Our panel of experts dissect the big news events of the year, from Facebook’s Libra to the existential threat of AI and robotics. Chaired by Nicholas Pratt.
Richard Clarkson (global head of solutions, Oracle)
Louis Wright (sales director, Calastone)
Keith Hale (fintech investor, non-executive director and adviser)
Funds Europe – Facebook has just unveiled details of its global cryptocurrency plan. Should the funds industry be worried about what will come next? Meanwhile the IMF has issued a warning about big tech’s threat to financial stability. Are regulators the best chance of the funds industry staving off the threat of big tech?
Richard Clarkson, Oracle – I think the IMF is trying to get ahead of the curve because clearly the government’s missed the boat with Twitter, Facebook and all the current social media services. Cryptocurrency will be an interesting thing. It is being termed as a new asset class but is it still a bubble? People haven’t got a clue, and there are lots of charlatans and fake stories out there. So yes, there are use cases, yes there’s going to be disruption but it needs to be thought through. It’s not going to destroy everything but it will destroy a lot.
Keith Hale – Cryptocurrency seems to be a bubble to many and a Ponzi scheme to others. My kids’ school has even just launched a coin, so that tells me that there’s too much froth at the moment. I think it’s at a very early stage but the likes of Facebook coming into the crypto market could bring some credibility and stability leading to wider adoption. In the medium to long-term future, I think more viable ‘crypto-style’ currencies will come through but currently the volatility around the likes of bitcoin isn’t viable. I’m very sceptical about current cryptocurrencies and this crop are largely overhyped and will probably die, but Libra is a first move into something more serious that might have sustainability.
Louis Wright, Calastone – I’m probably on the other side. With 2.4 billion users, Facebook has access to a lot of people who’ve got no bank accounts who can suddenly start selling products online and start making money. I think that’s going to be a big game-changer. If 1% of those people adopt the currency, you’ve got 24 million instant users. So, I think it will work. I agree crypto is very dangerous and a bubble, but this is backed by, amongst others, Uber and MasterCard. Facebook wouldn’t do this without having spent a year with their lawyers and putting millions into research. The question is whether the regulators will try to shut it down before it takes off.
Funds Europe – Could this turn the likes of Facebook or other GAFAs [Google, Apple, Facebook, Amazon] into stateless superpowers with their own global currency?
Clarkson – It’s the data miners that have the real power. It could be Amazon or Facebook because they have the data, but who can actually truly extract the value from that data? Right now bitcoin is fading, because there’s only a finite amount that can ever be found. So will Facebook have an infinite number of Facebook coins or will they also be a limited resource?
Wright – If you look at the millennials, they’ve seen a subprime crash involving a regulated currency that lost a lot of people money and they don’t trust the banks any more. They have more faith in Microsoft and Apple and Amazon than they do in the banks. So, the market will change, and I think it’s more fear-driven than actual fact.
Hale – It is interesting that you have Facebook coming into the crypto market, which could be disruptive. But you only need one problem and the trust will be lost immediately. Libra will seem like a really good idea to some people and they will dabble with it. But if there’s a problem or it tanks in value, those same people will realise there’s actually much more risk associated with it than first thought – think of the dotcom period in 2001. On the other hand, if it is successful in the long term, it will be very interesting. Will there be a temptation to issue more virtual money if the company’s share price isn’t where Facebook management want it to be, for example?
Clarkson – I think Libra will be perceived like PayPal, which is well accepted now with the millennials. That is the image that Libra needs.
Funds Europe – Where is the impact in the funds industry and should the funds industry be scared?
Hale – According to an Efama study, only 10% of households own investment funds, so on the one hand there is lots of white space in long-term savings opportunities. The downside is the funds industry is not providing a good enough service in terms of either value or returns. And look at the distribution side. Putting cryptocurrencies aside for a moment, the idea of an Amazon funds supermarket seems obvious. But would millennials actually buy it? Products that go through that online store need to be much more returns-driven, with lower costs, if people are going to buy into it.
Clarkson – Millennial investors use technology more than cash and Facebook will jump in with Libra because it will be a seamless, cheap and effective way of putting money in. And that’s where the funds industry is going to really struggle because it’s expensive, doesn’t distribute well and is seen as stale, male and pale.
Wright – I agree that the institutional asset management world will not be that affected but the retail investment market will be massively affected over the next few years. The institutional and pensions markets will remain fairly stable, even if they will be watching closely the technology and benefiting from the cost savings it generates.
Hale – The retail sector might grow or it might be replaced by somebody else that does it better at lower cost, like zero-fee ETFs, for example. That kind of stuff could be massively disruptive.
Clarkson – Even the institutional sector’s going to struggle because where does that money come from? It’s still a retail investor paying into its pension pot, and millennials probably won’t be paying into pension pots.
Funds Europe– Are regulators the best chance the industry has of protecting itself against the GAFA threat?
Hale – The asset management industry should not hide behind regulation to protect itself. The industry needs to do a better job at a lower cost, more efficiently and with better returns to the end investor. The regulator should absolutely protect investors, as it does today, and continue to do that, whether that’s new entrants or not. GAFA companies should have exactly the same stringent controls that the current industry has. There will be a challenge for regulators because we are in a fragmented global industry and they have to talk to each other more to coordinate regulation. The challenge is how the regulators interact and share data to each other to get that global view in a consistent way to protect investors.
Wright – The regulator needs to adapt to the market if it wants to better control it. For example, you can’t read a Key Investor Information Document on a smartphone – it will need to be dematerialised into a tab format where users can swipe through all the parts. The regulators also need to talk to each other. Luxembourg’s CSSF is tech-savvy but certain others are not. Know your customer (KYC) and anti-money laundering (AML) are still very decentralised
Clarkson – Many of the national regulators are mindful of their own markets but don’t always have a macro view. The IMF has a macro view but doesn’t actually regulate.
Hale – What did Uber do in the regulated taxi industry? It just ignored the regulation and paid the fine instead. So it is a hard job for the regulators to ensure that new entrants don’t just flout the rules that are there for the benefit of the end investor. If anything, the regulatory bar needs to be higher for new entrants to prove that they are serious participants.
Funds Europe – A survey commissioned by Calastone found that only a third of millennials prioritise ethical investment and the majority are more concerned with long-term savings and reduced fees. Have we misjudged the millennial generation and its attitude to investment and money? Are they just the same as everyone else?
Hale – The first question with millennials is whether they have the money to invest. The next question is what they will invest in and whether it would be a fund. And if they do invest in a fund, what type of fund would it be? It probably will be some form of ESG but that is a few steps down the decision tree and they have to reach that point first.
Wright – Many millennials want to be a combination of Gordon Gekko and David Attenborough, where they can make money but be socially responsible. However, of all the savers in the survey, 40% of them mention investing in property or a holiday or retirement. None of them mention funds. But I think we are too focused on the ‘millennial’ generation. What we should be focused on is the number of people all using smartphones and tablets for all their transactions, which could include Generation X just as much as millennials. They don’t want to wait three days for a fund to settle.
Clarkson – We are moving to a service economy and to funds as a service where people can dip in and out depending on the stage of their lifecycle. Yes, we need to bring in more ESG factors, but as millennials grow older, that demand for ESG will fade, unless you have the next generation to fill that gap. ESG has to happen for the sake of the planet but we shouldn’t overtly focus on it because there will be a return to cold, hard or digital cash.
Wright – Facebook, Instagram or Amazon can follow your interests and buying patterns and if they see that you are interested in a specific product, they will use social media with regular pop-ups and ads enticing you to invest with the click of a button. Distribution in the retail sector for millennials will move from the traditional banks and financial advisers to a direct-to-consumer model via smartphones. But that can only happen if we get to T+0 settlement, remove all the fees and layers of intermediation and make the whole process a lot smoother.
Hale – We’ve been in a very long bull market, so trackers have become immensely popular because people have seen their ETFs increase in value at low cost since the end of the financial crisis. If there’s a big correction, the preference for trackers will quickly dip. But if you’ve got a balanced portfolio, it should reduce the risk associated with being purely exposed to whichever equity markets your ETF is tracking.
Clarkson – But isn’t that what we’re supposed to do as an industry, provide that guidance? Millennials should be more risk-friendly because they’ve got longer to save.
Hale – A lot of millennials were at school when the financial crisis happened, so they haven’t seen a downturn in the market at this point. I agree that most active fund managers don’t do any better than the benchmark they are trying to beat but some do. For example, private equity funds have been very successful, partly because their returns are largely decoupled from the public markets.
Clarkson – Neil Woodford is a single person in a massive industry, but the problem is his brand and his star-ness has made it headline news and adds to a sense of greed and disengagement with the end investor. There’s a lack of clarity with what’s happening, that adds to the feeling that the financial services industry is self-serving, not serving the end investor.
Funds Europe – Investec has exited the robo-advisory market, claiming it is overhyped. Is it?
Hale – The robo-advice market is worth about $1 trillion right now and is due to grow 27% to $2.5 trillion. But when you compare that to the $80 trillion that’s in the investment market, robo is still a relatively small part. We are currently at version 1.0 of robo-advice in my opinion and the low end of the adoption lifecycle. A number of providers ask for your risk tolerance and suggest a basket of ETFs but charge you the same as a traditional adviser. Robo should reduce but not remove the level of human interaction by enabling an adviser to service more investors at a lower cost. There is definitely an opportunity for technology to help the adviser and investor make better investment decisions more cost-effectively, but I think there’s a lot more that can be done with the technology.
A major problem with the current robo-advisers is the lack of brand. Nutmeg is reasonably well known in the UK, for example, but it’s not really a robo-adviser and has not been a roaring success yet. If the big brands like consumer banks or GAFA companies actively leverage robo-technology with an advisory service wrapped around, we may see a much wider adoption.
Clarkson – These early robo-advisers are often very basic. They are not even using genuine algorithms – it’s more like one plus one equals two. They add some value but they are overcharging for what they provide. It was seen as a great way to enter the market and to boast of new distribution channels – the normal financial services hype. But it has not proven to be what it was advertising. We probably did not have enough data at the time. We have more data now but does everyone have the skills and the tools to dig into that data? Google and Amazon do, but most asset managers don’t use their investor services or transfer agency data other than to meet its regulatory or accounting requirements. Google does, Amazon does, because that’s what they do. I don’t think the average asset manager uses its investor servicing data, its transfer agency data to any degree, other than make sure it meets its compliance and accounting requirements
Wright – The term ‘robo-advisers’ was very poorly chosen. A brand like Google Investment would be something you trust, because you know they work with data.
Hale – I don’t have a problem with an adviser charging you a lesser fee because he can service more customers, because he’s using technology to do a better job. The current charging structures, from adviser through to the underlying fund, are way too much. So if some of that process is automated from advisory all the way through to the underlying funds, there should be a lower fee.
Clarkson – Should there be any fees? If I’ve typed all my own details in and been self-serving and am still being charged a fee, where’s the value? Self-service, I’ve done my own job, and now you’re charging me for typing my own name into a box? What is the value added?
Funds Europe – What should a fund manager’s strategy should be right now in terms of robo? If you have an existing service, do you keep it? If you haven’t entered the market yet, do you wait until the technology allows you to offer something more attractive?
Hale – Robo-advice is more a wealth management tool, it should be applied in the wealth advisory market. The fund manager’s role is providing collective investment vehicles – be it low-cost ETFs or actively managed funds, for example. They may use some form of AI for that process and it is worth them engaging with the robo-market to better understand AI. But I understand why Investec stepped away, because it’s not really their market, even if there is some blurring of the lines between wealth and asset management. The wealth management space is equally of need of improvement as the asset management market, in my opinion.
Wright – The smart banks of the future will cater to both the wealth and asset management markets. They’ll have their traditional advisers for more institutional or the very large clients, and then you’re going to have the millennials who will want the quick, online, low-cost solution.
Funds Europe – Northern Trust has transferred its blockchain platform for PE asset servicing to Broadridge, citing the latter’s fintech credentials. What does this suggest about the ownership and running of distributed ledger technology (DLT) platforms within the funds industry? Will wide adoption only be achieved if a platform is run by a third party and not a market participant?
Hale – End-to-end market-wide DLT infrastructures by their nature should be industry utilities shared by a wide range of participants and therefore probably owned by the industry, rather than a single organisation, regardless of whether they’re a fintech or not. When DLT-based utilities finally get genuine adoption, they will be infrastructures where the benefits and cost savings are shared by the whole industry and not an individual firm.
Clarkson – At Oracle, we’re engaged with a proof of concept in a country where we’re dealing with a number of customers, and we’ve said to them it can’t be owned by one of them, it has to be owned by all of them.
Wright – The migration of Calastone’s global network of more than 1,800 customers across 41 markets represents the largest community of global financial services organisations connecting and transacting via distributed ledger technology. The DMI immediately solved several key points of friction, which are fully automated and visible as all participants are connected into a common infrastructure.
Hale – But your nodes are within your infrastructure and not external. If I understand correctly, the nodes are owned and hosted by Calastone and that is the bit I struggle with, because it is not a DLT in the true sense of the word where everybody has a node and can be sure of the data they share. You mention real-time access, but it’s possible to have real-time access to data with a big enough single database, but its only when the data is distributed and shared that you get the non-repudiation benefits, for example. In that full distributed scenario, I don’t think any individual firm should have unilateral control over the pricing of an industry-wide utility.
Wright – Currently, there’s a fully managed service to host the nodes. But if any clients want to host their own nodes, they can leverage the open technology on which the DMI is built, allowing them to innovate, stay competitive and offer new services and investment opportunities better suited to the changing, more sophisticated needs of their investors.
Hale – Right now we are at the proof-of-concept stage with a proliferation of small DLT projects. What may yet happen is that they all start to interact with each other. Some will prosper and others will die, but will there be a single, industry-owned utility? Possibly. Would it take a long time? Almost certainly.
Clarkson – We all agree that we have to work together but not today, maybe tomorrow. A lot of the problems are associated with KYC. We all agree it’s a pain and it should be decentralised and it should be a token on a phone. But if I do my KYC at one bank and then change my status and then invest in another firm’s fund, where does the responsibility lie for any inaccuracy?
Funds Europe – If we end up with a situation where there are lots of different versions of DLT which shave a bit off existing operational costs, would that be acceptable or would it be a waste of the technology?
Clarkson – It wouldn’t even do that. If you’ve got more DLTs, you’ve got more connections and more costs. Whatever you might save in one area, it’ll end up costing you more somewhere else.
Hale – Right now there is lower-hanging fruit to address, such as robo-advice and distribution. The business case and appetite is lacking for a large, single, shared infrastructure in my view. Any technology adoption involves a load of upfront cost and investment, and then you get the benefit over the long term by sharing that cost of development. Successful software vendors reuse the same technology investment across a number of customers.
Clarkson – One area where DLT can have a massive impact is reconciliations. There are so many levels of intermediation and we spend so much on reconciling to reconcile to reconcile. With a DLT, it’s instantaneous and transparent.
Funds Europe – Two Nordic banks (Nordea and Danske) recently stated that they expect to see significant reduction in their compliance headcount in the next three years as regtech robotics mature. Has the industry thought enough about this issue or is it one to be welcomed rather than feared?
Clarkson – Robotics still conjures up the idea of a scary T2 Terminator world because of society’s fear of robots. Of course, it’s not robots, it’s an algorithm. There is still a computer somewhere at the back end.
Wright – Compliance headcount will come down to AML KYC, which comes down to sharing data, which will come down to technology. If the market can connect and share the data correctly, then yes, it will reduce costs, and all the painstaking work into finding out the identity of the ultimate beneficial owners.
Hale – Repetitive tasks are often replaced by robots because computers aren’t talking to each other, because they haven’t got proper interfaces, such as APIs. To improve oversight, the automation of repetitive human work is a good thing because of the associated cost saving. The question is whether that cost gets passed on to the end investor. So, let’s not stop doing the oversight with some of that repetitive work undertaken by a robot, I’m not talking about anything AI-based oversight here. I’m just talking about undertaking oversight in an as-automated-as-possible way that was previously done by a human re-keying data, for example, which is prone to errors and is costly.
Clarkson – And also, the human could actually do proper job-worthy stuff rather than retyping back and forth.
Wright – Just having an aggregator that can go into every single regulator’s website, know where to enter the name of the company, get the information out and feed it into the bank’s CRM [customer relationship management] tool, that would save so much time and that’s just basic robotics.
Hale – It amazes me that the industry still has so many manual tasks that could and should be automated, mainly because we can’t get the systems talking to each other because it’s such a fragmented industry. Therefore we will end up having a robot replacing what a human is doing because he’s literally going from one system to the other and retyping the same data.
Clarkson – Robotics will have the biggest impact in the back office where the most repetitive work is done. And most back offices are now located offshore. Robotics needs a repetitive, streamlined, procedural process and that’s exactly what we did with offshoring.
Hale – The asset services and fund administrators have done exactly that, they’ve offshored people to reduce costs and improve their P&L. Rather than automating manual processing, it’s just been offshored to a low cost. But this trend should be corrected through better technology – either robotics or some form of automation – rather than the spaghetti systems that don’t talk to each other and don’t do a very good job. The benefit will be getting those processes streamlined. Robotics is a quick fix; the real benefit will be systems talking to each other and humans managing exceptions when there is a problem.
Clarkson – It is another return to that service-based business model where someone in exception management will not be doing pure data entry any more. We have not seen reduced headcount yet, but we have not applied robotics effectively yet.
Hale – We’ve probably increased headcount for two reasons. Back-office functions have been offshored to save cost. But the headcount actually increases because of the lower labour costs, so one FTE in Luxembourg is replaced by 1.5 FTE or two FTE in India, for example. The other reason is the ever-increasing levels of regulation and oversight that people are expected to do, which means hiring more people. If those Nordic banks have chosen to try and automate some of those currently manual compliance processes in order to reduce the overall cost to the industry, then I believe it is a worthwhile endeavour.
Clarkson – Robotics could improve people’s quality of life. We all work in this industry from seven in the morning until nine at night. If we could add value back into our lives by returning to a nine-to-five job, that would be a big win.
Hale – That’s not what happens though, is it? Somebody with a P&L will expect to get more out of you as an individual by working efficiently for just as long if not longer. They’re not going to give you the rest of the day off because of a robot doing some of your job. Sadly, technology has not made people work less. I’m pretty sure it’s made them work more.
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