Bill Hortz's picture

[The Institute for Innovation Development interview series will be inviting top innovation specialists from around the world to talk to our readers about global, cross-industry innovation activities and how to apply these innovation best practices to financial services businesses.

For this interview, we have two financial services veterans from The Immersion Group - Greg Smith and Jeff Harrison - each with 30 years of industry experience, whose shared mission is not just consulting on how to make your firm incrementally more successful but facilitate in transforming it into an agile, future-ready organization that can continuously adapt to and lead change in the increasingly competitive financial services business environment.] 


Hortz: Thank you gentlemen for your time today. Let’s get right into it! As business transformation specialists, what exactly is a Transformation Facilitator and why is one necessary in today’s financial services business environment?

Smith: We believe that current traditional Financial Services’ business models will soon go the way of the Sony Walkman and become obsolete.  Whether due to cultural changes, shifting generational preferences, ethnic diversification and/or a desire to impact society, the financial services client is changing… and we must change with them!  When we talk about business “transformation”, it is not just about an incremental change that involves the addition of new technology to the organization.  We are talking about a foundational alteration in the “why” and “how” we do business. It is about developing an organization that is able to continually address change and reinvent itself.

Bill, do you remember the Kodak Instamatic and the Xerox printer?

Hortz:  I do, but don’t we still have Xerox printers?

Smith: Yes, but today’s Xerox machine copies, scans, prints, routes images to your network, emails, faxes, and more.  What a great example of maintaining product relevance!  More important to this discussion, though, is that Xerox has remained a viable entity because it has continuously challenged and reinvented itself.  

On the opposite side of the spectrum is the example of Kodak.  Kodak thought they were in the camera and film business even as demand for film was waning in light of the digital revolution.   Ironically, Kodak actually invented the first digital camera in 1975.  As recently as 1996, Kodak was a $28Billion company and employed around 140,000 people. Sixteen years later, the firm declared bankruptcy with about a tenth of its previous workforce. They are no longer the Blue Chip household name they once were.  

Xerox, on the other hand, remains a large, relevant company with over $1Billion is annual income and almost 150,000 employees.  Realizing they are in a broader business - business services - Xerox keeps reinventing itself by embracing an “agile business model” to help consistently and systematically transform their “business thinking and projects”.

These are just two quick glaring examples of the need to constantly transform and innovate as the world changes rapidly around you.

Our mission, as transformation facilitators, is to help financial services organizations determine the extent of change needed from their traditional business processes and proactively walk them down the path to more agile and innovative business processes. That is one of the reasons why we prefer to talk about ourselves as Transformation “Facilitators” rather than “Consultants”.

Hortz: What are some of the major forces that you see impacting the financial services business going forward?

Smith: The first big one that comes to mind is demographic.  According to the Census Bureau, 63% of America’s population is aged 47 and below (2013 projections), comprising the segments commonly referred to as “Gen X”, “Millennials” and “iGen”.  (See attached chart.)  While the latter group is still under-age and not spending much time focused on managing their wealth, the other groups make up 40% of our population, a figure more than 50% greater than the Baby Boomers.  Yet, it appears that the industry is still very entrenched in designing product solutions for, and focusing on conducting business in ways that appeal mostly to, the Boomer generation.  We think that the industry risks missing the next wave of investors! We would suggest that the Gen Xers, Millennials and the iGens are all quite different from one another and each one will demand unique & different interactions.



In addition to this tremendous generational impact, America’s investing habits will also change driven by increased diversity.  Between the years 2000 and 2010, the Hispanic population in the US grew 40%.   By 2060, people of Latin American descent are projected to represent 30% of the total population in the US, corresponding to over 100MM people and a larger segment than the Baby Boomers represent today.

I grew up in Latin America.  Historically, there has been a very weak stock/bond investing culture in that area of the world because the majority of the population did not have access to the markets.  Nevertheless, that does not mean that they cannot and will not be investors in the future.  Additionally, in many cultures discussions around death are taboo, which potentially inhibits the sale of traditional life insurance. However, the fundamental need for protection still exists.  But the questions remain: How do we overcome some of these cultural barriers? Can any organization choose to ignore a marketplace that comprises 30% of the country’s population?  Are we building the right products and services for the future? Hiring the right people?

Determining how to profitably do business in an underserved market is a terrific example of a potential opportunity to create new value through innovation. The key point here is that we need to distinguish between the old assumptions, urban mythology and the changing facts, and use those facts to drive our businesses strategies to new directions.

Hortz: Besides these two dimensions of the demographic issues you describe, what other forces do you see that will drive the need to transform financial services businesses?

Harrison: A second overriding trend is the “blurring of lines” between the various segments of the financial services industry.  In years past it was all much clearer.  Stockbrokers sold stocks and were paid a commission.  Advisors charged fees. Bankers lent money.  And P&C insurance agents provided coverage for valued possessions. But today, one individual may be playing many roles, sometimes even simultaneously, and it can be next to impossible for the public to distinguish between the roles. This opens up opportunities for outsiders offering a newer value proposition. 

While existing firms have jockeyed for position, inevitable gaps have been created and are being filled from outside the industry.  E*Trade began this invasion a number of years back, but lately we have witnessed a flurry of new entrants from outside the industry, dubbed “robo-advisers”.  In the 2nd quarter of 2014, almost $300MM of investment capital was pumped into robo-advisers, most of them originating from outside our industry.

Smith: A third major force is something that we have dubbed “Better Investing”.  As Harry Markowitz’s thesis from his monograph Portfolio Selection evolved into what we now call Modern Portfolio Theory, it grew into an end, as opposed to a means, of investing.  Painfully, we learned in 2008 that even a well-diversified portfolio in traditionally-applied asset allocation models was not immune to being battered by the economic downturn. 

As an industry, we need to become comfortable with “post-modern” techniques in designing products and/or portfolios that fit the client’s changing perceptions, preferences and risk aptitude.  Similar to the recent energy industry boom, which is due to new techniques in drilling, such as fracking, we are seeing the advent of new investment methodologies, alternative investments, and new ways of working with clients in our industry.  For instance, while investing for societal effect is not new, the phrase Impact Investing was coined only in 2009.  In that year, The Monitor Institute estimated that a $1Trillion would be invested in Impact investments by 2020!  When investing for societal impact, clients will look first to where their money is being invested.  Many clients are moving away from what I call a “solo performance” mind-set and we need to move with them.

These 3 major forces discussed will drive major changes in the way financial services providers conduct their businesses and that will necessitate a major transformation from current business practices to more flexible and agile processes that can ride these changing needs and respond with innovation.

Hortz: Why do businesses need to transform themselves NOW?

Smith: In the April 2011 edition of Fast Company, a comment attributed to the Babson Olin School of Business stated that within 10 years (2021), a full 40% of all Fortune 500 firms will be out of business. With the advent of new technology, trends come on the scene and become part of the landscape virtually overnight.  Our mainstream lexicon now includes words that previously were found only in science textbooks and that reflect the compression of time: cyber, virtual reality, nanosecond, flash trading, etc.  All organizations need to become more nimble and agile, willing to try new things and to re-invent themselves every so often.  Otherwise, an organization may find itself “leap-frogged” by the next iteration of product, delivery mechanism or communication tool and, thus, wind up on the corporate casualty list.

Hortz: Do you think that Financial Services companies want to, and can, transform?

Harrison: Absolutely. Maybe… Historically, for whatever reasons, the financial services industry has been a slow transformer in comparison to other industries.  There may be a self-fulfilling aspect to this statement, in that a recent McKinsey study of financial services executives found that more than 50% of those polled believe that it is harder to innovate in our industry than in others.  Primary causes given for this over-riding belief were the pressures to produce short-term financial success as well as resource allocation challenges, and the lack of organizational mechanisms/infrastructure for handling change and driving innovation was mentioned as a secondary concern.

We think that companies in the financial services and wealth management industry see a need to change their business models.  But, we need to overcome a hesitant mind-set and shed some of the “urban myths” that have crept into our thinking.  For example, “young people do not have any money.”  How many stories do we read about daily where a young man or woman has started a relevant new company whose valuation rapidly reaches the millions, if not billions?  Transforming a business effectively and profitably is going to take some effort, but it can be accomplished if management is motivated to take the actions necessary to meet the forces we discussed earlier.

Hortz: So, how exactly can companies transform themselves? 

Harrison: The first real step is deciding that one needs to change and then creating facilitated, open dialogue within the organization.  We assist in the facilitation process to open minds to new possibilities.  Next, an infrastructure, such as an incubator or innovation lab, needs to be created and developed.  Pilot projects should be undertaken and then thoroughly evaluated before a full launch into the marketplace.

Finally, we want to dispel the notion that transformation is just about technology.  New technologies are, most often, a downstream result of a transformation process that starts at the strategic level.  The transformation process needs to proactive, not reactive.

We believe that the Financial Services industry has to realize that it is at a tipping point that will decide which companies are the next Kodak and which are the next Google. Now is the time to develop new business models and operating realities that will support the dynamic growth needed for the changing financial services industry. We work with a variety of clients at every level to equip & prepare them for the future. Even though it may seem daunting to some, we are excited about the impending and inevitable transformation of the financial services industry.  To quote Lou Gerstner: “Longevity is the capacity to change, not to stay with what you’ve got.”

Hortz: Gentlemen—Thank you for sharing your provocative insights into the financial services industry.  I understand that you have some unique thoughts on how to run transformation programs and manage innovation projects.  I look forward to having that conversation in the near future.

Greg Smith is a Principal & Founder, of The Immersion Group.   Greg has over 30 years experience in the financial services industry, including Executive Management, Sales & Marketing, Business & Product Development, Investment Management, Operations and Compliance. He holds Series 7, 24, 53, 63 and 65 registrations along with a BBA in finance from the University of Notre Dame and MBA from the University of Texas at Dallas. He is also a Chartered Financial Analyst (CFA) and is a member of the CFA Institute. 


Jeff Harrison is a Principal of The Immersion Group.  Jeff brings over 30 years of experience in Wealth Management Marketing & Sales, Product Development and Advice Innovation.   He holds Series 7, 24, 63 and IAR registrations, an MBA in Finance from Baruch College/CUNY and a BA from George Washington University. He is a Certified Financial Planner® and a Project Management Professional.


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