The future of finance

By Matt Bell | August 24 2016 07:00AM

Photo: Freepik

The CFA Institute Annual Conference held in Montreal in May brought the best minds of the finance world together in one place. With the theme, Investing in a Changing World, the conference addressed major trends impacting the future of finance, including  robo-advice, big data, cyber security risks and how they’re shaping the industry going forward.

Five trillion dollars! That is the Citigroup’s prediction for how much in assets the robo-advice platforms will have gathered within a decade – a dramatic rise from its current value of $50 billion. In a presentation entitled The Future of Financial Advice, Jon Stein, CEO and founder of U.S robo-advisor company Betterment says more people are craving financial advice than what they’re getting now.

“In a survey, 83 per cent of those surveyed want more advice than what they are getting now. Everyone wants more advice about their investments and that advice is very expensive.”


Stein says with people demanding more for their money today, he sees advice having a great couple of decades ahead. This applies to both robo-advice and traditional advice, he adds.

“The world is more and more complicated. We need more advice to help navigate this reasonably complex world.”

Stein created the largest and fastest growing robo-advisor company in the world with 160,000 customers and manages some $4.5 billion. He describes robo-advice as something like a self-driving car for money. The demand for robo-advisors has seen his company become the fastest growing investment company in the United States. 

He believes advisors need to know more about their customers so they can give better advice.

“The more we know about you, the better advice we can give.”

He used the example of Netflix. With the information they collect on their subscribers’ viewing habits, they’re able to recommend other shows. Consumers also want similar personalized service in financial services. Whether it is automated or traditional advice, people expect tailored, not generic advice, explains Stein.

“Customers want simplicity, peace of mind. The best method isn’t to give people whole heaps of tools to figure out themselves. The right solution is to tell them the right things and ask them simple questions that they know the answers too.”

While some advisors might be skeptical about robo-advisors or “robots” taking over their life, Stein is the first to come out and say humans aren’t being replaced by robots.

Serving more customers

“You’re going to be able to serve more customers than you ever have been before and you’ll be able to serve them better, because you’ll be able to have a more reliable process. You’ll be able to spend more time understanding their needs.”

The evolution of robo-advisors is being compared to previous technological changes in the industry, such as advisors adopting the telephone or using spreadsheets instead of paper. Stein says robo-advice is transforming the industry and it’s something that everyone will use.  Stein’s Betterment Company offers a direct-to-consumer offering that he says is extremely efficient if one doesn’t need the handholding of an advisor. He also offers an advisor software that helps automate your office so there is less time filling out paperwork and more time advising customers.

“Ultimately, this technology is going to be used by everyone, whether you’re investing on your own directly or you have an advisor, because it’s just that much better than not using technology,” Stein says.

Stein says right now we are undergoing the advice revolution and says robo-advice at this point is growing bigger than mutual funds when they were first created. He says robo-advice is the future in how people will invest and operate.

During the CFA conference, several presentations concerned the the impact that big data will have on the industry. Tim Gaumer, global director of fundamental research at Thomson Reuters says the big data trend is gaining steam.

“The reason big data is going to work is because of the dramatic decline in the cost of storing it. There’s been an average of a 60-per-cent decline in the cost of storage for each year of the past six decades,” he says.

Big data

Gaumer says Thomas Reuters is using big data to build models such as predicting the probability of a company defaulting on their debt. They’ve used publically available data such as conference calls, filings, the entire Reuter’s newsfeed, broker information and so forth.

“We searched keywords that could predict financial distress and we came up with a predictive model, which will get you ahead of what the rating agencies are saying and traditional human spread sheets are doing,” Gaumer says.

Models like this that use big data managed to predict, a year ago, that U.S company Peabody Energy would be in a dire financial state and in April 2016 the company filed for Chapter 11 bankruptcy. Thanks to texts and data, big data was able to predict a bad outlook, long before human analysts and credit agencies did.

According to Gaumer, video and images are the next big thing for big data and will shape the way we use information. There are cameras out there that capture half a terabyte worth of information every half a second, Gaumer says. This type of information will be used more and more, he predicts.

Cyber-attacks might be the biggest risk facing individuals and businesses today. Eric Cole, founder and chief scientist at Secure Anchor Consulting says the threat of a cyber attack is so strong that you’re either hunting or being hunted.

Cyber-security risks

“If you have not detected an attack or compromise in the last six months, it’s not because it’s not happening. It’s because you’re not looking in the right areas.”

During his presentation, Cole provided a statistic which could come as an unpleasant surprise to organizations: insiders are responsible for 90% of security incidents, of which 29% are malicious, including fraud and data theft. He added that 71% of security incidents are unintentional, including log-in/log-out failures, cloud storage, etc.

Cole has authored books on how to protect against cyber threats, including, Advanced Persistent Threat: Understanding the Danger and How to Protect Your Organization.

He gave the audience some simple ways to help avoid digital attacks:

  • Do not open attachments.
  • Do not click on web links.
  • Do not store passwords within programs.
  • Trust no one.
  • Always verify email.

But he ended his presentation with a joke that underlined that it is not possible to be 100% protected, no matter the measures taken: “The only way to be safe in a digital world is to go Amish.”

Social media

Everyday 500 million tweets are sent around the Twittersphere, providing both insightful and, of course, pointless comments and discussion. But how is social media changing financial services? Michael Batnick, director of research at Ritholtz Wealth Management and Tadas Viskanta, founder and editor of Abnormal Returns presented a brief presentation on how financial advisors are winning from the digital age.

The global web index says an average internet user has 5.54 social media accounts, which means there is a big business out there for advisors, they say. For financial planners, it may come as no surprise that LinkedIn is the most popular social media website in the industry. According to research Batnick and Viskanta presented, 70% of financial planners use LinkedIn and 56% of those surveyed use LinkedIn as their prime social media platform.

With financial planners using social media, many are reporting it has helped them gain new clients. 79% of financial planners who used social media had reported gaining new business, Batnick says. LinkedIn was the most likely social network to gain financial planners new business, he adds, with that percent rising to 88%, while Facebook and Twitter were in the mid 60’s.

“Social media is a powerful way to amplify your message. Whatever the message may be, whatever the audience,” says Viskanta.

The top three tips presented for gaining new clients was all about being engaging and interacting on social media. This includes: be interesting, be interested and be experimental and have fun.

Responsible investment

Steve Lydenberg, partner, strategic vision for Domini Social Investments presented a talk on responsible investment. He says with the population to reach 11 billion by 2100, there will be increasing tensions around natural resources and economic inequality. Because of this, responsible investing will take on a dramatic new approach.

Since European governments established a soft law culture after giving up control of national industries to the private sector decades ago. Lydenberg says this introduced terms such as corporate social responsibility (CSR) and carbon market into the financial vocabulary.

This culture instilled social awareness into companies strategies. Throughout the 2000s, an increased demand for social and environmental disclosure and ratings and the launch of such campaigns as the Principles for Responsible Investing (PRI) has created a climate where people expect companies to demonstrate their credentials across an expanding definition of “social responsibility.” Lydenberg says these indications show society’s appetite for responsible investing and the financial sector is now responding.

Lydenberg predicts with social responsibility firmly established across financial services, there is potential for responsible investing to go beyond product innovation and deliver fundamental changes to the global financial system. He envisions a possibility where stock markets will require companies to disclose multiple social and environmental disclosures before being listed and demand investment reports to be written in jargon-free language that anyone can understand.

Lydenberg finished the presentation by saying responsible investing is coming of age. If wisely guided, the next generation could go further than was once dreamed possible, he believes.

Related to the same topic …