Tuesday, January 8, 2013

Is the future of investments about people or products?

A fascinating week, and the flood gates appear to have opened up on conversations concerning the wealth management industry's future being more about understanding people than understanding investment products.

There are several different starting points to these discussions.  Generally, however, two key themes prevail: regulatory and marketing.

In the regulatory camp, the discussion is all about what is a survivable (as in not subject to appeal or litigation) method of mapping investment products to people, or perhaps the other way around. The debate here is expansive, but is fundamentally centred on what is a legitimate way of mapping the 'needs' of a person to suitable investment products. This is pretty challenging if the design or purpose of the product does not map to the 'needs' of the investor.

This, in itself, raises a number of questions: how does the product owner or operator actually know the needs of the investor? Have they spoken to them? Or, is it just assumed? And, if so, on what basis? In the past there has been an assumption of modern portfolio theory and asset allocation, but is this still valid today? Is this defensible? Clearly, there are some big questions here...

In the marketing camp, the discussion is more about 'how' does one promote a 'product' in a way that is suitable to an investor's needs. If there is an accepted theory that this mapping can be done from within, then there is a better chance of marketing success and investor acceptance.  However, if there is not, then the product manufacturer (or the person implying suitablility) must demonstrate some basis for mapping the product philosophy to the investors' 'needs'.

Again, the approach of modern portfolio theory comes up a number of times. But what does modern portfolio theory have to do with each and every individual person? Not a lot in the specific sense, but quite a lot in the generic sense.


Are financial consumers being held hostage?


Consumers are supposed to be the new royalty in any service industry. In the financial services world, plenty gets written about how important the consumer is, how powerful, how discerning but how many business models are really built around the consumer?

Far from being more free and able to exercise all those choices one sees dangled tantalizingly in front of the ravenous crowd, today’s consumers are sometimes little more than hostages to the current system.

The UK has a declining class system with perhaps dangerous erosion of order and predictability.  The extreme wealth of London is offset by the poverty and extreme uncertainty of the working classes.  This has been the price of freedom: consumers – individuals –  are now hostages to the very system that was supposed to liberate them in a financial sense.  

This situation is not, of course, unique to the UK.  In the US, for example, 47% of people currently are supported by the state.

If we are to liberate today's financial consumers, I suspect that there must be a genuine, fundamental shift in the very nature of the system that caters for them.  Most importantly, everyone - from financial services companies to governments - must act with empathy when considering the consumer and, more broadly, the electorate.  

All of us who operate within financial services must recognize, in a collective sense, that the system must give consumers what they really need as opposed to what we think they need.  Specifically, we must ensure that the system intended to build wealth in order to fund individual retirements can, in the first instance, actually support sustainable livelihoods for individuals.   

I suspec this is will be critical for rebuilding confidence in the financial services system.  More broadly, this could become a permanent election issue. I suspect people cannot build wealth meaningfully while they are held hostage within a system that may well threaten their survival.