The founder and CEO of robo advice platform Scalable Capital reveals what he thinks is the future of wealth management.
From the shoes on your feet to your daily caffeine shot, many retail companies allow clients to customise their products, generating brand loyalty in the process. Think of mass customisation as the combination of mass production with bespoke tailoring. It is a way for companies to provide unique value to their customers in an efficient manner.
Technology has greatly increased the possibilities for mass customisation. For example, Levi Strauss pioneered the idea in 1994 of a mass-customised pair of jeans with their ‘Original Spin’ model. They measured clients in stores and sent their details electronically to the factory. The customised jeans were then cut electronically and posted to the client. And while Henry Ford once famously said: "You can have any colour you want, as long as it’s black", today’s car buyers are used to configuring the interior of their new car using the manufacturer’s now commonplace online configurators.
One sector though seems to be quite late to the party: retail investors are still largely faced with standardised products that they cannot re-configure to make them more suitable for their individual needs. There is a clear disconnect between what customers want – more personalisation – and what the financial industry is currently able to deliver. The most prominent excuse is that clients with investments below £1 million cannot be serviced in a personalised way due to cost implications. But we believe this doesn’t hold true any more - just like other sectors managed to overcome cost issues by embracing new technologies and adopting more flexible processes, the investment management industry can make substantial improvements for its customers. regulations.
Let’s first have a look at the current situation. Until recently, there was a clear split in investment management between two types of clients. An “elite” of very wealthy clients could afford a private wealth manager and was offered a unique investment portfolio adapted to their needs (“bespoke tailoring”). All other retail investors, with too little money to invest for a private wealth manager to open their doors for them, had to content themselves with a narrow selection of ‘model portfolios’ or pick from standardised funds that aren’t tailored to their individual situation, but are identical for every investor putting money into them.
So how can this change going forward? Most recently, the first generation of “robo-advisers” have democratised access to investment management for people with smaller pots who don’t want to or don’t know how to manage their own portfolio via a platform. But that alone doesn’t lead to more customisation. It takes a different approach to using technology and the cheap computing capability offered by cloud computing to be able to make the step-change to mass-customised portfolios.
A new wave of investment managers (‘robo advisors 2.0’), including us at Scalable Capital, are ready to make that step now - we offer retail investors access to portfolios that are continuously optimised in order to deliver the best returns for their particular situation, reflecting their individual risk and soon also their particular tax situation. This means every trade is made only if it makes sense for this particular investor, and it might not be made for a different investor in the same risk category who signed up on a different day and has a different tax situation.
Making better use of data and working with algorithms that can incorporate each investor’s tax situation leads to customised portfolio allocations that can ultimately deliver better risk-adjusted, post-tax returns. This is where the future of investing starts.
Adam French is CEO of Scalable Capital
AltFi is returning to Amsterdam for its second annual Summit in the city. The inaugural event last year was a roaring success, with key figures from across Continental Europe's alternative finance and digital banking sectors highlighted. These included Jeroen Broekema, managing director of Funding Circle Netherlands, and Mieke van Engelen, head of innovative partnerships at ABN AMRO's standalone lending platform, New10.