Financial Planning and Commoditization, Pt.1: Defining Terms

Nonetheless, a great deal of commoditization does exist in many industries. For instance, many types of technology goods have been commoditized; while computer processors may remain competitive because of various processing speeds, more "mundane" parts like keyboards or power supplies or hard drives are often viewed as undifferentiated and interchangeable, where it's easiest to just purchase the cheapest solution.

This is similarly true for many other products as well, from auto parts to construction materials to cleaning supplies. And of course, the term is commonly used for a number of financial markets goods that are similarly viewed as interchangeable "commodities" such as gold, silver, orange juice, cocoa beans, heating oil, and more. Notably, the concept of commoditization can apply in the service industries as well; for instance, internet and cable service has been largely commoditized (although the companies try to differentiate themselves with offerings like premium channels), and commoditization has also struck much of the airline industry, and even annual services like tax preparation.

What Is Being Commoditized in Financial Services?

In the broad financial services industry, many parts of the business have become largely commoditized in recent years, as evidenced by the strong downward pressure on prices for certain services. On the plus side, this allows consumers to get many services cheaper than ever; the downside, however, is that it's a very dangerous environment for companies that risk being made irrelevant if they cannot find a way to cut their own prices enough to compete.

For instance, the execution of investment trades has become almost entirely commoditized over the past two decades, driven heavily by the automation of technology and the rise of online brokers like Charles Schwab and E-Trade; as a result, executing a stock trade a few decades ago might have required the services of a bona fide stockbroker and cost $100-$200 or more, while in today's marketplace if can be done using digital tools for no more than 5% – 10% of that cost from a few decades ago… and in some cases, less, or even entirely free.

Similarly, the world of indexing has also been largely commoditized in recent years, a trend that began with Vanguard but has accelerated with the rise of Exchange-Traded Funds (ETFs). As a result, the investment expenses that must be undertaken to gain raw exposure to the markets just continue to fall lower and lower, as consumers simply buy whatever commoditized indexing vehicle is available at the lowest cost – since, by definition, the actual investments in the index would/should be identical.

Of course, the forces of commoditization have been playing out in other industries related to financial services as well. For instance, the rise of companies like TurboTax and H&R Block have drastically cut the pricing for tax return preparation (which posed a significant challenge to many established accounting firms); arguably, though, tax preparation was especially prone to commoditization risk, since the process is dictated by adhered to IRS rules and therefore everyone should ultimately end out with the same tax return results. Similarly, the rise of online services like LegalZoom has begun to put pressure on the cost for basic legal documents of all sorts, which again are typically identical or substantially similar for at least the majority of consumers (until the needs and situation become more complex for a select few).

In the second part of this post, we'll finally answer the question—is financial planning becoming commoditized?