Innovations on the digitalisation of the investment value chain

Day three at Fund Forum in Berlin and a pre-lunch panel in the Future Finance Forum produced dire warnings that the current crop of robo-advisors would herald a repeat of the 2008 financial crisis and investors in FinTech startups would do better to if they “threw their money out the window.”

However, while there were some on the panel who held no confidence in the current crop of robo-advisors, there were others who strived (with the support of murmurings in the audience) to bring the conversation around to the benefits of FinTech innovation outside of the narrow confines of robo-advice.

“FinTech seems to equal robo-advice in this industry, but that is not the right way to look at it,” said Patrick Murphy, founder, Puregroup. “Technology and data have always had a place in investment management and how we manage those products.”

Technology’s purpose is to support business decisions and remove downside risk, allowing the investment management industry to “constantly question the products we are creating,” Murphy adds.

However, it was Gina Miller, founding partner, SCM Direct and Paul Resnik, co-founder and director, Finametrica who were the most vocal in their opposition to FinTech, which both almost exclusively defined as robo-advice.

Resnik, in a tone meant to provoke, lamented what he describes as “leveraged hubris” where “pontificating arseholes” who are “unwilling to look at science” are leading the industry down a path that would result in a repeat of the 2008 financial crisis.

In 2008 the industry was at fault for “mismatching advice”, says Resnik, which is what the robo-advisors are doing now.

“We used to only give rich people bad advice, now we give it to everyone – it will blow up in our faces,” he adds.

Miller was more measured and considered in her arguments, but no less passionate. She argues that the current crop of robo-advisors – firms like Betterment and Nutmeg – are online investment solutions and not robo-advice. “FinTech is an enabler and could produce better outcomes with better algorithms,” she adds. “But we are a long way from robo-advice today.”

Miller went on to question the sustainability of the current crop of ‘online investment advisors’ arguing that their basic business models were flawed. The costs of marketing, on-boarding, and maintaining a customer on these platforms, over three years, outweighs the amount being earned in fees by these ‘low cost’ advisors, she outlines.

Miller also questions the continued emphasis on marketing to millennials. “Millennials are not joining up to these platforms. We do research on this. Investment management is not their priority – paying for rent or paying off student loans are,” she adds.

The hype around startup investment is mostly to blame, according to Miller. Most investors are “hoping” they will back the winning FinTech startup, but Miller jokes that investors would be better off “throwing their money out the window” if that was their strategy.

“Many of these companies [by companies she means robo-advisors] will not be around in three years’ time,” says Miller.

However, Murphy stresses that the industry need not fear failure when it comes to FinTech innovation and startups. “We need tech to fail – because that is how we find new business models,” he argues. “Even if Nutmeg fails, we have learned a lot about this market.”