How Amazon Could Disrupt Wall Street
I woke up this morning to find a story in my Inbox with one of those headlines that compelled me to click and read more “ Amazon ‘Well Placed’ to Disrupt Asset Management Industry”.
It’s one of those articles that I quickly read through and thought ‘this is ridiculous, why would Amazon want to get into the investment industry?’ But the more I thought about it, the more I thought ‘why wouldn’t they?’
Amazon has built its empire by looking for large industries where the major players had become complacent and stopped innovating.
Amazons History of Disrupting Brick & Mortar Industries
Book stores
In the mid ’90s Amazon launched its business primarily as a website to sell books online. This was a relatively new idea at the time and by not having the same fixed costs that traditional bookstores had, they were able to significantly reduce the price of books for consumers.
This forced the big players in the industry to invest more in their online retail operations and lower their prices to compete with Amazon. Unfortunately, Amazon’s disruption also squeezed many small, independent bookstores out of business. They simply did not have the scale to be competitive in the digital age.
Amazon would later take their book disruption a step further by asking the question “what if we got rid of books altogether?”. They answered that question by introducing the Kindle ebook reader in the mid-2000s. This caught the industry off guard yet again and even put some of the larger book retailers out of business.
While people still occasionally buy actual books from physical stores, Amazon forever changed the book industry.
Brick & Mortar Retail
Amazon quickly moved from selling books to selling EVERYTHING online. Giant retailers that were a staple in society were either forced to adapt or die. WalMart is an example of the physical retailer who adapted to Amazon’s disruption by investing heavily in its online retail. At the same time, WalMart expanded heavily into discount groceries and truly became the “one stop shop” physical retailer. WalMart’s ability to adapt has not only helped them survive but thrive with both its sales and stock price on the rise.
On the other end of the spectrum we have Toys R Us. Founded in 1948, Toys R Us was THE place generations of kids begged their parents to take them. As a child of the 90’s I will never forget the “I’m a Toys R Us kid” ad campaign during Saturday morning cartoons. Sadly Toys R Us was not able to compete in the online space and recently filed for bankruptcy. R.I.P.
Groceries
I’d classify Amazon’s disruption in the grocery store industry as “to be determined”. In 2017 Amazon purchased Whole Foods, which immediately sent shares of grocery store chains plummeting. Amazon may have given us a preview of what disruption in the food retail industry might look like when they opened their pilot food store in Seattle that featured “no cashiers”. So how do you pay for your groceries exactly? You use your phone of course! Shoppers scan their phones using the Amazon Go app and are automatically charged for their purchases when they leave the store.
No idea if this model could work on a national scale, but it will be interesting to watch play out.
If Vanguard Can do It, Why Not Amazon?
If there ever was an industry that was ripe for disruption it is the financial services industry”. Having used to work in the industry, I know first hand that the primary focus of the industry is collecting fees and selling. For too long, financial advisors were able to get away with charging 2.5% of total assets for simply allocating your money to a mutual fund.
Next time you are in a financial advisors office, look around at all of the computers, the staff, the fancy suits, the nice cars in the parking lot and ask yourself “Who is paying for all of this?” The answer is YOU! Many firms in the financial services industry get paid by taking a percentage of your money that they “manage”. The money they make is tied less to the performance of your investments and more to how much more of your money they convince you to invest with them.
Enter companies like Vanguard and Blackrock which allow investors to get money into the market for a literal fraction of the cost of using traditional financial advisors. If you want to better understand the differences between traditional mutual funds and Index funds, I’d recommend reading the following two stories.
The point is that companies like Vanguard looked at the financial services industry, found a way to remove all of the bloated costs of having physical offices and the salaries for advisors, administrative positions, not to mention the massive money that mutual fund managers make by moving all of the transactions online and following an algorithmic passive rather than active investing strategy. Then they passed those savings onto the consumer.
If Vanguard can disrupt the financial services industry by cutting out all of the salaries and cost of physical offices and moving the sales of a product entirely online, why wouldn’t Amazon move in with its massive resources to do the same thing? They have a massive built-in customer base through their Amazon Prime service. I don’t find it hard to imagine Amazon Prime subscribers being able to have their money managed for free or nearly free. If the name of the game is lowering costs, which company has a better track record than Amazon?
Financial services are exactly the type of industry Amazon can flip on its head, and I hope they do.