Morningstar Magazine - June/July 2017 - 89

To move from providing transactions to providing
real services to clients, the financial-services
community needs to gain their trust. That's where
innovation comes in. It can provide the knowledge
that helps clients make the right decisions.
Rothschild: Don, you come at this from a
different perspective.

Don Phillips: I'm a huge fan of innovation
that helps advisors educate clients and help them
better understand their investments. What
Josh is doing with his practice is fantastic. But
with investment products, it's very easy to
over-engineer things. It's often the whole foods,
the basic building blocks as opposed to
genetically engineered TV dinners, that serve
people best. What investors really want is
simplicity. And the investment management
industry is designed to deliver complexity. That's
a fundamental mismatch.

Jack Bogle spoke on this stage a couple of years
ago. He expressed his fondness for Shredded
Wheat, "the company that put the 'no' in
innovation." It's a great irony that Jack Bogle had
two amazing innovations, the mutually held
fund company and the index fund. He had this
great idea: Buy and hold the entire market forever.
We've turned this into an amazingly complex
thing. There's about 5,000 stocks in the U.S, about
15,000 funds, and one index provider alone in
the U.S. offers over 1 million indexes.
The best innovations are the ones that simplify
things and make them easier for investors.
Investors crave simplicity, especially that marginal
investor, the newer people that we're forcing to
be investors, like people in 401(k) plans.

Who Benefits?
Rothschild: Josh, what innovations have you
found valuable?

Josh Brown: The more I think about innovation,
and the history of investment management and
financial advice, the more I realize that a lot of
what we call innovation is really repackaging.

If Morningstar were holding this conference in
1931, we'd be talking about the open-end

The best innovations are the ones that simplify
things and make them easier for investors.
Don Phillips

mutual fund as the new disruptive force in the
industry. Prior to the crash of 1929, closedend funds were really the only game in town if you
weren't doing individual stocks for yourself. They
were leveraged, so they didn't survive through
1930. The open-end mutual fund, by law, was not
employing leverage but really, there was very
little difference. It was just different packaging,
with a lot of the same managers.
Robo-advice is another example. That's not to
denigrate robo-advice. I think it's going to play
a huge role in our careers going forward, to enable
us to scale up. But robo-advice is just a different
user interface overlaid on top of a life-cycle fund.
The other point I want to make is that the primary
beneficiaries of innovation since the information

technology revolution began have been advisors.
We have benefited more than our clients have.
It's not necessarily a negative. You could have the
greatest idea in the world, but if you don't get
uptake by professionals, you're going nowhere.
There's no better example of that than Betterment
for Business, which is courting institutional investors
and financial advisors. Smart fintech companies
know that it's great to have a mouse trap for the
individual investor, but it's even better if you can
get a financial advisor to employ it in their practice.
Rothschild: How do you think the average investor
perceives the innovation in our industry?

Sironi: Individuals are facing very challenging
times these days, and they're looking for

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