Digital Distribution for Funds – From theory to practice

AGEFI – Décembre 2017 :

And suddenly the digital broke into our lives. We all remember Napster disrupting the music industry in the late nineties and the subsequent rise of iTunes. All of a sudden, the music distribution went digital and the high-street music stores slowly disappeared. Since then many digital distribution channels and marketplaces such as Uber, Airbnb, Netflix, Amazon or Ebay, only to mention the most famous ones, have emerged. It seems as if long periods of little or no change are followed by periods of sudden, significant change. And the added value provided by the offering does not even have to be mind-blowing to be successful. The ease of use, efficiency and nowadays expected connectivity already result – as it seems to be as a matter of fact – in a better customer experience.

Getting now back to the financial industry, and more specifically to the world of fund distribution, the sales processes as a whole still very much function as they did several years ago. Printed factsheets or Power Point presentations are used during client meetings. And questionnaires are filled out with real pens. But so much more could be offered. The advantages of using technology in the sales process are multiple. And that’s probably why not much has moved yet. Robo Advisory is in its infancy. After having responded to few questions, the “robo” proposes one of normally just a handful model portfolios. These are rigid ETF only portfolios whose only robotic task mostly consists of a quarterly rebalancing. The rest of the automatisation rather favours internal banking processes than the clients. Yes, we are being voluntarily quite provocative but for good reasons.

Luca: Tobias, after having “pinched” the audience, can we go back to concreteness and thus elaborate some further this affirmation ?

Tobias: Yes indeed, we actually know that much more is possible. There is the advent of big data which opens up new horizons of analytics, artificial intelligence or machine learning. All of them can be used to filter the ideal investments or to construct portfolios in a clever way. And that is exactly what the Institutional Optimiser of Nectar Financial is doing. We look at the impact of single funds or other investments on a portfolio. Artificial Intelligence helps us to classify instruments based on all data, not just descriptions. We analyse current portfolios and show how the addition of a fund changes the risk return metrics instead of promoting it isolated with a KIID or factsheet. Our investors start with an existing portfolio, not just cash. And they are interested in a diversified portfolio covering the entire investment spectrum including single stocks, bonds, funds, commodities or alternatives. They don’t think that they are perfectly diversified by restricting themselves to ETFs.

Luca: Well, when technology is used in order to help clients in a flexible manner, showing them the impact of different investment decisions graphically and intuitively, the added value of a digital channel is evident as investors naturally look for a better way to compare alternatives. This concept of active comparation is already widespread and well utilised in other sectors of our economy (insurances, holidays, banks, etc). Why not systematising it also in the investment fund industry ?

Tobias: In the coming years, access to more information and transparency is a given, not an option. More information will furthermore enhance the quality of the dialogue with the client and allow for data based decisions. Efficiency can furthermore be increased by reflecting regulations in an automated way. We are currently working on risk classifications and cross border regulation, a field in which digital automatisation will play an important role due to the ever-increasing complexity.

These tools are offered well before millennials require new distribution channels. They can be combined with a human oversight and help the client to take well informed decisions. It’s a tool to enhance the quality of the dialogue, supporting the investment advisor, not replacing him.

Luca: very interesting your last words: “.. enhance the quality of the dialogue (as opposed to a monologue), supporting investment advisors and not replacing them”. This latter being a very hot topic that is feeding a plethora of articles, posts, reports and dichotomic statements from supporters and detractors. But time at our disposal is over and we may develop this intriguing controversy another time.
Thanks Tobias for your sharing your view.

Luca Bruni is an expert on Italian and Swiss markets and joined Initio as Senior Manager in 2017
Tobias Baumgartner, Nectar Financial AG,

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