Norman Alex Newsletter
Norman Alex is proud to publish the first edition of our newsletter. It contains our current market reflections “Winner Takes All?” and a recent article from the Press which also looks at the impact of technology on the financial services sector (these and other relevant articles are posted on our website). Our next edition will examine a similarly important theme. We have included a few samples of our current career opportunities at the end.
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Norman Alex is an international consulting boutique providing executive search and corporate development services. Established in 1997 in Monaco, we have offices in Geneva, Paris, Luxembourg and Miami as well as partners in Dubai and Singapore. We have the experience and global reach to help our clients develop their activities in most major markets.
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Articles of the month
WINNER TAKES ALL ?
In 1996 Garry Kasparov, probably the greatest chess player of all time, was challenged by Deep Blue, an IBM supercomputer which could be considered to be one of the earliest examples of artificial intelligence (although many people would argue that it was just a sophisticated algorithm). The human won although not without some problems. However, a year later a more sophisticated Deep Blue won the rematch and it’s not an exaggeration to say that the world hasn’t been the same since.
IBM further improved Deep Blue to create Watson, capable of processing hundreds of algorithms simultaneously and beating all comers at Jeopardy. Perhaps more interestingly, in 2016 Google’s Deep Mind beat 18-time world champion Lee Sedol at Go, a more mathematically complicated game than chess, using reinforcement learning and a neural network that can be regarded as similar to that proposed by Alan Turing several decades earlier.
This battle between man and machine has obvious lessons for the fund management industry. Probably the best-known fund manager of recent times is Warren Buffet. Berkshire Hathaway has enjoyed annual growth of 19% since 1965 which is roughly twice that of the S&P 500 Index over the same period even if this difference has been narrowing in recent years. His company has now become one of the largest in the US.
Jim Simons, unlike Warren Buffet, is not a household name although he is obviously well known to people in the fund industry. He established Renaissance Technologies in 1982 and his flagship Medallion Fund six years later. This fund had a staggering 72% annual return from 1994 to 2014 and almost doubled in the year when Lehman Brothers collapsed. At its peak, the company could impose a management fee of well over 40% and still be obliged to turn away investors.
Whilst Warren Buffet is an amazingly astute “value” investor, poring over balance sheets for months before making an investment, Jim Simons is a world leading mathematician and used to work as a cryptologist for the CIA. His company employs mathematicians, physicists, statisticians but no one with a financial background. It’s interesting to note that Renaissance doesn’t employ economists either and the history of Long-Term Capital Management would seem to prove them right.
Simons’ approach, certainly with the Medallion Fund, is considerably more successful than Buffet’s and would seem to suggest that a sophisticated algorithmic approach is more successful than one based on value. The poor performance of most hedge funds in recent years may seem to contradict this but I would argue that a hedge fund is only as good as its algorithm just as a value fund manager is only as good as his financial analyses. Poor hedge fund managers, like broken watches, will be right occasionally.
The success of Renaissance, in my opinion, is a testament to the immense complexity of their big data analytics and a precursor of what lies ahead as artificial intelligence becomes ever more complex. The neuroscientist Sam Harris believes that “Free will is an illusion. Our wills are simply not of our own making. Thoughts and intentions emerge from background causes of which we are unaware and over which we exert no conscious control.” This would seem to suggest that artificial intelligence, once it reaches the necessary level of sophistication, can predict the behaviour of all human beings and, by extension, that of the financial markets.
It’s clear that artificial intelligence is not just a trend, a phase that will disappear, but a phenomenon that will hugely impact financial services and almost all other aspects of our lives. Indeed, this impact may be so fundamental that certain highly respected scientists and scholars believe that it could threaten our very existence. Stephen Schwarzman, the founder of Blackstone and no mean investor himself, recently donated ￡150m to Oxford University to fund research in humanities including an Institute for Ethics in Artificial Intelligence. The funds are not therefore designed to fund studies in artificial intelligence but rather to make sure that artificial intelligence is used in an ethical way to serve and not destroy humanity. This is a huge difference and an admission of the potential risks inherent in the new technology. Indeed, Stephen Hawking warned that “the development of full artificial intelligence could spell the end of the human race.”
To return to the fund industry, we could imagine that the company which creates the most efficient artificial intelligence will dominate the industry and gain huge market share. The winner, in other words, will take all just as Google has become the dominant force in Internet browsing and Amazon in Internet shopping. However, the history of Renaissance does perhaps contain some hope for the future. Firstly, the group’s other funds aren’t as successful as the Medallion Fund and, secondly, the very success of the latter led the company to close the fund after only a few years to limit the assets to “only” about $9-10bn. Regular annual returns of over 70% are difficult under any circumstances but probably impossible for investments in excess of $10bn. Furthermore, technical measures have been implemented by stock exchanges to avoid excess volatility and prevent “winner take all” positions from being implemented.
To conclude, the lessons of Renaissance would seem to suggest that artificial intelligence will make life increasingly difficult for the fund industry in the future but that there will still be a certain place for human judgement. This human judgement will, however, have to be exceedingly compelling to convince investors that they will obtain better returns with man than with machine.
(Ivor Alex).
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GENERATION Y CHALLENGES PRIVATE BANKING DNA
INTRODUCTION
This week, Norman Alex would like to share with you an article which appeared recently in swissinfo.ch examining the impact of technology on private banks and their clients. It indicates that most banks are clearly way behind the curve in their use of technology and that this slowness in adapting can threaten their very existence. Indeed, certain banks seem to be satisfied with proposing an online platform to their clients, confusing “online” with “digital”. Furthermore, the arrival of increasingly sophisticated artificial intelligence will only serve to accelerate this seismic shift.
GENERATION Y CHALLENGES PRIVATE BANKING DNA
Imagine a world in which suave private bankers have been replaced by algorithms and mobile phone apps have toppled centuries-old banks. Both finance technology start-ups (fintech) and digital-savvy investors threaten to disrupt the world of private banking.
The likes of Wealthfront, Nutmeg, Mint and eToro already offer a range of digital services; connecting investors in dedicated social media groups, allowing ever more complex transactions at the swipe of a smartphone screen and providing advice on investment strategies.
Most fintech global leaders are popping up in the United States and Britain, but a handful of Swiss entries, such as Swissquote ePrivate Banking, are flying the flag in the alpine state.
The Swiss-based company nViso took the link between wealth and technology to another level in conjunction with the Bank of New Zealand last year. By scanning facial reactions to a series of questions on money, nViso’s EmotionScanexternal link software tells the bank how clients really feel about their investments.
Stone Age banks
Rich clients love digital. Not just ‘Generation Y’ upstarts and business entrepreneurs, but also the over-50s who have parked their assets in traditional private banks for years.
The Capgemini/Royal Bank of Canada World Wealth Report 2014 found that half of the world’s multi-millionaires currently use digital channels for private banking activities. Two-thirds might leave their bank if their growing demands are not met in the next five years.
“Private banking is currently in a waking up phase. It is a very conservative industry, both technologically and culturally,” Steffan Binder, head of research at MyPrivateBanking, told swissinfo.ch. Social media, in particular, grates with the tradition of discretion and privacy that has defined the Swiss private banking sector from its earliest days.
Swiss private banks are keeping pace with peers in the United States and Asia with their early stage digital offerings, according to the Swiss-based firm which closely monitors such trends. But across the board, such adaptations are patchy and still very much a work in progress.
“The private banking industry is still in the Stone Age in terms of digitalisation,” Bank Syz spokesman Moreno Volpi admitted to swissinfo.ch. “But all banks are thinking digital, this is nothing new. We have to modernise all the tools that our clients are currently using.”
UBS is looking into partnerships with fintech companies while Credit Suisse is on the verge of creating an exclusive social network space for its wealthiest clients.
Personal touch
Digitalisation should be viewed as an opportunity rather than a challenge, according to Sebastian Dovey, managing director of Scorpio Partnership, which researches the behaviour and expectations of wealthy clients.
Social media can help banks drum up new business while big data can be used to better understand the needs of clients. But the Holy Grail is matching the latest digital advances to client relationship managers (CRMs) – the specialists who have personal contact with clients and differentiate private banks from the rest of the pack.
“It’s no good just throwing an iPad at a CRM and telling them to get on with it,” Dovey said at the European Private Banking Summit in Zurich last month. “Banks have to ask themselves: why do people like doing business with us right now and will this be matched by digitalisation in the future?”
“Clients are already asking themselves why they pay thousands of dollars in fees each year for things they can find on the internet.”
The answer to strengthening ties with clients is letting go, Dovey told swissinfo.ch. “The old relationship between private bankers and clients is like a parent and child. It needs to change to a parent-teenager relationship.”
Empowering clients to gain greater control over their assets and have access to more investment information through digital tools will not make them run off, according to Dovey. Instead it will buy their continued loyalty by enhancing their banking relationship.
A money issue
“A paper-based advisory service will no longer be relevant to more tech-savvy clients in future,” warned Matthias Bossardt of KPMG Switzerland’s IT Advisory division. “They are demanding an interactive experience with meaningful real-time data that tells them, for example, what would happen to their portfolio if they picked certain stocks or shifted assets from commodities to blue chips.”
But Swiss banks are being held back from making large scale digital investments by dwindling profits, a lack of technical know-how, cutting back IT, the cost of implementing new regulations and the ongoing distraction of tax evasion probes.
A health check of the Swiss private banking sector earlier this year by KPMG and the University of St Gallen found that 34 of 94 banks surveyed are posted operational losses in 2013, largely as a result of ongoing United States tax evasion investigations.
Smaller banks may be forced to share digital platforms offered by larger rivals, according to KPMG’s Bosshardt.
Another issue facing the notoriously Swiss private banks is the safety of client data that might be put at risk by digital systems. The issue was highlighted by a cyber-attack on the US bank JP Morgan last month.
The Swiss financial regulator said that regulations already exist governing the security of electronic systems, but that there were no specific guidelines concerning the new digitalisation trend in private banking.
Competition from the world of technology could become hotter if giants such as Facebook and Amazon harness their big data capabilities to the world of wealth management. Private banks could then be at risk of becoming “dinosaurs”, warned ABN Amro executive Hein van der Loo at the European Private Banking Summit.
To avoid this fate, private banks need to find a way of retaining their unique, exclusive character while at the same time entering the digital world, according to MyPrivateBanking’s Steffan Binder.
“As in the medical profession, human interaction is irreplaceable,” he said. “This interaction should be enhanced, not replaced, by digital. But there should not be any complacency, as such enhancements will prove a valuable competitive edge in years to come.”
Futuristic banking
Digital has long conquered retail banking while fintech start-ups are crowding into the mass affluent space, snapping up clients who have several thousand dollars in spare cash each year to invest. All the evidence points to multi-millionaires also demanding a slice of the digital action when managing their vast fortunes. The challenge for private bankers is finding ways of combining digital tools with the complexities of managing wealth spread over multiple jurisdictions (with different regulatory and tax environments) and over a wider range of asset classes (ie business investments, real estate, family trusts, fine arts or even charitable contributions).
The search is on to develop digital platforms that give wealthy clients an instant overview of all their assets in real time. A next step would be to design algorithms that could give performance simulations of various asset classes going into the future. This would help clients plan changes to their portfolios.
But wealthy clients would also demand personal contact with experts that specialise in such areas as inheritance and philanthropy. Bespoke wealth management services need to connect highly mobile clients with advisors at any time in any part of the world.
Social media is another tricky nut to crack. A private bank with no Twitter, Linkedin, Google+, Facebook or YouTube presence is already behind the times. But squaring this mass social engagement with discretion and exclusivity is still a work in progress.
Reasons to fear fintechs
A survey of 198 senior bankers by Geneva-based financial software company Temenos found that 23% of respondents feared competition from technology companies such as Apple and Google. By comparison, 20% saw the biggest competitive threat from large, established banking rivals. Some 30% cited wavering customer loyalty as their biggest challenge facing the banking industry.
The Capgemini/Royal Bank of Canada Wealth Report 2014 found that two-thirds of all multi-millionaires expected to run all, or most, of their wealth relationships digitally in the next five years.
Private banks are viewed by wealthy clients as seriously lagging behind the consumer electronics, telecommunications, medical, automotive and travel/hospitality industries in terms of innovation, according to Scorpio Partnership research. According to consultancy firm Accenture, some $30 trillion of wealth will be transferred from baby-boomers to more digital-savvy generations X and Y inside the next 30 to 40 years.
(swissinfo.ch).
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Career Opportunities
Below are a few examples of our current career opportunities. Please consult our website for a full list.