 people. By comparison, the Packard Factory in Detroit (the world’s largest abandoned factory) employed 40,000 people at it’s peak. The robot revolution promises to do this to every job, over time as more and more menial aspects of work can be reliably handed over to more complex bots.

So when McDonald’s says that it’s new self-serving terminals won’t threaten jobs, they may mean it but we should know that they are wrong. McDonald’s pioneered standardization in the food industry. They made people into robots long before robots were common. They should know above all, that new cheaper and versatile robotics will in the long term reduce their number of employees, a reality that will speed up as minimum wages continue to rise.