Fintech & The Future Of The Investment Profession
Fintech isn’t just a buzzword anymore. Although we are in the early days, it’s clear that fintech has taken the financial services industry by storm and is here to stay. New technology promises to revolutionize (or at the very least, streamline) the financial services industry by increasing efficiencies, lowering costs, offering better access to services, and creating a more convenient and personalized experience.
As the investment management industry and regulators around the world take steps to embrace fintech, the big question on everyone’s mind is – what does this mean for the future of the investment profession?
To shed some light on the disruptive potential of robo-advisors and other new financial technologies, CFA Institute released a new fintech survey, which collected the opinions of CFA charterholders and investment professionals worldwide. According to the survey, while fintech promises to have a long lasting effect on the investment management industry, its benefits and risks may not affect all investors equally.
A majority of survey respondents (40 per cent) say robo advisors will have the greatest impact on the financial services industry both in the near and longer term. The survey showed far fewer respondents felt peer-to-peer lending, crowdfunding, or blockchain technologies will have a significant short term impact. However, 30 per cent of respondents thought blockchain and its potential to eliminate the need for intermediaries and people to authenticate financial transactions could have a significant impact on financial services within five years.
Changing The Way
Its evident robo advisors are already changing the way investment advice is produced and delivered; providing access to a multitude of investors with accounts too small to be profitable for many traditional advisors. What remains to be seen however, is whether the rise of low-cost, algorithmic investment services points to a natural evolution in the industry – making way for high-volume, low-cost providers – or if it is a trend that will result in lost market share for traditional high-end providers and a loss of jobs for advisors.
The results showed that the asset management (54 per cent) sector will be most affected, followed by banking (16 per cent), securities (12 per cent), and insurance (eight per cent). Taking a closer look at the results revealed that several respondents also noted (as ‘other’) that financial advisors and wealth managers will also see significant impact. Additionally, respondents believed interactions with human advisors are expected to diminish for those investors managing less complex portfolios or requiring less sophisticated advice.
Affluent Open To Fintech
This sentiment is based on that fact that automated advice tools are currently unable to consider many alternative asset classes or active investment strategies, so we are unlikely to see ultra-high net worth or institutional investors move away from human advisors. Conversely, high net worth and mass affluent investors are likely to be more encouraging and open to fintech and some (34 per cent of respondents) predict mass affluent investors may replace human advisors with technology entirely.
But are robo advisors the answer for mass affluent and high net worth individuals? Although this group is likely to see significant consumer benefits in terms of continued fee compression and perhaps greater and better product choice, there are concerns about a potential reduction in service quality and a greater likelihood of fraud and mis-selling as a result of these new platforms.
Investors using these new advice tools may also be exposed to new risks. In many cases, the algorithms used to provide investment choices are not transparent and cannot be easily evaluated. In addition to the potential for mis-selling, almost half (46 per cent) of survey respondents were also concerned about problems with algorithms that may expose investors to flawed or suboptimal investment recommendations. Cybersecurity is an increasingly significant issue for both advisory organizations and investors, so it’s not surprising that privacy and data protection threats were indicated as risks that investors may experience. Another concern is that new technology may not be able to deal with the human complexities of investing. This sentiment was echoed by some survey respondents who felt that automated financial advice tools may not be able to satisfactorily account for behavioural biases or personal circumstances.
When speaking on how technology will change the business of investing at the recent CFA Institute Annual Conference in Montreal, Ashby Monk of the Stanford Global Projects Center reaffirmed that technology is already changing the way that people engage with the world and that the implications for the investment profession will be profound. However, unlike innovations in earlier years, due to the speed at which technology is changing investment processes, and the relationship between investor and investee, it is difficult to assess future eventualities and the degree to which technology will disrupt the current investing ecosystem. What investment professionals seem to believe is that that even beneficial disruption will be accompanied by new and unique risks that both professionals and investors will need to identify and manage.
Robert Stammers, CFA, Director of Investor Education at CFA Institute