By David Stevenson on Friday 6 October 2017
Earlier this week – Tuesday to be precise – AltFi hosted its first WealthTech summit at the City offices of Taylor Wessing. I thought it was a great success – I would say that, wouldn’t I – largely because it got all the key players in one room talking about the frontier of digital wealth, and particularly robo advice.
Three topics seemed to dominate the discussion. The first was, as you’d expect, technology. There was feverish speculation about the potential of AI and sober reflection on the importance of speedy digital on boarding.
Yet there was also a realistic discussion of cost structures – this wasn’t one of those tech events where all the key players guiltily avoided all mention of the elephant in the room i.e cost of client acquisition.
It helped that just the day before the event Gina Miller from SCM had fired off a scorching commentary on the accumulated losses at robo leader Nutmeg – you can see it here. These legitimate questions about the economics of direct to consumer propositions were in part answered by the rush towards partnership deals and white label arrangements – working with bigger marketing partners who would distribute the product. This talk of partnerships so early in the game is I think a positive sign that this young digital wealth sector is growing up fast – not least because of the growing number of bigger traditional wealth players muscling in on the space such as Killik and Co and Investec.
But what surprised me most was that a bevy of related topics barely got a mention all day long – including banks and social investing.
The first is the more obvious. Most upstart robos have the existing wealth advisers to varying degrees in their sights. This I suppose makes most sense as this is where the readily available, easiest to pick pocket capital is at the moment, but it seems obvious to me that the real gatekeepers of our collective national wealth are those enormous high street banks we all love and respect (!). My guess is that we’ll see at least two or three of these high street goliaths launch their own version of a digital robo wealth platform in the next 18 months. More importantly if ever there was a pool of dissatisfied capital looking for a new home, the banks must be top of that list. Even their most reclusive customers - who’ve not read a newspaper in decades - must have realised by now that most high street banks are not a trusty worthy home for their investments. Their outrageous charges, brazen disregard for customers' long term interests and appalling lack of service must have registered with most clients by now. Banks should be target Number One.
Social investing is a much more niche concept but again I think it a huge growth area. In China for instance investing is a decidedly social activity. People gather together to exchange ideas and gamble on their futures. An echo of that could be found in the growth of share clubs in the UK a few decades back – hundreds of these emerged in a short number of years, most of them based in pubs or coffee houses. The success of investment events such as the Master Investor show shows that despite the slow decline in those share clubs, there is still an appetite for the social bit in social investing. Most of the running in recent years has been via social digital platforms such as eToro and newbies Dawrinex. These have grown steadily although their primary driver seems to be getting investors to follow the behaviour of star investors – rather than swap ideas. Nevertheless, I stick to the view that being social and sharing ideas is a huge part of the investing process and that too many digital wealth solutions are in reality either top down professional solutions OR allegedly bespoke solutions which are in fact top down solutions dressed up as technological fixes.
Perhaps the most important issue for me on Tuesday was that most industry players suffer from a profound misalignment of issues – there’s a lot of talk about UX and strategic partnerships but not about deep seated investor behaviour and what investors need out of the investment process. Put simply, when a customer buys an investment product, what do they want out of it?
One potential way of answering this is to use (and abuse) the idea of Abraham Maslow and his hierarchy of needs – a much beloved concept widely adopted by both psychologists and marketers alike.
This argues that in a pyramid of needs we’d start with physiological requirements such as food and water and then move up to safety (we are a collective species afterall) before hitting the higher order needs such as belonging and then esteem. At the very top is self actualisation – modern civilisation in all its narcissistic glory!
This hierarchy of needs has been adapted to finance by a number of professionals – I’ve highlighted two below, one by Mission Assets, the other by Ruedi wealth. Both look fairly sensible to me, at least in the financial planning sense.
In the terribly designed graphic below, I map out my own take on this hierarchy of investment needs, built up over decades of talking to ordinary investors (and some extraordinary ones) about investing. Apologies for the entirely rubbish design!
In my humble experience what investors really, really care about is the base need of investment – returns.
Wealth creation. Remember that investment is an entirely different activity from saving. It requires an appreciation of risk and that without risk you cannot get returns. So, for most investors that trade off requires there to be some capital growth.
End of story.
Curiously because the vast majority of robo based platforms are infatuated with talk of lowering costs, they’ve almost completely forsaken the idea of alpha, capital returns and wealth creation. The only stab at attempting to answer this is to feature entirely pointless tools which show what might happen if I save at £xxx per month at a capital growth rate of 7 per cent a year. Cue risible chart.
In my experience the vast majority of investors regard this as pointless waffle. What they care about is your investment track record. Did you give your clients a better return?
Cue the next level of needs – protection. Again, in my experience the vast majority of ordinary savers and investors are obsessed by both greed (give me super average returns) and risk (don’t lose my capital doing it). Maybe it’s because I am a cynic but I have lost track of the number of times I have been brought to task by readers' letters demanding to know why I have talked about a risky investment?
The reason why there are so few long term investors here in the UK is that most ordinary folk hate the idea of risking their hard earnt capital. They see volatility as risk and are prone to an immediacy bias – they remember seismic events such as the global financial crisis and ignore the long, boring periods of steady growth. They instantly seize on the potentials for downside and ignore all the much quieter engines of upside.
One side issue is that of time spans. After a great deal of education, many providers have got investors to understand the trade-off between risk and return but then they ram into the time window concept. Put simply, too many wealthier customers accumulate capital in their mid 40s and then start dialling down risk because they believe they’ll need the cash in their mid 50s, whereas their real retirement age is likely to be closer to 70.
So, their window for capital growth – the timespan that allows for risk – is shortened considerably. In fact, I think this idea of short windows of opportunity is true for virtually every generation including the millennials: “I can’t afford to speculate because I need to save for the house”. The reality is that we all have long time spans ahead of us – and thus big windows of opportunity – which in turn means we can absorb more risk than we know. But we choose not to.
Many platforms react by talking sensibly about the wonders of compounding. It is indeed a wonder but in my experience a great many investors suffer from a behavioural quirk that stops them appreciating its potential.
Many investors simply cannot plan on any financial basis beyond five or ten years. They simply won’t accept that a long-time span is both wise and probable. In sum, compounding is boring and pointless. Which, of course, removes one of the key props – building blocks – of modern investing. The only arena where they’ll accept this idea is in professionally managed pensions or in-house prices.
As we move up my pyramid of needs we run into another challenge – the need to talk to someone when problems emerge, such as after a stockmarket collapse. In my experience, every time there’s a sudden spike in market volatility, investors hit the email software and pick up their telephones. Woe betide the platform or product that is not ready for this.
Near the top of my pyramid is brand – clients love established, trusted names that their friends use.
Only at the very top do we get to technology based stuff such as UX. It’s a nice to have but it’s not a necessity.
My pyramid of financial needs suggests that next generation digital wealth platforms are going to need to rewire the way they think - and behave - in front of customers. If they don’t, they’ll be eaten alive by much bigger names who understand this psychology of needs intuitively.