Today I am taking a break from analysing the current market conditions and the choice of economic policy. Instead I am going to talk about what many are calling the future of financial services –”Fintech” or Financial Technology.
For those of you who have no idea what I am talking about. Basically the start-up, entrepreneurial technology hub of the world, Silicon Valley, California has decided to take on Wall Street. A bold move to say the least but they are in fact succeeding to a certain extent. When I say “taking-on” I simply mean that the traditional finance, banking, investing and advisory models, that have we have all come into contact with as did our parents and their parents before them, is being challenged. The challenge comes in various forms and is not trying to replicate the models of old, in fact it is trying to do the opposite. This is the next wave of disruptive technology.
Think of what Uber has done to the Taxi/Transport industry. If you don’t know what Uber is and are still using traditional public transport I urge you to reconsider. So how can technology enter the financial realm? Surely enough incredibly intelligent people work in this field?
Financial advisory for one is an area where I think this technology will find itself very useful. Why? Most financial advisors collect personal information from their clients and input this information into a programme of sorts, this programme then spits out a set of answers that the advisor then uses to create the financial plan. A lot of the hard yards that the client assumes the advisor is doing is in fact an already automated task. Not to mention that human error exists which means that the advisor may input data incorrectly or be making use of an outdated or incorrect model.
Robo-Advisors are rising in popularity in the US and UK as a way for the millennial generation to create their own financial plans using the same (if not more robust and accurate) technology that their financial advisor of old used. Money is pouring onto these platforms and the valuations of many of these companies has sky-rocketed. So should advisors be worried?
The answer to that question is a tough one to answer. The Robo-Advisor scenario plans using a set of assumptions that will work with the highest probability. Very much like the tools most advisors use to date. The law of averages applies and assumptions are key because these models essentially can only use empirical (historical) data to try and forecast the best way forward for the future. The benefits are that is a self-service portal, that in most cases cuts out the advisory fees and reduces total expenses related to financial planning.
The downsides in my opinion are exactly the same things that make Robo-Advisors appealing. They are built for the masses and use probabilities to create your financial plan. If you had two people with the same financial inputs and same degree of risk aversion (in theory) it would spit out the optimal asset allocation and fund selection for the client. This would be identical for both clients. Yet the needs and the appetites for risk and different asset class behaviour could differ significantly between clients. This means a completely different client/investor experience for the two individuals despite them having similar investment needs going forward.
Here lies the opportunity for the advisor as we know it today. You have to build meaningful and honest relationships with your clients to ensure that the investment advice that they are given is suited to their unique set of circumstances and tolerances. This is the human element that a Robo-Advisor may never be able to cater for.
Robo-Advisors are coming whether we want them to or not. They are not the enemy because they will assist millions of people have at least the basic planning necessities in place. However how those investment goals and plans are actually achieved and managed will be determined by the guidance an advisor is able to give. Advisors should use them as a planning aid where they can because they allow for a far more in depth and accurate planning process that can be scenario tested with the experienced advice of a trusted planner.
The local bourse ended the week higher, with the ALSI and the TOP40 posting 5.61% and 5.40% gains. The local markets were carried by a global market rally which we experienced throughout the week. These gains were significant enough to lift the YTD figures into positive territory.
Mining shares continued to rally, increasing the RESI 13.7% due to rising metal prices. Financials increased 4.44% on the news that Old Mutual is looking into splitting into four separate businesses. This follows the announcement that Barclays plans to sell its African business which includes the ABSA business. Industrials gained 3.75% to end the week off on a high note.
The Rand strengthened significantly over the week which is a positive sign, although a lot of this movement may be as a result of a global risk on appetite as opposed to any positive developments locally.
European markets were strong in line with other global equity markets. The FTSE finished 1.70% higher over the course of the week. The German DAX was 3.27% higher and the EUROSTOXX was 3.69% higher. All eyes will be on Mario Draghi as the ECB meets to discuss possible further stimulus measures this week. The expectation is for continued stimulus and a move to more negative rates.
The US market rose broadly with the S&P 500 rising 2.67% for the week. The technology rich NASDAQ posted a 2.76% gain. Jobs data surprised on the up side with the economy creating 249 000 jobs as opposed to the expected 190 000. The Dow Jones added 1.48%. The Dollar weakening and oil price increases were also positive price catalysts for the market.
Asian markets were not isolated from the global equity rally with the Nikkei rising 5.10% and the Hang Seng rising 4.20%. The Chinese government is planning to create more income tax deductions to boost consumer demand, further adding to global market strength. This however may not be a sustainable policy move in the long run. Chinese GDP is expected to grow around 6% this year which is still a massive growth expectation. This has added to the recent equity rally going into this week.
Oil closed the week 10.61% higher to a level above $38 per barrel. Official US data showed that oil production had fallen to its lowest level since November 2014, thus reducing the supply glut slightly. Gold continued to climb, to close the week 3.05% higher.
The Rand strengthened to R15.34/$ on the back of average US earnings coming in at -0.1% for the month of February, down from 0.5% in January. The main contributor to its strength is mainly the optimism; returning to global markets, that the worst could be over for commodity prices.