In May 2014, CNBC reporter Eric Rosenbaum concluded an interview with FutureAdvisor CEO Bo Lu with a straightforward question. “So who acquires FutureAdvisor ultimately, or who do you become?”
Replied Lu: “No one acquires us. We become the next-generation financial advisor.”
Insert drum roll.
In fairness to Lu, the pressures that led to the acquisition by BlackRock were just starting to unfold at the time of that interview. As I note in a previous blog post, the robo advisor phenomenon has been veering from a direct to consumer model to B2B for some time. Motif, Betterment and now SigFig are all examples of firms bent on securing advisor-led distribution.
How could things be otherwise? Portfolio management has been commoditized, and the significance (namely, pressure on fees) of this development weighs as heavily on the automated advisor as on the “man and his dog” RIA. The launch of Schwab’s zero fee Intelligent Portfolios was a clear sign of where pricing is heading. And with hints of a market correction as visible as the changing fall foliage, it made sense for Mr. Lu and his friends at FutureAdvisor to get out while on top.
I’ll talk about the impact of this deal in my next post.
As if Amazon.com didn’t have enough PR problems already, Bloomberg.com just published an article slamming the Seattle-based company’s 401(k) plan. It noted that many of Amazon’s lower-paid employees were not participating in the plan, to the extent that the company had to pay back the government upwards of $5 million for the plan to retain its privileged tax status.
The article does not explain why lower-paid employees are not participating. It’s fair to assume that many (particularly if they are seasonal employees) lack the income to sock away money for their Golden Years. Others may not be receiving helpful plan information. Or perhaps the reason is more prosaic: Bloomberg ranked Amazon’s 401(k) plan last among the top 50 public companies.
Wow. One wouldn’t expect a billion dollar global behemoth to be called on the carpet for its lousy 401(k) plan. Traditionally, it is employees at the smallest firms (those with less than 100 employees) that have gotten the short end of the retirement stick. These plan participants tend to pay twice as much in fees as much as their counterparts at larger firms; they lack access to robust investment products; and they receive less investor education and support. Needless to say, these shortfalls tend to translate into negative outcomes.
This is something of a national scandal, particularly given the adulation to which Americans accord small business. Indeed, the Federal government, fearing a doomsday scenario in which older Americans start outliving their savings, has become increasingly active in trying to right the retirement ship. At the same time, a new crop of 401(k) plan providers is offering smaller companies access to low cost, digitally focused platforms, as I discuss in a recent report.
The reach of these upstart providers in a highly fragmented market is limited, however, and the response of the largest plan providers to the needs of small business has underwhelmed. I have to wonder, given the emotions around retirement and the centrality of the 401(k) plan to the lifetime earnings picture, how long it will be before Bernie Sanders takes on this topic.
Are the automated investment advisors on their heels? Wealthfront CEO Adam Nash has been out in front of the recent market correction, highlighting the value of his firm’s approach while putting the downswing in context. The heads of other automated advisory firms are weighing in as well.
Perhaps more important than what these leaders are saying, however, is the fact they are speaking at all. One might say that these firm honchos must speak up, since their robot-advisors (or more precisely, their algorithms) can’t talk to clients themselves. That was a point made by Investment News and other media outlets describing investors’ jitters at the market upheavals.
Fair enough. But to say that client communication is the Achilles heel of the automated investment advisor misses the point, in my view. Indeed, it speaks to a advisory business model that is about to go the way of the Minotaur.
- The savvy market participant takes the long term view. Remember, 84-year old Warren Buffett is putting money into investments that (for actuarial reasons) he’ll never see again. Clients need to ask themselves if they are investors or traders.
- Do clients who are investors need the counsel of salesmen, which many advisors still are? Too many advisors simply respond to market developments and lack an actionable take on the future. Where’s the value in that?
- In most cases, the advisor will counsel patience in the face of the storm, which does indeed make sense. But is that counsel really worth a 1% annual fee, given point #2 above?
In his writings, the satirist H.L. Mencken liked to highlight the readiness of the average consumer to settle, i.e. to accept a subpar product. This state of affairs has defined the retail wealth management business to date, as advisors have had clients over a barrel. But as clients today have more choice, advisors do too.
Whether real life or virtual, advisors must market their services to a new generation of clients, one that is digitally functional, demands transparency and value, and invests for the long haul. These clients treasure action over words. They are not necessarily defined by age, but they are the future of the industry. The rest are hardly worth the while. That’s my response to the investor hand-wringing that’s taken place regarding the recent market correction, and the parallel claims that the robo advisors are about to get their comeuppance.
What will the Swiss Capital Markets look like in a decade from now-in 2025? As private banking and wealth management digest the many changes in the post-crisis financial world what will be the implications on sourcing financial products and liquidity? We have already seen new business models reacting to these new pressures.
At our next client roundtable this September 22 in Zurich, the Celent wealth management and capital markets teams will look at opportunities for innovation in the face of regulatory and economic pressures, including the pressures on flow businesses that support a variety of clients, operational forces driving automation and the hunt for liquidity in capital markets. Topics such as competition from emerging offshore hubs such as Singapore will be discussed as well.
Joining us for a lively and interactive discussion will be strategy, technology and innovation leaders from European banks, brokerages and other financial institutions. This will be a great opportunity to hear the views of numerous financial service leaders in a private setting. While space for the roundtable is limited, I’d welcome hearing from individuals interested in the topics above and/or potentially attending.
What will Swiss Private Banking look like 10 years from now? As the business reorients itself from secrecy toward transparency, can it remain true to core principles of discretion and personalized service?
At our next client roundtable this September 22 in Zurich, Celent will look at opportunities for innovation in the face of regulatory and economic pressures, including competition from emerging offshore hubs such as Singapore. Operational forces driving automation and the hunt for liquidity in capital markets will be discussed as well.
Joining us for a lively and interactive discussion will be strategy, technology and innovation leaders from European banks, brokerages and other financial institutions. While space for the roundtable is limited, I’d welcome hearing from individuals interested in the topics above and/or potentially attending.
In my latest report, Big Rewards Come in Tiny Packages: Why Small Retirement Plans Offer a Huge Opportunity for Plan Providers, Sponsors, and Advisors, I explore a rich but underserved corner of the defined contributions business, the market for small company retirement plans.
Defined here as plans with less than 500 participants, the small plan market is a unique laboratory for exploring the contradictions and inefficiencies that characterize the 401(k) business in general. Small company 401(k) plans, where they exist at all, are expensive, burdensome to operate, and skewed toward cost-inefficient investments, even more so than their large plan counterparts.
Disruption is in the air, however, and the opportunity for new plan providers offering low-cost, technology-driven platforms is great. While in the broader retail investments business, innovation has been tech-driven, in the DC space, regulation (and its cousin, litigation) has been the engine of change. The industry is on the march to a uniform fiduciary standard, and it is no coincidence that so many of the plan providers mentioned in this report, firms such as ForUsAll and Employee Fiduciary, have emerged within the last two years.
This is the second blog post where I am going to pick up on a quote from Blythe Masters who was presenting at a Blockchain & Digital Currencies conference. The quote I am referring to is below and I have highlighted in bold the text that I will address here.
“It should be fairly obvious that the addressable market for this technology is absolutely gigantic. We’re talking markets that are measured in the trillions, not the billions. However, there are real frictions that exist, like the cash that we use is fiat cash and resides in bank accounts and not on digital ledgers.”
Well I would certainly agree that having fiat currency in its current form, supported by legacy technology that lacks the functionality of bitcoin certainly presents an issue. For this reason, I researched a report that addresses this very point called: “Fiat Currency on a Blockchain.”
For those of you who have yet to read it, I set out compelling reasons why such technology provides central banks and regulators alike with enormous benefits notably optimizing the movement of liquidity (cash) within an economy-the implications of this alone are significant in financial terms. It would also provide detailed insight into the workings of an economy-from understanding macroeconomic variables like the money multiplier to providing a platform for the introduction of micropayments which then could be leveraged into the Internet of Things. Even the most casual observer will note that the technology affords central banks and financial regulators with Big Brother type control over financial transactions and all entities within an economy-something that regulators typically relish.
But moving fiat currency onto a distributed ledger could catalyse distributed ledger technology and its disruptive force within capital markets. It may assist migration of title of financial assets onto a distributed ledger and assist the future use of smart contracts to settle transactions.
What is clear is that the perspective one needs to truly understand the potential of this technology is very broad-it straddles capital markets, correspondent banking, macroeconomics, RegTech, and that’s before you even get into the post-trade settlement environment.
A framework is beginning to emerge of how to categorise different approaches to blockchain/ distributed ledgers and, importantly, the phasing with which disruption is likely to occur in banking & capital markets.
Plenty to ponder.
Some days ago I alluded to the fact that there was a divergence occurring within the Blockchain ecosystem as different camps begin to emerge each of which is approaching the technology in slightly different ways. Some are permissioned whereas others are permissionless; some use a cryptocurrency whilst others do not; and so on.
Well, it seems that there is now divergence in the Bitcoin Blockchain itself as reports emerge in recent days of different groups of Bitcoin developers having different views on the future of the Bitcoin network. The central issue is around block capacity of the network-the existing 1mb it is argued is insufficient for the scale-up of transaction processing envisaged and a separate version of Bitcoin, called Bitcoin XT, will have capacity of 8mb. Bitcoin XT will be incompatible with the original Bitcoin software as I understand it.
There is a long debate between both the 1mb and 8mb camps as to why the capacity should or should not be changed. Frankly, it doesn’t really matter at this point. The central issue here is that the Bitcoin Blockchain is a DAO-a decentralized autonomous organization-which means that no-one controls it. Unfortunately, just as no-one controls it per se it can also mean that it can be uncontrollable. Decentralization is fine when you are talking about, say, the internet where the uncontrollable pace of growth of new websites and their variety are what contribute to the richness of the on-line experience and fosters innovation. However, something like Blockchain which includes a protocol, mining, cryptocurrency, and a huge ecosystem of developers, wallets, VCs, start-ups etc. dependent upon it means that interdependency can become very tricky. Which fork should a start-up follow? What about future forks? You get my drift.
This DAO issue of Bitcoin and the potential for splintering is one which I have been talking to clients about for some months and is highlighted in my research. Bitcoin will likely face other significant structural choices around its protocol (capacity in this case but there are others down the road which are potentially even more critical) and driving consensus is likely to prove challenging and likely to create further forks in the road.
There are a couple of critical takeaways here from my perspective:
- Anyone interested in blockchain technology should focus on companies that control their own destiny and are not dependent upon the collective decisions of others. The general idea is that start-ups must be able to pivot their business model as they see fit as opposed to having the protocol on which they are programming change on an ad hoc basis which may substantively impact their own business model.
- Secondly, a solid platform is required in order to support innovation of distributed ledgers/ blockchain technology and that platform, at least from a banking & capital markets perspective, is likely to come from fiat currency.
You will be hearing a lot more about #2 going forward…
High Frequency Trading (HFT) received its share of attention in the US last year with the publication of Michael Lewis’ Flash Boys. Recently it has received attention from somewhat unexpected quarters – regulators from India and China. India’s securities market is regulated by the Securities and Exchange Board of India (SEBI), while Reserve Bank of India (RBI) mainly deals with the country’s banks and monetary policy.
However, in a recent Financial Stability report, it expressed worries about trends in algorithmic trading (a cousin of HFT) in the country. Algo trading was introduced in India around 2008 with allowing direct Market Access (DMA) in the local market; colocation was allowed subsequently in 2010 to promote its adoption. Even though it didn’t take off immediately due to overall macroeconomic condition persisting around 2008, it now represents a sizable share of around 40 per cent of cash segment trades conducted at the two major exchanges, up from around 15 per cent in 2011.
More worrying for the RBI is its share in cancelled orders – of all cancelled orders, around 90 per cent comes from algo orders, and this has become a cause for concern for the RBI. To be sure, India, like many other emerging markets, has conservative regulations in all aspects of its financial services markets and promotes innovation in the markets gradually trying to contain potential risks to the maximum extent possible (for example, new algorithms need to be tested and approved by exchanges).
A while ago SEBI indicated that it would come out with guidelines to curb very high order-to-trade ratio. SEBI is now considering measures to control some aspects of algo trading. One idea floating around is a lock-in proposal that prevents traders from cancelling an algo order for a given period of time. Another idea is to install a two-queue system, which allows trades by brokers with co-location and another without.
China’s securities regulator is also scrutinizing high-frequency traders since its recent stock market troubles raised concerns about its financial system, though China is still at a nascent stage in its adoption of advanced trading tools and technology.
Like India’s case, order cancellation seems to be their cause of concern as well. These two may be isolated incidents, but serve to underline two important themes; first is the obvious growing scrutiny on algo and high frequency trading from regulators world-wide.
Equally important is the trend that while emerging markets look to emulate and adopt innovations taking place in the developed world, they are also keen to do it ‘their way’; and this is most apparent in their practices of risk management and market safeguard.
The acquisition of SunGard by FIS definitely helps expand FIS’s expansion into both Wealth Management and Asset Management. This part of the SunGard product line merges well with existing FIS banking products as banks continue to search for higher margin businesses and the expanding market in WM and the overall retirement space. In turn Asset Management provides the needed products to supply to the demand. As Defined Contribution retirement schemes continue to proliferate internationally, the asset managers will produce both active and passive products to fill investor demand.
This means the growing WM and AM businesses need operational applications and services. And as banking products grow into WM and retail trading products offering asset management choices, FIS can meet the demand. Of course the issue will be the successful integration of SunGard into FIS but that is a much more complex topic for further research!