Wealth management is definitely changing and is one of the most sensitive areas of Fintech Revolution. We asked a couple of question on this topic to Paolo Sironi (website: http://www.thepsironi.com) IBM Industry Academy member and International keynote speaker.
Question: What’s your take on roboadvisory? Is it a fancy way to sell the same old stuff or can it be, as claimed by its supporters, a new paradigm to bring high quality asset management services to a broader customer base especially young people with limited amount to save?
Banking has always been one of the largest technology plays, although it is currently challenged by a new way of innovation which threatens existing infrastructures based on outdated legacy systems. Yet, Wealth Management is one the banking businesses which has been less affected by technology transformation until now, and always relied upon personal relationships. On one side, this technological delay spells for great opportunities to provide startup innovation on the digital wealth management space, of which Robo-Advisors are one example. On the other side, this is also the consequence of the asymmetry of information which is rooted in investors’ psychology (apart the self-directed few) which has allowed to build a wealth management industry that is largely dominated by the offer side.
Investors’ cognitive biases, when it comes to investing, cannot be easily overcome by digital technology. Digital is a PULL technology, which means it is well suited for people who access digital services with a purpose: more or less they know what they want. Investing instead largely operates in a PUSH economy, which means that investment products are sold to final investors. The history of Trading on Line platforms is also revealing, since on average no more than 20% of ToL customers’ transactions fund the remaining 80% which are typically dormant on the platform. This is the reason why Robo-Advisors grew very differently from their initial ambitions: more among mid 40s clients instead of millennials, more among affluent than retailers. In my bestseller “Fintech Innovation: from Robo-Advisors to Goal Based Investing and Gamification”
I make no secret about these mechanisms, and I see that the WealthTech landscape is effectively landing where I indicated: more on business to business to consumers (B2B2C) or business to business (B2B) offers than business to consumers (B2C), which I branded Robo-4-Advisors. I believe that the hybrid model “human advisors” plus “machine automation” will be the dominant model for a while, although something is starting to shift. Artificial intelligence is becoming more conversational, which can ultimately turn digital from being PULL to being PUSH technology. Only than the game will truly change.
Question: The patron of Easyjet has recently launched a saving account that should exploit the tax benefits of UK IFISA regulatory framework, regulation is often seen as a shield that protects incumbent financial intermediaries from competition of innovative players is something changing?
I always advise to see the positive side of regulation, especially in the aftermath of the global financial crisis. In a very asymmetrical world, such as banking, regulation is mandatory to foster investors protection although regulatory requirements can be an overkill, inconsistent or subject to damaging arbitrage. Honestly, shoot the industry not the regulator if regulation is not consistent: should the industry be able to self regulate, regulation would not be needed. However, what truly matters today is that Europe is facing a regulatory storm made of PSD2, MIFID2, PRIIPS and GPDR. If we read regulation carefully ,we can devise there is a consistent spirit of regulation across Europe, which is the attempt to make the banking industry more open (PSD2), transparent (MIFID2), understandable (PRIIPS) and protective of people data (GDPR).
This will force many financial firms to transform their business model from transactions (commissions on products, which are progressively squeezed) to services (fees for added value services and advice). Without technology and fintech innovation this change will not be feasible, reason why regulation is an essential engine for sustaining innovation.
Question: The fintech wave that is hitting payments industry and retail banking seem less disruptive for wealth management, where good relationship with clients seem to matter more than cost saving and efficiency gains allowed by technology, is this just a temporary illusion or this segment may actually prove more resilient to change in future?
I believe many commentators and entrepreneurs of the Fintech ecosystem have been making an innocent but substantial mistake: they have debated payments, wealth management, credit and insurance as separate pillars called PayTech, WealthTech, CreditTech or InsurTech. Fact is that, if we want to be truly digital we have to conceive a client-centric digital platform as the sustainable outcome of innovation, because only platforms win on digital. What is such a platform? Clearly not an agile deployment mechanism of banking products, such as many challengers banks seem to imply. Banking as a Service should mean to create a client-centric platform which has the personal financial equation at core, either for individuals or SMEs, in which the operators are logical symbols. “Earning – Paying = Saving + Investing + Lending + Borrowing +Insuring + Retiring + Donating”. Big data is generated on the left side of the equation, because of digital payments which are the gateway of the banking relationships. But most added value products are still laying on the right side of the equation, like investment and insurance products. Which means that the only way to stay profitable on digital, without overcommoditizing, is the learn how to move from the left side to the right side of the equation in a continuum called “engagement”. Therefore, only the bundling of digital payments and digital wealth management into an AI powered engagement mechanism will allow to generate a resilient transformation of the banking industry.
How do you see Italy from your global perspective? Is fintech more a threaten or an opportunity for our country?
I think FinTech is a great opportunity for Italy. The banking system is still facing difficult years, which will be dominated by banking aggregations and cost cutting, while interest rate margins and intermediation margins are due to shrink further. I believe that only technology and open innovation will help banks to land onto a new landscape made of agile operations, lean business models, value for clients, new professional opportunities for banking employees and small entrepreneurs. Innovation generates growth, and growth we are compelled to seek for.
Paolo Sironi short bio
Paolo is C-level advisor for banking innovation, mentoring financial institutions and entrepreneurs globally on digital business models and investment analytics. He is visiting professor on Fintech innovation for post-graduate courses and formerly held senior roles in quantitative risk management and investment banking. He owns a track record as startup entrepreneur, and is author of bestselling literature on finance, technology and regulation to guide financial services towards sustaining innovation out of today’s disrupted landscape. Author’s page thepsironi.com
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