New Year New Tech New Research

In your new year resolutions, did you pledge to understand more the technology that scares you? Or at least the one that some people (aka analysts like me) claim will replace you? If the answer is “No” and you are working in the field of Investment Research, whether producing, consuming or distributing it, then you may want to read our latest report Start Coding Investment Research: How to Implement MiFID II with Robots and AI.

I get paid to write research on fintech so theoretically I am not the tech scared type though I am the first one to control screen time at home. I know we have more and more competition from free research you can all find at your fingertips on the internet, and from cheaper research that leverages outsourced resources crunching a lot of data, but so far we are keeping up probably because our clients think we provide insight that those competitors do not provide yet.

I know however that we have competitors that have technological platforms that distribute their technology in a more user-friendly way with podcasts and fancy databases, that write their research in a more automated way and that you can consume easily because you pull the information with selective search technology that knows what you want and how much you can pay for it.

So before the holiday season, to make sure we were all going to start this new year with the right information in hand, I did look into what artificial intelligence and robotic process automation tools will be doing to research; not exactly my kind of markets fintech research, but more specifically to Investment Research, those written recommendations about equity or bonds or macroeconomic environments to help the buy side make investments.

The result is very honestly scary and exciting at the same time. These new  technologies are maturing at a time of big regulatory change in Europe, MiFID2 is finally kicking in and that means the unbundling of investment research cost from the execution costs the brokers and banks charge their buy side clients. Some buy side will keep using them and be happy to pay that fee, some clearly will start looking at other solutions that will have to propose a different business model provided by banks or by new market players, based on technology.

In our recent report we do look exactly at that: new business models and live case studies that have already been implemented in investment research production, distribution and consumption. Enjoy.

In robo world, B2B = buyer beware

The success of robo advisors in commoditizing the historically manual portfolio management process is proving their Achilles heel, as I noted in my last post. Incumbents have taken over the narrative. Yet the efforts of these incumbents to build, buy and partner with the robos comes with its own risks.

Foremost among these is how to implement robo advice within a multichannel ecosystem. As discussed in the report, Getting the House in Order: Consolidating Investment Platforms in the Wake of the Department of Labor Conflict of Interest Rule, the ability to deliver consistent advice across channels has become paramount in the new regulatory environment.

This consistency requires a clear view of assets held in house, which in turn implies eliminating product stacks and their underlying technology silos. Of the big four US wirehouses, Bank of America Merrill Lynch has led the way by consolidating five platforms into one. Their competitors are still trying to solve the problem.

Regional banks, with their legacy tech and limited budgets, are going to have a hard time getting this right. Asset managers are eager to help them launch robo platforms, despite the “me too” nature of the banks’ efforts. 

It’s hard to blame these asset managers for wanting to distribute their wares. B2B sales are in their DNA. But I’d point out that their headlong rush to abet bank robo contrasts with their cautious efforts to roll out on their own platforms.

Schwab spent months and millions to launch Intelligent Portfolios. UBS has moved much more slowly, and appears to be using SigFig as a placeholder until it can achieve the technological and service clarity demanded by clients and regulators alike. Fidelity danced with Betterment before rolling out Go through its retail branches. It's tepid if not touch and go.   

I don’t begrudge asset managers for taking their time. They have their own considerations, foremost distribution. That’s why they are enabling bank robo capabilities, even if it's not clear exactly how the banks will manage this. Why not give the teenager the keys to the Audi? But with their own clients, they have to get things right. They have shareholders to answer to, and the stakes are much higher.

The time is now for bank brokerage

happy businessman and money on a white background. vector. flat illustration As a follow up to my last post, I want to provide a little context on the challenges facing bank brokerages. Banks and their brokerage arms represent a wild card in terms of the adoption of automated investments platforms. Still wedded to a product push mentality, they could benefit greatly by rolling out self-serve advisory options. On both the loan and deposit side of the balance sheet, banks have broad (but rarely deep) relationships with clients, whose investment needs they serve via rival trust, advisory, and brokerage channels. Historically, brokerage has lagged other bank channels in technology and service terms. Automated advisory (or robo) platforms offer an opportunity to escape this defensive posture and give bank and nonbank clients a reason to bring assets into the brokerage. A robo advisory offer also represents a forward-looking investment in infrastructure. An online advisory platform may neatly substitute for a burdensome legacy RIA, or serve as a template for creating a more customer-centric investments platform that integrates trust and brokerage functions. At a minimum, implementation of an automated investments platform should help reduce overhead, drive fee income, and serve as a sweetener for Millennials disinclined to do business with a bank. For bank brokerages, it’s time to drop outmoded segmentation strategies and a focus on high commission products in favor of a model aligned with client interests.

Symphony messaging: WhatsApp to business’ ears?

It’s official, what many financial institutions have been saying for quite a while is becoming reality: they don’t want Bloomberg (or any third party?) to have access to all of their messaging, trading or not related, anymore and hence have decided to team up as equal partners, in a top-notch technology utility that serves the needs of its members, a key to its potential success, to fund a competitor messaging system called Symphony. The network, the link between the bankers and their clients and between their clients and their competitors is what enables them to be and stay in business: A third party cannot be invited around that table. Not only, Symphony could be offered to other business sectors as a professional WhatsApp. Follow me here: financial institutions don’t trust anymore a third party to manage their messaging data, but think other business sectors will trust financial institutions to manage their messaging data. Although I personally got annoyed when my bank asked me why I was spending some of my savings‎ on our family farm when I asked for a mortgage, I know they probably know my financial situation better than I do, and that I am not a potentially “good” client for them: I trade myself, have little savings, do everything online, so I guess it’s only fair for them to ask. Of course Big Brother is watching me – and so should he. But I am not sure if I would send all my WhatsApp messages on a bank-owned competitor system, would you run the risk that your bank could potentially see all your messages? In the case of corporations and businesses though, things are slightly different: their relationship with their banks are usually extremely deep, their bank helped them get their first line of credit, maybe introduced them to private investors or helped them IPO. And when they wanted to take part in a big project with a new foreign client they bridged the financing of the project, they helped them offset their FX risk, invest their liquidity and manage their treasury… so if they started potentially seeing their employee’s messages to their clients or suppliers, would it really make a difference to them? Probably not. Of course I am extremely simplifying the potentially extreme risk such a system could have; It has been created on the back of a highly secure encrypted internal system Goldman Sachs had developed and has been enhanced with the best of the best (it is said) technology, in an open source environment. We’ll be make sure to test it as soon as it is offered to the public later this year and am waiting for the next Instagram for finance.

Banks set to jump into robo

In a post early last week, I talked about some of the robos who are providing automated investments services to advisors. Those robos are making inroads in the RIA world with their B2B vision, even if the blending of robo and real life remains largely untested in practice. While sales to independent advisors typically equal small change, matters are about to scale up. The launch of Schwab’s Institutional Intelligent Portfolios means the B2B model is becoming, well, institutionalized. While the platform may face some headwinds (centering mostly on resistance from Schwab advisors), it is massive and here to stay. Schwab has imprinted B2B automation on the advisory map. The banks, meanwhile, have been silent. They won’t be for long, as nearly every decent sized bank worth its wealth management salt is exploring its robo options. A passel of partnerships—and maybe even a buyout or two—is in the air, and next generation robos such as Trizic and Jemstep are egging banks into the fray. Whether these banks truly know what they are getting into is something I’ll discuss in my next post.

Time for a New Take on Trust

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?