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.  

'Platforms' to be fought out in front office

Some extensive discussion and articles over here in the UK about that the platform battle will be fought out in the front office. Sorry, werent platforms about holding investments for investors...doesnt seem like that anymore...

I think what we are seeing is the difference in the concept of a 'platform' to hold investments, trade, execute, settle etc, and the 'platform proposition'. It appears that there is going to become a distinct difference, and with such, a difference in the economics and dynamics associated with each also.

It is likely that the business of 'platforms' are high volume scale game operations of which there are probably going to be handful of viable offers in each geography. But the business of 'platform propositions' is likely to be very different. With the ability to outsource back office functions to some of the scale players, yes it sounds like differentiation is very much going to be in the front office. But let's examine this more closely...

Is it really going to be the case that each 'platform proposition' will develop all the componentry to provide a complete front office ? Isn't that going to be expensive ? Isn't that going to take time ? Hang on - isn't that the business of technology vendors ?

If we look at this in a traditional sense, we could see that technology vendors and 'platform propositions' are perhaps going to converge. However, I think if we look at this more closely in a more Web 3.0 context, perhaps we can see some distinct seperations.

In this Web 3.0 context, 'platform propositions' are the businesses that put together front office componentry, fill it with data, integrate it with their back office providers, and make it look and feel how they want to to suit their target market. But, in order to do this quicker and keep it up to date, they can (and probably must, in order to be economic and keep up to date with innovations) use outsource third party front office 'componentry' from proposition enabling technoogy firms (such as Financial Simplicity). With such an approach, a 'platform proposition' can put together a highly functional, interactive and contempory proposition with model portfolios, managed accounts, portfolio tools etc together very very quickly. I think we are talking weeks -- not months or years.

Which then begs the question, why wouldn't every wealth management firm with any size then create its own 'platform proposition' ? Perhaps it will, which then poses the question what is the market for independent 'platform propositions' ? Are they just going to service the wealth managers and IFAs not big enough to create their own 'platform proposition'? And at what cost?

SelfWealth, a brand new solution to an age old problem.

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Read full article: http://www.financialstandard.com.au/news/view/23482918

Next-gen platforms cater for wealth management renaissance

Financial Simplicity offers views on the implications for investors of rapid technology change.

http://www.financialstandard.com.au/news/view/23437492

Whither the US election... And Europe... And China?

With the US election fast approaching on November 6, election fever has gripped the US. However, while the outcome is doubtless very important to the US electorate, global markets remain as focussed, if not more so, on the continuing challenges in Europe, not to mention the slowing economy in China.

As Australian equities fall driving by continued concern over China’s economic slowdown (and its territory dispute with Japan is not helping), global banks are trying to force reflation and are engaged in lowering interest rates. The International Monetary Fund has now cut its global GDP forecast to 3.3% for 2012 and 3.6% for 2013.

How will this affect investor behaviour? Mainstream investors are more cautious than ever. Despite common challenges, every investor thinks his or her situation is just a little bit different to that of the next person. While continued market uncertainty makes it more important than ever to have complete transparency and immediate control over investment portfolio holdings, it is just as important to reinforce an investor's belief that he or she is indeed unique. Today, more so than ever, that concept of uniqueness is what will attract and retain long-term wealth management clients in a world beset by short-termism.

Attached below is a White Paper written by Financial Simplicity on how mass customisation can serve the needs of the Unique Investor in any market.

http://www.financialsimplicity.com.au/images/whitepapers/mass_customisation_and_the_unique_investor.pdf

Yes, the rich really are different…

Really interesting article in Canada’s Globe and Mail newspaper considering attitudes that differentiate the highly affluent from those who are not.

But the lessons and thought patterns presented in this article are not just the domain of the rich right now. More and more wealth clients – high net worth and mass affluent alike – exhibit rich behaviour (specifically, they are “more inclined to assume they are in control” and tend to “individualistic behaviour”). More to the point, they expect their wealth managers to have a complementary mindset and, critically for wealth management operations, this implies a means of facilitating transparent, immediate investment control.

http://www.theglobeandmail.com/life/yes-the-rich-really-are-different-from-the-rest-of-us/article4557430/