Investors crave simplicity. Can fintech deliver?
For decades, technology trends have come and gone in the financial industry, but this time, the innovation feels different. Passive strategies, robo-advice, and regulatory scrutiny are bringing technological changes to how advisors construct portfolios and manage client assets. Some trends will turn out to be fads, but others could permanently change the industry. For the 2017 Morningstar Investment Conference, Tricia Rothschild, Morningstar’s chief product officer, gathered three industry leaders to discuss the evolution of the financial-services industry and the innovations driving change today. The discussion proved timely for our 10th anniversary issue.
Joining Rothschild were Paolo Sironi of IBM Watson Financial Services and author of several books on the subject, most recently FinTech Innovation: From Robo-Advisors to Goal Based Investing and Gamification; Josh Brown, writer of the popular blog The Reformed Broker and CEO of Ritholtz Wealth Management, an independent practice that was an early adopter of automation and technology tools for advisors; and Morningstar’s Don Phillips, industry thought leader, recipient of many awards for his contributions to the investing world, and a columnist and editorial board member of the magazine. Their conversation took place April 26 and has been edited for length and clarity.
Tricia Rothschild: How would you define innovation in our industry and how can we push the envelope forward?
Paolo Sironi: I would start with why we need innovation in financial services. Financial institutions can no longer make money by selling products; the margins are getting squeezed. They need to package these products into an advisory mechanism. Financial advice is about trust.
To move from providing transactions to providing real services to clients, the financial-services community needs to gain their trust. That’s where innovation comes in. It can provide the knowledge that helps clients make the right decisions.
Rothschild: Don, you come at this from a different perspective.
Don Phillips: I’m a huge fan of innovation that helps advisors educate clients and help them better understand their investments. What Josh is doing with his practice is fantastic. But with investment products, it’s very easy to over-engineer things. It’s often the whole foods, the basic building blocks as opposed to genetically engineered TV dinners, that serve people best. What investors really want is simplicity. And the investment management industry is designed to deliver complexity. That’s a fundamental mismatch.
Jack Bogle spoke on this stage a couple of years ago. He expressed his fondness for Shredded Wheat, “the company that put the ‘no’ in innovation.” It’s a great irony that Jack Bogle had two amazing innovations, the mutually held fund company and the index fund. He had this great idea: Buy and hold the entire market forever. We’ve turned this into an amazingly complex thing. There’s about 5,000 stocks in the U.S, about 15,000 funds, and one index provider alone in the U.S. offers over 1 million indexes.