Internet services are generally grouped into two fields - consumer and enterprise - but in reality I think there are three. For lack of a better term let’s grant the third its traditional name, professional services. This includes law, medicine, education, government and our company Covestor’s field, investment management.
The big disrupters in internet services so far have been consumer oriented - e.g. Amazon in retail, Google in advertising, Craigslist and blogs in media and Facebook in communication. Enterprise services are now experiencing major disruption from cloud computing and net-enabled big data analysis. But professional services have proven a harder nut to crack.
Why is that? Why are Skadden Arps partners still more concerned about malpractice suits than competition from equally competent independent lawyers billing far less from a home office? Why is Harvard more concerned about its endowment’s investment losses than the movement of its classes to a free online venue?
There are specific barriers in each professional field, but here are some that appear present in nearly all:
- Regulation
- Accreditation
- Demonstrable expertise
- Personal attention
- Client trust
While cheaper, more convenient, faster and better UX are enough to disrupt in consumer services, these things on their own don’t cut it for professional services. An internet startup that wants to take on big professional incumbents needs to come up with creative ways of overcoming one or more of the barriers above.
Note that some of these barriers are structural/legal and some are psychological, from the consumer’s perspective. In investment management we primarily face regulatory and client trust challenges, while an education startup probably has to deal more with accreditation issues (who will take your degree seriously in the workplace?).
I wonder if disruption in professional services will happen in the way feminist change happened against the big structural/legal institution it challenged, the patriarchy. That was a very long haul (still going on), and has taken place on many fronts over different periods. The first stage is solving pain points for the existing structure.
In her book “Uneven Developments,” Johns Hopkins’ Mary Poovey describes how professions like medicine opened up to Victorian women not through direct ideological or legal challenges, but rather through the back door, in an “uneven” way. For example, the anesthetic chloroform caused a certain arousal in women patients that made male doctors of the period feel uncomfortable, so they asked women in the operating room to take a more active medical role than they were previously permitted.
These are very early, neo-Victorian days for disrupting professional services. A parallel for our time is an internet company like Nighthawk Radiology (now merged with vRad), which allows hospitals to outsource nighttime X-ray readings when a staff radiologist would be too expensive to employ. Nighthawk solves a specific problem for the profession without challenging its core structure. But it’s paved the way for more radical disruption of medical opinion delivered via the net - medical startups that are not service providers to the incumbents, but rather challenge the heart of their business.
An investment management company like ours needs to work within the regulatory structure of the SEC, which creates serious operational, marketing and client support challenges for a tight-budgeted startup. And to attract clients requires overcoming the altogether natural fear of the new for professional services. It’s a no-brainer to choose Netflix over a local Blockbuster, but shifting your investments from a mutual fund to a net-enabled, democratized investment framework, or entrusting your health and business to the services of a doctor and lawyer you’ve never met is a bigger psychological leap.
Other successful finance startups have worked at the edges - for example in gaming (Betfair), media (my former company Seeking Alpha), payments (PayPal, Square) or providing data or services to the big players. But we - like BankSimple - are going for the heart of the multi-trillion dollar industry.
At Covestor we’re getting creative to slowly break down the walls of institutional money management. From within a fully compliant framework, we now offer clients the opportunity to mirror the trades of talented investors they’d never have access to before - like a Google analyst who runs a statistical arbitrage portfolio, or an optical surgeon who uses his clinical experience to build his healthcare model. On the client end, we’re addressing the natural hesitancy to plunge into a new way of investing with a trial account that lets you virtually invest $100,000 on the platform for 90 days. And our blog is unique in offering a verified track record alongside all market commentary, as I think reading stock commentary should be like watching baseball - you want to see stats and track record on the screen to understand the context behind the player.
All of these are gaining serious traction, and we’ll keep at it to find the products, marketing and methods that create greater efficiency and transparency in active money management. The incumbents in our field will fall, it’s just a matter of time.
How are other startups out to disrupt professional services going about it?