The WEALTHTECH Book: The FinTech Handbook for Investors, Entrepreneurs and Finance Visionaries

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Introduction

Executive Summary

WealthTech can be narrowly defined as the technology/software used to help investors make better decisions when it comes to where they should put their money. In this book we define WealthTech much more widely as the impact that technology has on the global investment and wealth management industry, including private banking and asset management. WealthTech includes known business-to-consumer (B2C) models such as crowd-funding, alternative lending and robo-advisory.1 However, it also includes business-to-business (B2B) enterprise innovation and technologies in the areas of blockchain, artificial intelligence and big data analytics, which empower asset managers to achieve better returns at lower costs for the benefit of their customers. This part will provide you with an introduction into the future of this sector, which controls global assets of more than US$70 trillion.2

As much of the financial industry from the retail sector has started to transform, the asset management sector is now experiencing the changing tides of technology too. But this type of disruption is different from what we have seen in the past, as it is now more about FinTech partnerships and how to counter threats from new business models and tech giants. Alibaba’s four-year-old Yu’e Bao, for example, now has more than US$200 billion of assets under management and thus is the world’s biggest money market fund, overtaking JPMorgan’s U.S. government money market fund, which has US$150 billion of assets under management. Another example is WeChat, which already offers wealth management services to its clients over its platform.

WealthTech is not just for millennials, even the older generations of high-net-worth individuals (HNWIs) and ultra-high-net-worth individuals (UHNWIs) are taking a keen interest in it. Too often, wealth management firms try to appeal to millennials using the same marketing strategies that worked on baby boomers, by relying on their brand name and email communication. This one-size-fits-all approach does not work. Otherwise, firms risk losing the US$30 trillion in generational wealth transfer set to occur over the next several decades. Profitability is a major concern, and 2017 has tested FinTech companies – especially in the robo-advisory space – that are relying solely on lower costs to compete. Robo-advisors will challenge existing financial advisors and private banks long-term, but to be effective, the robos have to offer both digital services and strong credibility. However, WealthTech does not just include robo-advisors. To help you visualize the future, this part also includes a fictional email from a CEO to his company employees highlighting how artificial intelligence (AI) will be integrated into the company. The CEO’s message reflects new organizational priorities in the company around AI, technological choices and job creation.

Summarized, in this part you will get an introduction to WealthTech, both why consumers are driving digitization in wealth management and how established businesses can respond to it with innovative solutions. Following this introduction, the second chapter focuses on digitizing client advisory and robo-advisors, the third chapter on digitizing wealth management operations, the fourth chapter on digital platforms, products and ecosystems, and the fifth chapter on blockchain applications in asset and wealth management. While these four chapters each have a focus on digitizing specific areas of wealth management, the sixth to ninth chapters refer to more general areas like founders’ success stories, enterprise innovation, global WealthTech markets and the future of WealthTech.

Notes

1Source: Puschmann, T. (2017). Fintech, Business & Information Systems Engineering, 59(1), 69–76.

2Source: BCG, Global Asset Management 2017, http://www.agefi.fr/sites/agefi.fr/files/fichiers/2016/07/bcg-doubling-down-on-data-july-2016_tcm80-2113701.pdf.

The Augmented Investment Management Industry

By Patrick Donaldson

Head of Market Development, Wealth Management Asia, Thomson Reuters

Since we are currently experiencing the fourth industrial revolution, we should not be surprised that wealth management is entering a fourth epoch as well. What is particularly exciting about this era is that it offers an opportunity to fundamentally rethink the business of wealth management, rather than simply providing a more efficient replication of what went before.

A brief reminder – the World Economic Forum has defined the four industrial revolutions as: the rise of mechanical power; the advent of electricity and communications; the digital age and the development of modern computing; and finally a new era that builds and extends the impact of digitization in new and unanticipated ways.

The four stages of wealth management are slightly out of step with these. Technological advances have been a constant in the financial services industry, as investors have sought to find the most efficient and effective means of putting capital to work, but we can also discern significant step-changes in the way wealth management was conducted.

The first three epochs of wealth management were, broadly speaking: the hand delivery of documentation; the mechanization of those hand-to-hand processes; and the development of computing solutions.

That first involved the old coffee-house method of investment, where company documents were handwritten and exchanged among patrons. This developed into the old stock exchange trading floor, complete with jobbers and runners to distribute the news. Paul Julius Reuter opened his first office just behind the Royal Exchange in London (it still stands today). The boys he employed to carry news back and forth between the trading floor and his offices were perhaps the first low-latency trading solution.

The second stage was the laying of telegraphic cables across the world, and the use of ticker-tape machines to send information across huge distances. Again, pioneers such as Reuter effectively shrunk the world, providing a new richness and depth of information for investors.

The third era came in the 1960s, when computer networks began replacing the ticker-tape machines and systems such as ILX and Quottron were developed, providing processing power at speed and gathering information from price sources around the world. In the 1990s the internet and the rise of the home computer was followed by the development of online retail brokerage systems, but perhaps more significantly democratized access to data about companies and other investment opportunities. A lot of the information previously prized by wealth managers as sources of insight was now available to the investing public at the click of a mouse.

As wealth management progressed through its various eras, the value proposition also changed. At first, just having a stock price or news was valuable in and of itself. Then, the value came from having information faster. Once data (such as stock prices) became more of a commodity, value was created by analysing the data or combining it with other information such as news or earnings, quickly acting on the analysis.

We are now entering a new era, a fourth epoch, driven by technological advances such as cognitive computing. Whereas the previous eras developed efficiencies in an established process, the technologies available or in development today enable us fundamentally to rethink the process. Rather than simply replicating the established methods of managing wealth, they offer an opportunity to augment these in new ways.

We are at a point where advances in computing power and lower computing costs enable us to apply artificial intelligence, machine learning, natural language processing, neural networks and a host of other tools to everyday tasks. The opportunities for wealth management are genuinely epoch-making.

Clients are Changing

The practice of wealth management basically involves finding ways to protect and build wealth in order to pass it down the generations. As this wealth grows, and as clients’ family trees grow new branches, the number of clients expands exponentially.

The average US investor is in his/her early 60s and that is likely to rise to over 70 within the next few years. More than half of assets managed (53%) are already held by clients who are over the age of 65, leaving us poised on the precipice of the greatest wealth transfer in history, as The Fountain of Growth puts it.1

Meanwhile, the average advisor is in his or her early 50s, with a quarter of advisors already at the typical retirement age. These advisors control 25% of assets. This is therefore a second aspect to generational wealth transfer. Both represent risks to wealth management firms.

First, assets will flow from parents to their children. In this case, wealth management firms need to position themselves to keep these assets in-house. The challenge is in addressing the my father’s advisor syndrome, in which a son or daughter feels that their parents’ advisor is out of touch with their views on investing, risk tolerance, how they choose to invest and how they prefer to communicate.

Second, for advisors the risk is that, without proper succession planning, customers may switch wealth management firms – or wealth models altogether – when their advisor retires.

Unless there is a material market correction, the US wealth market will continue to grow across numerous metrics (assets, accounts and investors) through 2020 and beyond.2,3 At the same time, there is evidence that the number of advisors will decrease.4 Hence the need for wealth management firms to leverage technology to achieve the necessary scale.

The good news is that the expectations of the coming generations are very different. Younger clients are not looking for as much one-on-one attention. According to one study, millennials and generation-Xers (gen-Xers) are less likely to want to discuss investing strategies with a professional (49% and 48%, respectively) compared with baby boomers and mature clients (61% and 67%, respectively).5

To focus on that millennial opportunity for a moment, we can predict with some confidence that their personal wealth will grow. By 2020 the net worth of global millennials is predicted to more than double compared with 2015, with estimates ranging from $19 trillion to $24 trillion. The same study (by Deloitte) noted that millennials (those currently aged between 18 and 34) are about to enter their prime earning years.

It may also be worth noting that the majority (54%) of this generation in developed countries are self-employed or are planning to start their own business. This means that the option of employer-assisted wealth-building strategies will not be open to them. When it comes to planning their financial futures, they are on their own (less than 30% of millennials’ wealth is invested in stocks).

Younger clients’ expectations tend to be very different: they are neither looking for nor expecting as much one-on-one attention and they view technology as an important aspect in wealth management. Some 57% would change their bank relationship for a better technology platform solution, for instance. That is not surprising, given that in 2015 more than 80% of millennials owned a smartphone, and of those 89% would check their mobile devices within the first 15 minutes of waking.6

The expectation is therefore that millennials will prefer to be self-directed investors, who can call on expert advice if needed. They will be significantly more comfortable with robo-trading than older generations. Millennials and gen-Xers are more likely to prefer a computer algorithm over a financial advisor (40% in each case) than baby boomers and mature clients (30% and 24%, respectively).7

Part of this may be driven by the fact that 44% of millennials and 47% of gen-Xers would rather not pay for personal services, while mature clients and baby boomers are still content to do so (56% and 55%, respectively).8

There is one constant among the generations, however: as life becomes more complex, all investors, millennials and gen-Xers included, become more interested in speaking with an advisor. This applies most around tax questions and estate planning (71%), followed by the approach of retirement age (64%), life events such as births, deaths and marriages (60%) and when a person has new money to invest (58%).9

Connecting Market Data and Client Data

The amount of information, data and news that is generated and delivered daily is massive – and increasing.

As technology becomes more prevalent in our life, so does the amount of data generated, either intentionally or as a by-product. According to IBM, we create 2.5 quintillion bytes (2.5 × 10¹⁸) of data each day, and 90% of all data has been created in the past two years alone.10 More photographs were taken in the last 10 minutes than were taken in the whole of the 19th century, according to Google’s Eric Schmidt.

In the financial services industry, our traditional definition of data has usually included asset prices, earnings data, news and the like. However, data from other sources can now be brought together, with the advent of greater computing power to provide a much richer view of the world and the investment opportunities it affords. Whether it is sensor data from a factory line, or sentiment sensed by a chatbot or in a tweet, the world of useful data is exploding.

This wealth of data, and the advent of greater computing power, place the onus on the wealth manager to identify the most relevant information and to filter out the noise. This is where cognitive computing can assist. Tools such as intelligent tags, entity identifiers and other tools help to clean and process data to ensure that powerful algorithms deliver insights to investors.

The Fourth Epoch – The Marketplace of Wealth Management

The opportunity for the wealth managers of the future is to operate as a marketplace rather than as an individual vendor.

As the potential client base grows, wealth managers can collaborate to provide a wider range of services to attract and retain potential clients. Collaborating with others, to combine data to yield new insights for investors, is an enormously attractive option for potential clients. WealthTech is a rich and diverse ecosystem and there is no reason why a wealth manager would limit his or her potential access to this. The value comes from knitting content and workflow together for the benefit of the client.

As wealth technology has evolved, so then has the value proposition it delivers. In the marketplace model, it evolves once again, enabling wealth managers to inter operate for more efficiency and greater insight by linking multiple solutions, from multiple sources, together on one wealth management platform.

Future investors will be looking for opportunities beyond conventional investment strategies. As digital natives, they will also be highly aware of the data, news and events that generate investment opportunities. The successful wealth managers will be the ones who can demonstrate that they have access to all of that information as well, combined with the capability to use it to drive investment solutions.

Notes

1The Fountain of Growth (PriceMetrix, 2015).

2Global Wealth Databook (Credit Suisse Research Institute, 2016).

3Global Wealth 2016, Navigating the New Landscape (The Boston Consulting Group, 2016).

4The Cerulli Report Advisor Metrics 2015: Anticipating the Advisor Landscape in 2020 (Cerulli Associates, 2015).

5Man and Machines: How Different Generations Approach the Use of Technology in their Personal and Investing Lives (Charles Schwab, 2015). Kobler, Hauber & Ernst, https://www2.deloitte.com/content/dam/Deloitte/lu/Documents/financial-services/lu-millennials-wealth-management-trends- challenges-new-clientele-0106205.pdf. Hugo Greenhalgh, Financial Times, https://www.ft.com/content/da7f0a1e-a4bf-11e5-a91e-162b86790c58.

6Ibid.

7Ibid.

8Ibid.

9Ibid.

10What is Big Data?, http://ibm.co/2aYLZfW.

FinTech Disruption Across the Wealth Management Value Chain – Will FinTech Dominate the Wealth Management Model of the Future or is there Still a Place for Traditional Wealth Managers?

By Boudewijn Chalmers Hoynck van Papendrecht1

Senior Manager, EY

Wealth management is one of the few segments of the financial services sector that, to date, has been relatively unscathed by digital disruption. In contrast, banks have led the digital transformation charge, spurred on by customer expectations of greater convenience in their often daily financial transactions. Meanwhile wealth management, with its lower-frequency, more discretionary customer contact – and an older customer demographic – has retained many analogue processes.

The lower levels of innovation can also be attributed to the scattered nature of the wealth management value chain. Owning all aspects of the B2C value chain, banks have been more vulnerable to disruption with new, digitally enabled entrants picking off prize elements of the chain, such as loans or payments. In wealth management, multiple players tend to own specific parts of a B2C chain, making these markets more complex and less attractive. For example, in superannuation, incumbent players include trustees, investment managers, custodians, super administrators and insurers, leaving few toeholds for would-be entrants.

With less of an imperative to change, while other industries have invested in digitizing legacy systems, the wealth management industry has had little appetite for technology investment and upgrades.

However, as digital natives enter the wealth management customer base, a large number of innovative FinTechs are arriving on the scene. New market entrants are already starting to compete with incumbent wealth managers right across the value chain. They are leveraging a different technology-based operating model to deliver better customer experiences, at a better price and a lower operating cost. Traditional wealth managers either need to disrupt themselves or risk being disrupted.

Definition of Wealth Management

For clarity, in the context of this chapter I define wealth management as:

The services provided by an institution (i.e. the wealth manager) in order to manage the personal finances of clients (ranging from mass affluent to ultra-high-net-worth individuals (UHNWIs)) in order to realize individual client goals. These goals can be diverse and will differ by individual. The products and services required to realize these goals will also differ by individual client.

Wealth Management Value Chain

The wealth management value chain is complex from beginning to end due to the nature of the participants and components that make up the wealth management ecosystem. These participants and components include the different wealth managers (both incumbents and new entrants), wealth management products and services, product providers, regulators and ultimately the multifaceted needs of the customers, including company ownership, remarriage(s), children and the associated responsibilities.

What’s Driving Disruption in the Wealth Management Industry?

Demand for transparency. Recent advice scandals have put the wealth management industry under unprecedented regulatory scrutiny, resulting in new costs and complexities that have seen international wealth managers closing or selling their businesses. We expect to see a continued focus on transparency and tax regulation of UHNWIs in geographies such as Luxembourg, Switzerland, the Channel Islands and the Caribbean. At the same time, regulations around fee structures through the Retail Distribution Review in the UK, the Future of Financial Advice in Australia or the Foreign Account Tax Compliance Act and Markets in Financial Instruments Directive II may have the potential to affect the existing operating model of wealth management by putting the emphasis less on product push and more on holistic financial planning and advisory. Wealth managers relying on legacy systems will not be able to handle the volume of regulatory change coming down the pipe.

Changing Customer Profile

Clients have become more digitally savvy, using mobile apps and social media to interact with companies or search for information 24/7. Used to transacting with retailers and other financial services online, clients increasingly expect their wealth managers to provide a seamless customer experience, where they can interact via their preferred channel or device. With generational change, trillions of dollars of wealth will soon be transferred to a new generation of wealth management clients – with new, digital preferences.

EY’s Global Wealth Research 20162 assessed clients’ channel preferences in the next two to three years against wealth managers’ expectations (see Figure 1). The findings reveal a strong preference for digital services across advice, services and education – considerably greater than anticipated by the wealth managers interviewed.

Figure 1: Clients’ channel preferences in the next two years

Notes: The left graph shows clients’ channel preferences and the right graph is the wealth managers’ expectations of clients

Source: EY Global Wealth Research 2016

This does not mean that clients expect an entirely automated experience. Clients are simply looking for easier ways to deal with their wealth managers across their channel of preference. In particular, they expect 24/7 access to their own information and portfolio status, combined with the opportunity to speak with a person when they want to.

Changing customer preferences have also changed the definition of value. EY research suggests that more than 50% of what customers define as value, which is directly correlated with their willingness to pay for products and services, is not related to product or price. Instead, it is driven by areas such as service, recognition, engagement, experience and innovation. This offers wealth managers important opportunities to differentiate themselves from general banking services.

Advanced technology. Emerging technologies, such as blockchain, robotics and artificial intelligence, are transforming the user experience and service quality, while greatly reducing operating costs. Robotic process automation (RPA) is particularly useful, as it can be implemented on top of legacy systems, enabling transformation programs to be completed in weeks – not months.

RPA uses software bots performing rule-based, high-volume, repetitive tasks on a computer. The bots perform just as a human would, except substantially faster, with 100% accuracy and no breaks, leading to more than 70% productivity improvements over paper-based, manual processes. To date, the wealth management industry has been slow to embrace this technology. However, we are now seeing some exciting use cases emerge, including automated client onboarding and using chat robots to support basic account enquiries such as finding the latest discounts and reporting lost cards.

Distributed ledger technology (DLT) provides a more radical option, replacing existing architecture, increasing transparency and reducing costs. The most well-known example of this technology is blockchain, a technology that allows multiple parties to share data in a trusted environment, creating a single source of truth. If blockchain were used in financial services to record ownership and trading of assets, it could eventually become a single source of truth for all financial transactions. Instead of each party keeping their own record of events, blockchain allows all parties to access the same definitive record. Many new areas for the use of blockchain are starting to be explored, such as sharing know your client (KYC) data, fund transfer agency and trade finance.

Where is the Current FinTech Development Focused Across the Wealth Management Value Chain?

Currently, FinTechs are focused on the investment part of the wealth management value chain – where money is being made – through robo/automated advice solutions. This leaves significant opportunities for incumbents to address other aspects of the value chain, such as client onboarding, administration and servicing activities, to which clients assign more than 50% of what they value in a wealth management relationship.

The wealth management value chain used to guide the direction of this discussion is outlined in Figure 2.3

Figure 2: Wealth management value chain

Where Will Innovation Disrupt the Wealth Management Value Chain?

FinTechs could soon be able to take over the full wealth management value chain.

Go-to-market activities for both existing and new clients. Typical activities include providing real-time data, news and analytics, market intelligence, product and service development, client communications and performance monitoring. FinTechs currently deliver intuitive, technology-enabled multi-channel experiences. This is also an area where social media insights increasingly play a role through analysing what the market says.

Client onboarding. This is often an area of frustration for customers, due to the high number of risk-related questions and repeated conversations required to set up an account. New entrants are solving these issues by using customer and behavioural data and gamification techniques to automatically identify the risk profile of clients, the loss acceptance levels, and to capture information as part of new regulatory requirements. Incumbents should keep up by exploring opportunities for cloud-based utilities to perform risk functions such as KYC, anti-money laundering (AML) and surveillance monitoring extremely cost-effectively.

Investment advice and distribution. Smart algorithms have led to the emergence of robo-advice, which could potentially address the advice gap as adoption scales. A key opportunity area for incumbent players will be to use hybrid models and goal-based advice. These solutions use complex algorithms to support life-stage planning, taking clients’ full-life situation (today and in the future) into account. Current options include:

Automated transactional advice – providing investment insights, data analytics and automation of risk identification, community intelligence and end-user-created wealth solutions. However, early solutions are very transaction-driven, don’t provide real advice and are typically not well suited to holistic financial advice.

Guided advice (hybrid) – providing investment strategies, investment advice, facilitation of customer interactions and advice on risk management, tax planning and financial planning. The technology performs the transactions, but leaves it to relationship managers to communicate with clients, creating an overlay of human interactions to create a quality experience.

Goal-based investment (advised) – providing goal-based planning, product and investment selection, asset allocation, optimization of risk and return, and tax optimization.

There is a clear opportunity for FinTech in the area of holistic and comprehensive financial advice delivery. Algorithm-based propensity models and life-stage planning could outplay a significant portion of human-based investment advice.

Investment management. FinTech makes investment management services accessible to individuals who are not yet high-net-worth individuals. Technology has the opportunity to speed up processes around decision-making, rebalancing and monitoring. Other investment management capabilities that are well suited for FinTech entrants include asset selection, discretionary management, settlement, etc.

Account administration. FinTechs are surging ahead by automating many elements of account maintenance and using self-service to support 24/7, multi-channel interactions.

Ongoing relationship management includes customer life cycle management, relationship management, performance reporting, education and coaching, and community management. This is an area where human interaction is typically preferred by (U)HNWIs. That said, these clients also have an appetite for digital and technology interactions. Some banks are trying to address this through offering the opportunity to communicate with the bank using WhatsApp. Wealth managers need to consider how to use each engagement option, what is appropriate and at which moments to use them across the customer life cycle. Also, a lot of work has been done to improve the channel experience while staying compliant with regulators’ requirements in terms of security and privacy.

How Can Existing Wealth Managers Address the FinTech Challenge?

To disrupt themselves, incumbent wealth managers need to partner with or acquire new entrants, or to build their own competitive alternative.

Partnering

The ultimate form of collaboration is partnering between an established, sizeable player and a FinTech. This would require investment from both sides and in some instances is being delivered through a joint-venture-like model. It could even be delivered to the market under a different brand. Partnering means an acknowledged mutual respect between the two partnering parties involved, with the aim being to deliver better outcomes to the end-client.

Buying

Alternatively, an established player can buy the capabilities of a FinTech and add or integrate them into its own business model. We have seen many examples of this strategy in action, particularly in the USA; for example, BlackRock’s acquisition of FutureAdvisor in 2015 and, more recently, UBS’s acquisition of SigFig.

Building

Many wealth managers are working to develop their own technology solutions or customizing an existing platform to meet their needs. Building brings a significant risk of lead-time to implement. It is unlikely that the incumbents will gain a first-mover advantage in bringing their own solution to the market. They also run the significant risk of being too late to gain the benefits they foresaw when they started.

Increasingly, larger financial institutions are launching incubators or other targeted programs and inviting FinTechs to encourage more innovation and knowledge exchange. In some instances, the programs provide start-ups with financial backing, giving the supporting institution first-hand insight into potential partnerships or buying opportunities.

Wealth Managers Need to Consider Partnering with FinTechs to Keep Up With the Pace of Innovation

Traditional players have an opportunity to remain competitive by addressing the operational efficiency across their broader business operations, improving the experience delivered to their clients and focusing human efforts on the areas where they create the most value. One of the fastest routes is to partner with FinTechs to gain access to their low-cost business models and proven technologies. The overall importance for incumbent players is to ensure that any innovation is well integrated into their business model and operations, rather than bolted-on to the existing model. If wealth managers are able to integrate these developments into their existing business models and operations, it makes key aspects of running a larger business significantly easier.

Disruption of the Wealth Management Value Chain Has Just Started

The opportunities and threats from FinTech have just started. To date, we have only scratched the surface in terms of the amount of change we can expect across the value chain. Right now, the only real disruption has been on the investment side. Looking ahead, we expect to see considerable disruption across operating models, especially in terms of the workforce of the future.

Notes

1Boudewijn Chalmers Hoynck van Papendrecht is active on his personal blog SocialFS. The views reflected in this article are the views of the author and do not necessarily reflect the views of the global EY organization or its member firms.

2http://www.ey.com/gl/en/industries/financial-services/asset-management/ey-global-wealth-management-survey-2016.

3Disclaimer: Rather than focusing on (dis)agreeing with the version of the value chain used to support this chapter, the aim is to gain an understanding of where across the value chain FinTech is playing a key role and across which areas we haven’t seen as much of that.

Embracing Emerging Technology

By Dr Yannis Kalfoglou

AI Strategist, Samsung Electronics

and and Dave Dowsett

Global Head of Strategy, Innovation and Emerging Technology, Invesco1

Digitally transforming your company is no longer a debate – it’s a necessity. What is a debate is how to execute a digital transformation and what to focus on. Without a doubt, these transformations are most successful when driven from the board to break through the frozen middle who are more worried about job security and fear of change over organizational advancement. There are many factors driving technological change, but some of the more pressing catalysts include: customer satisfaction driven by the FinTech generation, social media, competitors becoming technology-driven and using technology to provide an advantage, rate of change, demographic expectations, constant geopolitical landscape volatility and, for regulated institutions, the ever-changing regulatory landscape.

Human beings are comfortable at status quo; change makes us uncomfortable, but as the world around us changes, so must we. When times get tough due to lack of innovation, a default reaction is: It works today, so why change it? and this attitude leads to cutting the innovation and transformation arms to focus on the current cash cows, albeit shortsightedly. As much of the financial industry has been disrupted, the asset management sector is starting to experience the changing tides of technology too. This type of disruption is different from what we’ve seen in the past, as it is now more about FinTech partnerships or indirect threats such as RegTech. Let us unpack three core disruptive trends which hold the promise of the most impact, however, which we believe won’t succeed in isolation.

Online, automated investment advice (a.k.a. robo-advisors). Not long ago, the first robo-advisors of a new generation made their entry into the market and quickly brought to the table some irresistible benefits: low entry barrier, rapid enrolment process, modern user experience akin to the societal norms of a younger generation, 24/7/365 always-on access and availability, and most importantly some decent returns for the investors. It’s not a surprise then that in their short 10 years or so of history, robo-advisors today handle billions of dollars in investable assets (assets under management, AUM), with future estimates pointing to AUM in excess of US$2 trillion by 2020 and some probability of the upside being as much as 10% of all investable assets by 2025. That’s a staggering figure of US$14 trillion with today’s estimates. But what’s fascinating is the fact that robo-advisors themselves are changing too.

The early incarnations featured mostly fully autonomous, passive asset management robo-advisors (the likes of Wealthfront, Betterment, etc.). However, as the first wave of robo-advisors hit growth obstacles and faced the reality of customer acquisition costs at scale, it quickly became apparent that the underlying business model – low fees based on passive investments, mostly in index trackers with limited, segregated baskets of exchange traded funds (ETFs) to choose from – can’t justify the high cost of customer acquisition and attrition. We then saw the emergence and establishment of another type of robo-advisor, one that caters for segments of the distribution channel – direct to business and intermediaries. Also, incumbents repackaged their products and began offering types of robo-advisor services as part of their portfolios.

Today, we witness one more change in the trajectory of modern robo-advisors: the emergence of hybrids, where the best elements of passive and active investment advice are packaged together to offer maximum value for the eager investor. So, robo-advisors have made a huge impact in the asset management industry, allowing new entrants to emerge, new services to be developed and rolled out for the public to use, and incumbents to digitally transform their products and offerings. All that is music to the ears of consumers as today, investments and long-term financial planning are no longer the privilege of the few who can afford it, but the habit of the many who have a little to invest, are short on time and prefer easy, online enrolment. It’s a great example of how emerging technology enables new business models, serves the consumer better and works for both incumbents and new entrants.

Blockchain: the underlying fabric of the future financial ecosystem. Another area which we see driving change and impacting core processes is that of blockchain. From the early days of bitcoin’s emergence (the peer-to-peer digital currency that spans millions of nodes globally and whose current trading value in USD is significantly higher than gold) the underlying technology, blockchain, captured the attention of financial services institutions. Blockchains have some intriguing features: immutability of records, a massively distributed database shareable across countries and regions, built-in cryptography for secure transactions and tamper-proof transfer of value, and automation (e.g. smart contracts) that enable programmable money scenarios.

The business benefits of blockchain technology are too many to list in a short chapter, but suffice to say that the cost savings from efficient and lean post-trading processes, sharing and auto-validating (digital) assets and value on blockchain(s), and the enablement of new business models are the most interesting. In fact, in the post-trading processes area alone, reports indicate that cost savings could be achieved to the tune of US$20 billion annually, with potential to exceed US$100 billion.

Blockchain is the technology trigger for the disintermediation of financial services, and its value increases as more users and participants use blockchain networks. For example, in the asset management industry, value-added blockchain solutions range from post-trading operations (settlement and reconciliation of securities) efficiency and cost savings and securities’ lending process digitization as redeemable tokens to handle collateral risk, to funds’ flow real-time tracking to calculate performance and risk positions, to repurposing financial auditing and anti-money laundering (AML)/know your customer (KYC) data pipelines in order to achieve greater efficiencies and collaboration with ecosystem partners (including regulators). Clearly, the benefits of blockchain technology drive faster adoption and interest from financial services institutions and FinTechs. But ultimately, the greater beneficiary will be the consumer: leaner, more efficient processes and new products will provide more choices and better investment products.

Artificial intelligence: a catalyst for change. We also look at the impact of the ever-so-popular artificial intelligence (AI), especially the much-referenced machine learning sub-field of AI. The huge leaps in performance and accuracy of machine learning algorithms (five years ago the error rate of identifying images correctly was roughly 36% for a typical machine learning engine, today it is less than 3%, matching and even exceeding human performance) and the abundance of cheap computing power and storage makes these technologies easier to apply and achieve return-on-investment quickly.

AI’s tremendous leaps in performance were not an accident. At times, technology takes time to mature as other critical pieces need to be in place. The emergence of deep learning algorithms – a machine learning technique that tries to mimic the way the human brain works, with thousands of neurons processing information at speed to come up with plausible answers – certainly helped. As did the availability and computational capacity to access and process huge data sets for training our AI programs. The vicious cycle here appears to be: more data → better algorithms → better user experience (UX) → more data. As we now have available huge amounts of data that we can use to train machines, and that we can access and process efficiently, we are also able to fine-tune our machine learning apparatus, algorithms can get better and better with more data and iterations; that results in better user experiences, providing more accurate answers which in turn encourages the production of even more data and the cycle starts again.

In the asset management industry, we see – and at Invesco, work on – advanced AI technology that helps us automate existing processes and realize new revenue streams and business models. For example, robotic process automation (RPA) tools help us automate mundane, repetitive, manual and error-prone processes and improve the return on investment for back-office processes. In the distributions space, we use AI technology to help us predict customer journeys throughout the life cycle of their engagement with the company – from onboarding to redemption – and explore ways we can better serve and exceed their needs by offering products better suited to their investment style at certain stages in their journey.

On the product management front, we use AI technology to help our portfolio managers make the smartest possible investment decisions at a given point in time using sophisticated analytics and recommendation engines that consider historical and projected data. While all these functions are directly impacting our professionals, we are using AI technology as a smart aid, not a replacement tool. There is a huge opportunity here, we believe, to use this fascinating technology in a symbiotic manner, working alongside our experienced professionals to improve our performance, which in turn impacts and benefits our end-customers who trust their investments with us.

Other emerging technologies and approaches to be adopted in the financial space – such as virtual reality (VR), the Internet of Things (IoT) and crowd-funding, to name but a few – will come together to create holistic solutions. VR, for example, will be used to visualize the large volumes of data being created or for clients to be in contact with financial advisors. It is a fact that IoT in voice format will supersede at least half of all keyboard interactions in the next few years, and can be used to query and interact with your account via VR, for