Citisoft’s Young: Is automation the future for retail investment?

Steve Young Citisoft

I recently read a thought-provoking article that quoted a fund chief as saying that ”automation and computerisation were creating a ’brave new world’ for the asset management market”. The article quite rightly cites the rise in passive investment as a key driver to the rise of the machines.

Following the index is most certainly an area where the deployment of efficient technology can turn a small margin into a highly scaled, money making enterprise.

Automated trading, portfolio analytics and decision-making based on a risk profile and various economic factors will increasingly be areas where machines will play a greater role. Some hedge funds, for example, are highly automated, trading on the ingenuity of their algorithms. Yet the role of the fund manager within active investment, for large institutional clients especially, is not really under threat.

There has been much talk recently, in the business world in general, about disruptive technology and the growth of the ‘exponential organisation’. There has been noticeably less talk about it within asset management circles and the impact of technology disruptors or innovation on our industry. Frankly, I suspect that is simply due to the notoriously slow adoption of technology in the wider financial services industry. 

What I certainly do not know is how and when the retail investment world industry will be affected by true disruption. The asset management industry, for example, moves at a glacial pace when it comes to technology, and it is ripe for disruption. Asset management firms still move files from point A to point B in much the same fashion as they did 20 years ago. Data is still managed inefficiently on systems that are not scalable, expensive to maintain and difficult to extract and consume. So-called new investment vehicles ranging from ETFs to multi-asset products to OTC derivatives struggle when it comes to finding vendor software designed to meet their needs.

Richard Branson has stated that most great ideas come out of frustration; entrepreneurs who saw models that simply didn’t make sense have built several new businesses. Maybe the robo-advisor movement will take hold – Wealthfront is intriguing in the US, as is Nutmeg is in the UK.

The new digital wealth managers, such as Nutmeg, are keen to emphasise the trust angle. Increasingly investors under the age of 35 are wary of traditional wealth management firms and brokerages and are seeking technology solutions to their problem. These robo-advisers ask investors questions about their needs, risk profile and long-term plans (much like a conventional adviser) then use algorithms to devise an investment strategy. McKinsey says that robo-advisers have a cloudy future, but ‘virtual advice’ delivered by 24-hour super centres using experts and algorithms will win the day.

In the retail and wealth management industries, there is a lot of ageing technology, with legacy system issues that need to be addressed. If you were going to start a new retail investment firm, you almost certainly wouldn’t set up your technology infrastructure using the systems that are the most established in the market place. The potential for new market entrants, either from an established technology provider such as Google or Apple or from a start-up is high. A low cost, high technology firm with more inventive branding than we traditionally see in the wealth management space could rapidly make inroads.

The other key point to make is that retail investment is much more about the user experience now and much less about relationships and networking. This user experience is increasingly being driven from the technology perspective, including how the client interacts with their investment information. Advisers are moving to multichannel strategies that suit today’s investor, and we are witnessing a trend toward more of a collaborative approach to making the investment decisions. Investors desire more ownership and involvement (even with discretionary fund scenarios). They want to see what is happening to their portfolios much faster and feel that they are in a partnership.

Ironically, technology will increase this feeling of collaboration rather than lower it, as one might assume.

My concern is that the incumbent providers will struggle to get there. They are at a significant disadvantage as they have too many existing technology problems.

Steve Young is chief executive at Ciitsoft.