"Distribution today, digital tomorrow." Paolo Sironi, FinTech Thought Leader and Author, IBM Industry Academy - Watson Financial Services dives into whether digital is reshaping the asset management as expected and, if not, how and why?
The main rule of the personal finance game: investing is sold more than bought, like with insurance, because many households have cognitive biases when it comes to managing their money and don’t behave like in the consuming world. Therefore, while many Robo-Advisors attempt to gain mass market adoption by promoting their offers with captive user experiences, their 100% digital effort might not be enough to change investors’ behaviour in a short time. Digital can indeed harvest many benefits by streamlining investment management processes.
However, should western world banks go fully digital overnight, they would create more exclusion than inclusion because many final investors operate in a “push” modality; only a few self directed ones would know how to “pull” investment products. Being “pull” means going on digital with a purpose, like looking for a specific product on Amazon.
While none of my friends have ever invited me to take a look at what is happening on Amazon, clearly many readers have been searching for my literature and newest book - best-selling “FinTech Innovation: from Robo-Advisors to Goal Based Investing and Gamification” - online. On the other hand, very few households would google for the next UCITS compliant fund: the majority would ask a friend, a bank or an advisor for their recommendations. This is the reason why the growth of first mover Robo-Advisors had been initially very promising but then faltered, while firms like Vanguard and Charles Schwab can still grow fast on digital due to their capability to optimise marketing costs on their existing client base. The direct consequence is clear when Betterment recently decided to hire human financial advisors to help with the digital job.
"Transformation is not easy... A further compression of profit margins will force distribution networks and financial advisors to deep dive into the unchartered territory of digital change."
Clearly, this is a problem of financial knowledge and literacy which is the core of the asymmetry of information that has benefited asset managers and distribution networks, and created an investment management industry which is largely configured as a distribution channel of investment and insurance products, not necessarily advice. Clients are “sold” financial products, in essence, but the meta-truth is that many of them “buy” a fiduciary conversation, a comfort zone to make financial decisions. In this framework, for years research has been the main marketing mechanism that motivates people!
Currently the industry is facing a huge transformation, from transactions (revenues generated by product placements) to services (packaging products into a client-centric advisory mechanism which clients are willing to pay for transparently). This puts renewed emphasis on the human relationship, since the value that justifies the fees will generate from the gamma advice (relationship management) more than alpha seeking (investment solutions are getting progressively commoditised and challenged by the rise of passive investing). Moreover, European MiFID II will add steam to this process of transformation by placing the clients to the real centre stage instead of financial products and research, thus favouring transparent advice. This transformation is not easy. Clients themselves might have a hard time to understand the new value proposition. The consequence will be a further compression of profit margins will force distribution networks and financial advisors to deep dive into the unchartered territory of digital change.
"The digital touch-point could start dominating the human relationship and change the industry forever."
Although digital business models are not yet complete when it comes to investment management, this doesn’t mean that banks cannot go fully digital because things are starting to shift in the FinTech world thanks to artificial intelligence. AI is growing fast and Machine Learning, coupled with Natural Language Processing, is being tested and deployed to transform digital solutions into a more conversational engagement with clients. The trend is clear in the consuming world, since Amazon’s Alexa has been launched as an agent for personal shopping.
Many banks are now adding chatbots to their digital solutions to create a more informative experience. This is a first step, which can add to the efficiency but not yet take digital into a new mass market investing paradigm. However, as soon as cognitive technology becomes truly conversational, digital will transform from PULL to PUSH by creating a conversational engagement which can transfer more comfort for financial decision making. Then, the digital touchpoint could start dominating the human relationship and change the industry forever.
Your voice will be the new marketing!
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Paolo Sironi is a FinTech Thought Leader, IBM Industry Academy - Watson Financial Services, and Author of best-selling “FinTech Innovation: from Robo-Advisors to Goal Based Investing and Gamification”. Author's page thepsironi.com