Over >30 years working in the financial services industry, it’s always frustrated me that most financial services advice delivered to individuals is, bluntly, awful. But maybe, at last, fintech could give cause for optimism.
To start with, the gripes. Sometimes there’s genuine bad intent. The very first insurance salesman I ever met (whose “closing” technique to sell policies included threats of physical violence) eventually ended up in jail for fraud. Large amounts of other people's money creates temptation.
Sometimes the products are just unfit for purpose. I was recently offered a pension product in Japan that offered a 3% return after 10 years; that’s 3% total, not annualised – i.e. in even a weakly inflationary environment, it was guaranteed to destroy wealth.
Sometimes there’s pure institutional greed. My UK bank recently introduced a 5-day holding period for inbound international transfers; in other words they granted themselves, unilaterally, 5 days of free float on top of the fees and FX spread they already earn.
But mostly, it’s because of simple economics.
People’s needs are complex; people’s understanding of financial concepts are often hazy; the availability of financial products for individuals is often limited by well-meaning regulation; and as the world changes, plans need some level of ongoing oversight. Creating the right financial strategy for an individual, working out how to execute it with the products available, and then staying on top of it, is a highly skilled job. It takes training, probably an expensive professional designation, and a great deal of experience, to be able to do this. The job itself is time-consuming.
Who can pay for this?
Well, the client could, and some business models ask the client to do just that: pay an invoice for the service. That’s clean and simple, but in practice it’s been very difficult to get individuals to pay for advice. And if you’re a middle-income earner, paying someone a few thousand dollars to tell you what to do with your modest savings sounds like a very expensive and avoidable luxury.
More commonly, the client pays through fees embedded in the products they use, that enable the advisor or her organisation to be paid by commissions or rebates.
There are advisors out there who will focus on client needs, and ignore the financial incentives; but human nature conspires against this. There are far more advisors who (perfectly reasonably) would prefer to earn as much as they can in return for the investment they have made in their careers; or whose employers would like to earn the highest returns possible for their shareholders.
I remember witnessing a conversation between two private bankers about a client who wanted to build a small minority stake in a listed company. Rather than a simple staggered purchase, at normal brokerage rates, the solution they arrived at was a complex construction of derivatives and borrowed stock, which would have dramatically increased the complexity and legal risk but made the bank more than ten times the fees and spreads - and therefore contributed far more to their bonuses.
Mass affluent “advisors” in retail banks in Singapore, who may be advising several hundred clients each, are typically degree holders but with no particular financial planning training, and in their mid to late 20’s. Their overriding objective (and determinant of their career path) is to make their revenue targets each month; at a junior level, that’s typically the equivalent of US$40-50,000 per month. Those fees, commissions, and spreads must come from the pockets of comfortably-off (but not high net worth) customers.
Despite the efforts of professional bodies such as CFP, industry bodies across the world (I founded one, FPAS, with some friends many years ago), and, increasingly, regulatory action, the economics of the retail advisory business are stacked against the consumer. Up to quite recently I would have said that, sadly, that was the way of the world.
However, fintech may just hold the key to a better future. Technology holds the promise of delivery consistent and rational advice, and much more cost-effective products. The disruption that the financial services industry quite rightly fears, could well be, at last, the empowerment of the individual consumer.
Take robo-advisors. The asset allocation advice of a robo-advisor is reasonably good, reasonably tailored, and defensible - and is delivered to retail customers of any size. That may sounds unambitious, but it’s a lot better than the status quo. Theo (website in Japanese), Japan’s largest robo-advisor, for example, has an average account size of about US$6,000 equivalent (which might generate a few hundred dollars a year of fees – nowhere close to being worth even a couple of hours of a professional advisor’s time), but delivers an asset allocation that’s robust enough for a multi-billion dollar asset owner.
Fintech payment services remove huge frictional costs in money transfer. Using the banking system to send money cross-border can easily eat up >5% of the value of the transfer in spreads and fees and, increasingly, banks will “sit” on the transfer for a few days to make use of the costless (to them) float. This costs even more through non-bank financial entities; Western Union for example, would cost >11% to send US$1,000 from the US to Singapore. Migrants from low- and middle-income countries sent remittances of US$466bn in 2017. That would conservatively suggest that some of the world’s least privileged citizens are transferring US$50bn of value to developed-world shareholders in payment costs alone. While Western Union et al are legitimately responsible for making money for their shareholders, a transfer of this magnitude offends any sense of social justice.
A fintech solution such as TransferWise will effect an international cash transfer between banks almost instantaneously, for a fixed spread of 1% and no fees. That’s money in consumers’ pockets (and potentially $45bn specifically into poor workers’ pockets).
The world’s largest money market fund (US$165bn as at April 2017) is Yu’e Bao, ultimately part of the Alibaba group. It’s online-only, mostly accessed through mobile phones, has no minimum investment and an average investment of about US$600; it’s yield is around 3.9% compared with bank deposits paying 0.3% in renminbi. That delivers institutional-level returns on cash to any consumer, even those with only small amounts to put aside.
“Disruption” may be painful for shareholders of financial institutions, but the inverse of “disruption” is “inclusion”. Technological solutions are shifting power from the financial services ecosystem, to consumers. Not only are “pure” fintech plays delivering vastly improved solutions, but they will force the incumbent institutions to improve their offerings, or die.
For the first time in more than 30 years, I finally have some optimism that consumers may soon receive sensible advice and be able to buy genuinely cost-effective services and products.