Why good investment advice is only for the rich in the age of financial technology
Two things define you. Your patience when you have nothing and your attitude when you have everything.
And the landscape of wealth management services segregates its ‘have’ and ‘have not’ clients, whether or not they know or like it. Dramatic improvements to, and the popularisation of, information and trading technology may actually favour the power of financial institutions over clients.
The entire experience of what wealth management and private banking services mean is being turned upside down by technology that is providing unprecedented access to data, information and advice. It is already affecting how you make personal investment decisions. It is allowing banks to cull their retail clients, taking and serving the wealthiest, while leaving the least profitable ones to fend for themselves.
Technologists are embracing and promoting financial technology as the next frontier of personal investing with a passion that makes Robespierre seem prudent. Consumers should beware of the pitfalls.
Regulatory changes and new technologies have blown across the financial landscape like an unpredictable weather front. Competition in banking, from payment processing to asset management, have shifted some activities from traditional banks to non-bank institutions. It’s led to the emergence of a new class called “shadow banks”, which includes peer-to-peer lenders for small businesses and consumers and robo-advisors for wealth management. Distinctions between products and services have become blurred.
Then the combination of big data analytics and new and cheap distribution channels via the internet allowed technology start-ups to disrupt traditional banks. Technology acted as an enabler. It lowered barriers to entry so that new institutions could challenge big banks in certain areas. Most of the disruption has occurred in the consumer lending space. But it is also affecting wealth management.
If you don’t have an account starting at about US$1 million, it is unlikely you will benefit from truly interpersonal, high quality investment advice and opportunities.
But, more than ever, due to eight years of catastrophic, near zero savings rates, there’s a huge and eager audience for investment and retirement advice and services - all of them yearning and thirsting for investment yield. Then the internet and social media provides a means of information and distribution that is ridiculously cheap and easy.
Robo-advisors sites have proven to be an efficient marketing tool for financial institutions to aggregate and service small accounts at a low cost but they are unlikely to yield any significant return benefits to investors. Rather, too much information and too many choices simply bewilders them.
So far, I have not encountered a robo-advisor who has given this realistic, but horrific advice to clients: “Given the low rates of return, there is no way you will achieve retirement as you know it. You will probably have to work until you die. Your retirement goal of endless fine dining, golfing and long walks on golden beaches were nothing but themes for enticing advertising campaigns by wealth managers.”
That’s not only true in America. It’s especially cruel in Hong Kong if you haven’t owned and paid for your own flat during your best earning years. Advice that fails to encourage clients to trade is highly unprofitable for these sites because their clients are not wealthy.
One of the most overlooked opportunities in financial technology is communications. Finding a way to increase the application of instant messaging services (like Whatsapp and WeChat) to communicate with clients seems as important as an attractive website. While messaging is commonly used in other industries, banks have been slow to adopt them due to IT security problems.
For example, message apps are not allowed for official corporate and client communications in HSBC in Hong Kong, but they are used by HSBC in Malaysia. Customer preferences are making email slowly fade away. Instant messaging has been the most recent and important technological change for communications. However, security and compliance problems have caused the financial sector to react too slowly to its popularity.
The entire financial advisory model has traditionally been human-to-human. But banks are seeking to provide bespoke investment advice in a digital environment. By combining artificial intelligence, robo-advice and big data they hope to create a standardised advisory process that can provide differentiated services and products to all segments where each client has their own communication and distribution channel.
Unfortunately, it allows banks to rid themselves of less profitable clients especially since the regulatory burden of maintaining them has become an unsustainable cost. No one said financial advice is a right. But wealthy, qualified clients see a different world of opportunity from the commonality - access to top performing private equity, hedge and venture capital funds. The masses must contend with the mercenary parade of commission-driven Ponzi schemes lurking in the market.
Peter Guy is a financial writer and former international banker