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Current Issue • Jan-Mar 2017

Fintech and the Changing Face of Wealth Management

Technology has helped industries to become more efficient, more productive and more appealing to consumers. Just as technology helps us make a purchase, hail a taxi, or even conduct business meetings, microprocessors are now bringing financial planning to all and sundry. However, good financial advice depends on things that robots might overlook, like intellectual capital and an understanding of the nuances. A hybrid approach —part human, part robot-bionic, in other words, may be an effective answer.

As customers shift their behaviour and move increasingly towards digital solutions, that has enabled the average consumer to reclaim a sense of power over their financial lives, banks are rethinking their digital strategy. The rise of Fintech is the inevitable result of the increasingly demanding and technology reliant consumer base. Even as organisations’ digital ecosystem undergoes a transformation, inclusion is a necessary component for a financial system to grow. However, whether technology can be used to disrupt the highest end of the financial system is yet to be seen.

The Fintech boom is fuelled by a call for financial services that offer increased efficiency and lower costs. The result of this push for an innovation, that is an enabler, can be felt by both consumers and retail banking companies.

Dean Rajendra Srivastava; David Lee Kuyo Chuen, Professor, School of Business SIM University; Indian School of Business alumni from Singapore Mandeep Singh Nalwa, CEO, Taurus Wealth Advisor, Padmanabhan Balasubramanian, Entreprenuer in residence, ISB, and Rahul Banerjee, Founder, Bondevalue Pte Ltd., constituted an elite panel of academicians and practitioners to discuss the role of Fintech in the changing face of wealth management, during the celebrations, at Singapore, on the completion of fifteen impactful years of the Indian School of Business (ISB). Highlights of the discussion, which generated some points to ponder, are presented below.

The role of Robo-advisors in helping the way investors are going to deploy their capital

Companies must find ways to take advantage of the growing number of technological tools. Integrating Fintech into an Organisation’s digital ecosystem can help larger financial enterprises attract valuable niche customer segments, including heavy mobile users and 20-something consumers. This type of technology also lets financial service firms think more holistically about their customers’ needs and expectations, and develops innovative solutions, without losing sight of their core offerings and revenue streams.

Are Robo-advisors something that would complement traditional investing business and are disruptive enough to take business away from many of the traditional investment management firms? Well, that’s debatable. We live in a world where internet at a very basic level has allowed the aggregation of information for the consumer. Financial advisors who provide financial or portfolio management advice online, based on algorithms, and with minimal human intervention are likely to rule the roost. Automated investment services promise to make investing easy, inexpensive, and even fun.

Sometimes called Robo-advisors, these companies can take the pain and uncertainty out of investing by constructing a portfolio, reinvesting dividends, and even harvesting tax losses. Currently the total assets that Robo-advisor globally have is $30 billion which doesn’t really add up to much. Some financial services companies have invested and set up a Robo-advisory platform. Robo-advisors per se will not be disruptive but will be complementary largely because providing personalised service gives the customer close attention but limits the number of clients one can cater to. The other problem with personalised service is that it’s not scalable due to paucity of talent.

Robo-advisory has the potential to disrupt business, but not necessarily wean away business. However, service that provides automated, algorithm based portfolio management advice without the use of human financial planners is still some years away. While Robo-advisory has the advantage to scale up in a cost effective manner it can best be used as a complement because we trust in humans more than we trust machines.

As customers shift their behaviour and move increasingly towards digital solutions, that has enabled the average consumer to reclaim a sense of power over their financial lives, banks are rethinking their digital strategy. The rise of Fintech is the inevitable result of the increasingly demanding and technology reliant consumer base.

Disrupting the Highest End of Banking

In 2008 the world faced the long shadow of financial meltdown and people’s perception of banking changed forever. Investors lost trillions of dollars in net worth. People learnt the hard way that banks were fallible, with far too much power, inadequate transparency and an unfair profit margin. The resulting recession confirmed for many the doubt they had about the financial industry’s business model. The seeds of digital investing revolution had been planted and in the days ahead technology empowered average investors to gain access to the world of financial investments. By offering transparency, low fees, access and ease of use, the once immovable financial sector is now helping investors at every level to create, shape and drive a digital revolution that democratises investing.

Modern technology allows people to communicate directly. But when it comes to money, people have to trust the third party to be able to complete a transaction. Blockchain technology is challenging the status quo in a radical way by using mathematics and cryptography. Blockchain provides open decentralised database of any transaction involving value. The future global economy will move towards one of distributed property and trust where anyone with internet can get involved in Blockchain based transactions and third party trust organisations may no longer be necessary. Every transaction is recorded on a public and distribution e-ledger which will be accessible by anyone with an internet connection and financial fraud will be limited. We will become a global decentralised source of trust. A huge proportion of trust services from banking to notaries will face challenges on price, volume and in some cases their very survival. Unimagined new networks will evolve to meet society’s needs more cheaply and potentially more securely.

Currently, most people use a trusted middleman such as a bank to make a transaction. With Blockchain as an enabler, technology driven book building are a reality. Blockchain allows consumers and suppliers to connect directly, removing the need for a third party. Using cryptography to keep exchanges secure, Blockchain provides a decentralised database, or ‘digital ledger’, of transactions that everyone on the network can see. This network is essentially a chain of computers that must approve an exchange before it can be verified and recorded. In theory, if blockchain goes mainstream, anyone with access to the internet would be able to use it to make transactions. Blockchain could also help reduce fraud because every transaction would be recorded and distributed on a public ledger for anyone to see.

Despite a large part of population not having bank accounts, the digital transformation of hand phones continues unabated. Phone penetration has been astoundingly rapid and in three years it breached the 50% mark. For the financial system to grow, inclusion is critical to let private investors deal honestly with transparency and try and make sure that they get their return.

The low-touch personalised service will continue because investing $10 million with an e-wealthmanager.com may not be very exciting for many. The trust in human judgement is far more when compared to trust in machines. Robo-advisory will be lot more inclusive because the way wealth advisory firms are structured they can’t cover a large spectrum of the population of investors.

In 2008 the world faced the long shadow of financial meltdown and people’s perception of banking changed forever. Investors lost trillions of dollars in net worth. People learnt the hard way that banks were fallible, with far too much power, inadequate transparency and an unfair profit margin.

Value driven financial institutions

Technology can work for almost every type of transaction involving value, including money, goods and property. Its potential uses are almost limitless: from collecting taxes to enabling migrants to sending money back to family in countries where banking is difficult. But for someone at the bottom of the pyramid to scale up value being created has a great significance, and this value creation is based on trust.

The reluctance of buyers to pay until they saw their goods, and the disinclination of sellers to ship unless they knew that they were going to get their money gave rise to newer systems and newer intermediaries. While, on one hand, Alipay started by creating a 24-hour buffer where the buyer had 24 hours to confirm whether he liked the product or not (and if he did not verify in 24 hours then it was approved anyway) on the other, Flipkart introduced cash on delivery as several customers did not have a debit or a credit card. So the value in this case was created to help generate the trust that was needed in getting the transaction going.

Innovation very often happens from outside, quite like the big changes in every industry that have come from the outside, whether in automotive sector or the financial sector.

Innovation in the financial sector has gripped the imagination of the people, and this is where a bionic advisor that combines offline would be much better than machine alone. Being a disrupter is sometimes disadvantageous because technology has not reached a stage where advisory services are immensely profitable when the focus is largely on cost cutting.

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