Networks > social media

David Easthope

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Sep 3rd, 2014

I have never really liked the term social media. All media has the potential to be social.

What is really changing financial markets is the power of networks. Networks can be highly social (Twitter, Linkedin) somewhat social (lets not forget Bloomberg or even a Squawk Box as a type of network) or even anti-social (private networks).

Financial institutions and financial advisors should be looking for ways to leverage networks, not necessarily media. Content, services, insight, and advice can be delivered and shared among communities of users.

I am sure this is a lonely fight, but we should drop the term social media. Rather, we should emphasize the importance and power of networks to change financial markets.

How Automation Is Disrupting the Market for Financial Advice

Will Trout

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Aug 28th, 2014

 

My most recent report explores the competitive threat that online firms pose to traditional providers of financial advice, particularly in the area of investments. Some observations:

  • The portfolio construction and monitoring process has been commoditized. What a human advisor can do, an algorithm can do at least as well, and at much lower cost (typically under 35 bps). This means that automated investment managers such as Betterment, Wealthfront and SigFig have a built in competitive advantage over traditional (real life advisor) Brokerage and RIA models, especially if they can achieve some sort of engagement or relationship with the client.
  • A further competitive advantage is that because they are data driven, automated investment managers are naturally disposed to using data to improve both the client experience (for example, through better analysis and reporting tools) and portfolio performance. Algorithms can be used to test and develop new investment ideas, for example, as well as to monitor portfolio exposure or risk. Traditional advisors may be able to provide these functionalities but at much higher user cost and friction: that is, their delivery may not be as good, particularly if they have limited digital capabilities.
  • RIAs are under threat but the wirehouses and the discount/online brokerages are in a real pickle. Wirehouses recognize the need for automated advice but fear creating channel conflict with their sales force. The online brokerages also understand that automated advice is valued by clients (a few such as TradeKing are introducing algorithm driven platforms) but they will find it tough to overcome challenges of legacy technology (systems dating back to the early 2000s will need to be updated) and culture (the automated investment managers are mostly software engineers, while the discount brokerages are a mix of techies and investments people).

Given the deepening public embrace of ETFs and passive investment strategies, which enable automated advisors to manage money in a customized and highly efficient way, it may be that the online brokerages emerge as the most natural competitors of Wealthfront, Betterment et al. Most will want to launch their own platforms. The question then is whether to build or buy.

Webinar with Celent & Scivantage, September 18th @ 4:00PM EST

Aug 27th, 2014

Webinar with Celent & Scivantage, September 18th @ 4:00PM EST

The Race for Retail Investor Assets: Leveraging Analytics to Transform the Online Investment Experience

Register here:

http://info.scivantage.com/Sep2014sqope-Celent-Research_SQO_Landing-Page.html?cpstat=&ls=&pf=&lsd=&lss=Celent

The needs of the retail investor are rapidly changing as technological advances continue to push the boundaries of investment transparency, and social interaction.  With increased competition, the race for investor assets has never been more intense and it has financial institutions searching for new and innovative ways to transform their online investment experience.  From advanced portfolio analytics to community-based social investing initiatives, firms that are able to capitalize on this dramatic shift will realize game-changing ROI.

Join Ashley Globerman, Analyst, Celent, and Greg Alves, Senior Vice President, Investment Analytics, Scivantage, as they discuss the evolving expectations of the retail investor and the technology imperatives firms face in order to remain competitive.

In this complimentary webinar, you’ll gain:

  • Insight from Celent’s latest research into the evolving state of the retail investor landscape
  • A focused outlook into technology’s substantial role in connecting firms with their tech-savvy clients
  • Expertise on streamlined processes for delivering premium analytics and reporting solutions to a broader client base
  • An introduction to Scivantage’s new performance reporting platform, sqopeTM
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Time for a New Take on Trust

Will Trout

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Aug 26th, 2014

Five years after the end of the financial crisis, bank trust companies are taking steps to update their technology platforms. That’s a good thing as most of the trust accounting systems currently in place were implemented pre-2007, and the ability to track assets quickly, efficiently, and accurately is critical given today’s complex compliance and security requirements. Thinner margins and heightened client service expectations are also driving the push toward modernization. Small wonder that an executive with a leading platform vendor estimates that a third of wealth management firms using legacy trust accounting systems are in discussions with vendors to replace them.

The issue is not solely one of age, however. Trust accounting systems were not designed to manage investments, much less to serve as the backbone of a modern wealth management practice. Over the years, bank trust companies have compensated by deploying a dizzying array of back office systems (in some cases 50 or more), each with their own coding requirements. The result has been “systems spaghetti” and on the front end, old-school client service defined by manual processes and static performance reporting.

Trust platform vendors have ramped up efforts to tackle the technology and service deficit through the delivery of end-to-end solutions that embed onboarding, CRM and reporting tools directly into the trust accounting workflow, or what industry professionals call the “vertical stack”.

These newest trust accounting platforms do offer banks significant operational efficiencies but are for several reasons no panacea. First, efficiency in technology terms does not neatly translate into advisor productivity. Second, most gains are incremental: it is not possible to outsource everything and many of the major efficiencies such as straight through processing have been achieved already. Most critically, these efficiency improvements do not address the fundamental challenge facing the business: misalignment with the client viewpoint and interests.

Clients tend to see investments they hold within an institution as a whole, not in terms of separate brokerage, trust, or bank channels. They want to manage assets across platforms, receive a single statement from their financial institution, and so forth. The point is that while the immediate prospects for efficiency gains rest in the traditional vertical stack, the client’s desired perspective is horizontal.

It’s time to look past existing frames of reference and imagine what could be. Steve Jobs did it with Apple, and Jeff Bezos is doing it with Amazon. Where is the technology leader with a new vision for the bank trust company?

 

Big Banks’ exodus from Commodities

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May 30th, 2014

Goldman Sachs, Morgan Stanley, Barclays and JP Morgan used to be the biggest traders of commodity among banks. However, this space has witnessed many of the big banks exiting the business line in recent times. JPMorgan recently decided to exit physical commodities trading business by selling its raw-materials trading unit to Mercuria Energy Group Ltd. Morgan Stanley decided to sell its physical oil business to Russia’s Rosneft. Barclays decided to exit some of its commodities business. Deutsche Bank said it would exit dedicated energy, agriculture, dry-bulk and industrial-metals trading. Bank of America Corp. said it would dispose of its European power and gas inventory. UBS decided to shrink its commodities business sharply. Goldman began a process to sell part of its physical trading operations.

This retreat of the big banks from commodity business has been driven by tighter regulation, stricter capital requirements, increasing political pressure and lower profitability in recent times. Key regulations impacting banks in commodity trading include Basel III, Dodd-Frank, and the Volcker Rule. Rules brought in to address the financial crisis of 2008 (Basel III, Dodd Frank) require banks to hold more capital than in the past against trading operations, which has made holding commodities more expensive for the banks. New charge for credit valuation adjustment (CVA) – which requires higher charge for longer dated trades with lower rated counterparties – is likely to have significant impact on hedging practices of longer dated trades. Further, regulators are pushing for over the counter trades to the public exchanges, which is likely to significantly reduce profitability of such trades for the banks. Volcker rule, aimed at banning banks from trading with their own capital, is another catalyst in this regard. Anticipating this rule many banks have already scaled back or spun off their proprietary trading desks.

Politicians have also exerted pressure on banks to cut back their commodities business. Regulators and some senators have expressed concerns about banks being in the business of natural resources. This has been largely prompted by events like Deepwater Horizon oil spill, complains from other industries and associated media coverage. Policy makers are now seeking comment and exploring ways to limit banks’ role in trading of commodities.The U.S. Federal Reserve is considering new limits on trading and warehousing of physical commodities. Policy makers suspect that there are conflicts of interest when the same entity is involved in the physical market and also in trading derivatives on the same underlying. Commodity Futures Trading Commissions (CFTC) is investigating the effect banks are having in the commodities markets, as it has been argued that banks played a major role in the rising commodity prices, including that of agro-prices, in the latter part of the last decade.

Lacklustre market conditions are another driver behind many banks’ decision to shrink or wind up their commodity business. While regulatory burdens have added to cost side of the business, less volatility in commodity prices have hit top line. Combination of these factors has resulted in lower revenue from the business. Industry estimates suggest commodity-trading revenue for the ten biggest banks shrunk by over 67% in 2013 compared to peak levels attained in 2008. This trend of falling revenues holds good for not only the commodity business, but also to the FICC (Fixed income, currency and commodity) segment in general. Forced by this, some banks are shrinking or winding up their Fixed Income business as well.

These developments are making commodity trading an inefficient use of capital at a time when other markets, such as equities, are showing signs of recovery.

Exchanges and innovation

David Easthope

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May 29th, 2014

I recently attended the 2014 IOMA/WFE conference in Moscow. An interesting panel debate was on the role of innovation in the exchange universe.

Some observations:
• While not all innovation begins at the product level, exchanges tend to focus energies there consistently
• Exchanges seek early feedback from customers on product needs, particularly any products that offer risk hedging
• In some geographies innovation must involve a wide array of stakeholders including regulators
• Exchanges also concentrate on innovation along the value chain; seeking and filling gaps

In summary, the current state of innovation at exchanges appears to be fairly customer-centric when launching new products (e.g. index options or futures products).

To get beyond product innovation at exchanges, one must consider technology innovation. Since only a few exchanges think of themselves as technology vendors, technology innovation is difficult, but some exchanges may focus on driving down latency, improving capacity or delivering technology to a community of users.

Collaborative innovation may be on the rise, as exchanges look outside their walls for partnerships. For example, CBOE plans to invest in Tradelegs, a developer of advanced decision-support software.

Beyond HFT

Neil Katkov

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May 15th, 2014

I recently attended the Tokyo Financial Information Summit, put on by Interactive Media. The event was interesting from a number of perspectives. This event focuses on the capital markets; attendees are usually domestic sell side and buy side firms and vendors, including global firms active in Japan. This year there was good representation from around Asia ex-Japan as well; possibly attracted by the new volatility in Japan’s stock market. The new activity in the market was set off by the government’s Abenomics policies aimed at reinvigorating the Japanese economy. But I suspect the fact that Japan’s stock market is traded on an increasingly low latency and fragmented market structure gives some extra juice to the engine.

Speaking of high frequency trading, Celent’s presentation at the event pointed out that HFT volumes have fallen from their peak (at the time of the financial crisis) and that HFT revenues have fallen drastically from this peak. In response to this trend, as well as the severe cost pressures in the post-GFC period, cutting-edge firms seeking to maintain profitable trading operations are removing themselves from the low latency arms race. Instead, firms are seeking to maximize the potential of their existing low-latency infrastructures by investing in real-time analytics and other new capabilities to support smarter trading. HFT is not dead, but firms are moving beyond pure horsepower to more nuanced strategies.

Interestingly, this theme was echoed by the buy and sell side participants in a panel at the event moderated by my colleague, Celent Senior Analyst Eiichiro Yanagawa. Even though HFT levels in Japan, at around 25 – 35% of trading, have probably not reached their peak, firms are already pulling out of the ultra-low latency arms race–or deciding not to enter it in the first place. The message was that for many firms it is not advisable to enter a race where they are already outgunned. Instead they should focus on smarter trading that may leverage the exchanges’ low latency environment, but rely on the specific capabilities and strategies of a firm and its traders.

Looking at this discussion in a global context, it seems interesting and not a little ironic that just as regulators are preparing to strike against HFT, the industry has in some sense already started to move beyond it.

How can financial advisors benefit from leveraging social media?

May 15th, 2014

Private Asset Management (PAM) magazine recently approached Celent about the benefits financial advisors could receive from leveraging social media.

Read what we had to say here:

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6.11.2014 Celent Webinar: How to Better Leverage Celent

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May 12th, 2014

Celent CEO, Craig Weber

This event is free to attend and we expect you to walk away with a better view as to how you can get more from working with us. For more information, please contact Anna Griem at +1 603 582 6137 or agriem@celent.com.

Please click here for more information.

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Celent Wealth Management Webinar Replay: The Evolution of the Retail Investor Landscape

May 9th, 2014

http://www.celent.com/reports/webinar-evolution-retail-investor-landscape

Audio for this event is available here.

The retail investor market across Europe and North America continues to evolve in the face of more stringent regulations, slow economic growth, an increasingly sophisticated client base, and an increasing number of digital channels. Among investor groups, retail investors are unique in having differing levels of affluence, investment knowledge, investment product preferences, and expertise.

Technology continues to play a significant role in the evolution of the retail investor and how businesses will establish themselves in the post-financial crisis environment. With the proliferation of social media and smartphones, the way clients prefer to perform banking or trading activities is evolving. As such, the continued enhancement and development of digital strategies are at the forefront of firms’ strategic plans.

This webinar examines how the retail investor landscape has evolved and what online brokerages can do to differentiate themselves. Isabella Fonseca, Research Director within Celent’s Wealth Management group, and Ashley Globerman, Analyst within Celent’s Wealth Management group, discuss the challenges facing the industry and takes a prospective look at the future role of digital strategies in the retail investor market. They also examine the latest trends and developments in the market.

For more information about this event, please contact Andrew Renzella at +1.617.262.3124 or arenzella@celent.com.

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