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Don’t Let Your Long-term Returns Be Spoiled by This Disrupted Industry

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Recent advancements in technology have resulted in a countless number of disruptive forces that may be considered insidious developments in the eyes of old-fashioned firms. These firms, which once had stable revenue streams, may stand to face a more challenging environment in which the top- and bottom-line growth will be hard to come by. In fact, many challenged firms may see their moats erode as their top and bottom-lines shrink on a year-over-year basis thanks to the profound change in consumer preferences.

When it comes to these technological forces of change, many investors often think of the effects of e-commerce on the brick-and-mortar retail industry. Amazon.com, Inc. (NASDAQ:AMZN) and its effects on many big-box retailers serve as a prime example of a technological disruptor that’s caused a tectonic shift across an entire industry. However, investors should realize that the retail sector isn’t the only industry that’s poised to face profound changes over the next decade.

Thanks to recent technological advances, many disrupted industries are on the verge of secular decline. As time goes on, the technology will only become better, cheaper, and more popular as it moves from the early adopter phase to become a mainstream product or service of choice with the target consumer.

The potential disruptee is probably well aware of the disruption that’s on the horizon, and have they two choices: adapt by embracing the technology in order to retain long-term market share or remain in denial about the imminent technological threat. The latter choice leads management to conduct business as usual, and although no consequences are suffered over the short- to medium-term, such a decision may be detrimental to the long-term sustainability of the firm’s business model.

Thus, a firm needs to choose whether they’ll open their wallets and invest in initiatives to counter potential disruptive threats or remain passive in favour of shorter-term results.

Retail aside, one industry that’s about to face immense disruption over the next decade will be the financial advisory industry, and the firms that rely on the sale of mutual funds will likely be hit hardest.

At this point in time, robo-advisors is in the “early adopter” phase, as the human factor in the financial advisory service still remains of tremendous value to many investors, especially older investors who may not be up to date with new tech. Millennials, however, have embraced such technologies because such AI-based advisors typically command substantially lower multiples than that of a human advisor.

Trust remains the most desired trait for investors, however, and that will never change.

Robo-advisors can easily be programmed to adhere to the code of ethics and standards, and not be enticed by potential conflict of interest scenarios. But will robo-advisors really be more trustworthy than human advisors?

Robo-advisors remain a less popular means of financial advising at this point. However, over the next decade and beyond, expect such robo-advisors to experience growth at the expense of their human counterparts as investors gradually begin to trust AI-managed financial products and services.

High-fee mutual funds managed by people may soon become a thing of the past should “smart” AI-managed portfolios show a market-beating track record over the long haul. Who knows? The next Peter Lynch may well be an AI, as far-fetched as that sounds! And unlike its human counterparts, these AI-managed portfolios will likely charge a significantly lower fee, thereby blowing actively managed funds out of the water!

But, as Uncle Ben from Spiderman once said, “With great power comes great responsibility.”

As such, I’d keep an eye on the developing world of the robo-advisory space and the implications for firms that rely heavily upon the sale of actively managed mutual funds.

IGM Financial Inc. (TSX:IGM) is one firm that could take a big dent to its top and bottom-line as mutual fund sales weaken and MERs are slashed in order to counter this. The company has dipped its toe in the high-tech advisory space, but I believe such efforts will only serve to cannibalize its current business that relies on the sale of expensive mutual funds.

Stay hungry. Stay Foolish.

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Fool contributor Joey Frenette has no position in any of the stocks mentioned.

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