Using technology to re-balance value to investors

Using technology to re-balance value to investors

Technology has always been a key factor in the investment industry, with managers using it to manage portfolios and make decisions. However, in recent years there has been a big push towards integrating new technologies into the sector, as well as developing innovative ways to use them. This is being done both internally, by investing in new technologies, and externally, by developing mobile and tablet apps and expanding using social media.

In future, innovative models, especially in the retail space, will integrate investing with elements of social media, interactive gaming and education. For institutional investors, technology will enable more proactive, fully customizable risk management and governance. Firms like D.E. Shaw, Two Sigma and Renaissance Technology are already investing in this area.

While there is no one sector that has been untouched by these changes, retail and asset management have seen the biggest transformation through digitisation and new channels. Online stockbroker DE Shaw were early movers in building an expert system platform that combines human and machine intelligence to identify and deliver cross-market relationships.

Using big data and artificial intelligence is also becoming more widespread, with firms such as Two Sigma and Renaissance Technology using it to create predictive analytics. These companies can take in a huge range of data – from historical price information to news articles – and use it to model future events. This allows them to make better investment decisions with less reliance on human input.

In the future, technological advancements will allow for more innovative models to be developed – with the retail space likely to lead this with its increased use of mobile and tablet apps and integration of social media. In particular, financial technology is where value is being created right now as more customers desire digital services. In the long term, using technology in the industry will create a more seamless integration between front and back office processes.

In all cases, firms are not trying to replace human ingenuity with technology; they are trying to better inform it through access to new data sets that were previously impossible or prohibitively expensive. This then allows for more insightful analysis and informed decisions.

The integration of technology into the sector will also see a greater focus on personalisation, where customers' specific needs are being catered to by tailored services and offerings from businesses, which has been dubbed "adaptive investing". It is expected that this trend will continue in the next few years, with providers working even harder to meet customer needs and demands.

The most significant industry change that technology will see is increased integration between advisory and execution services, leading to a shift away from fully discretionary mandates towards fee-based ones. Developing smart order routers has enabled investors to choose how they want their orders to be executed, with this providing an opportunity for financial planners and other providers to offer alternative fee models that previously would not have been sustainable.

"In the future, these new channels will be built into existing and new investing services. For example, robo-advisers such as WealthFront combine automated portfolio management with financial planning and guidance from an established advisory firm."

Mobile apps are currently changing the industry as they allow investors to access their accounts from any device, as well as providing higher levels of customer engagement. The next step will be leveraging tablet apps to create even more opportunities for engagement and investment.

"The retail sector has been the most affected by digitisation and new channels. Online stockbroker DE Shaw were early movers in building an expert system platform that combines human and machine intelligence to identify and deliver cross-market relationships."

A recent survey by PricewaterhouseCoopers (PwC) found that a significant proportion of consumers worldwide are now using social media to share experiences about products and services, as well as contribute to their purchase decisions. Within the financial industry, this trend is also increasing customers' expectations for 24/7 customer service from firms, as well as creating new opportunities for differentiation.

"In particular, customer-generated content – such as referrals and reviews – has become a central source of information for consumers making decisions about which products to buy."

The rapid growth of financial technology is encouraging incumbents to embrace new technologies at a faster rate. This has allowed them to remain competitive with upstart fintech companies, but it also creates significant challenges as they seek to improve their back-office operations.

"Investment managers are now investing in big data technologies which monitor and analyse huge amounts of complex data, allowing companies to understand their clients better and develop more bespoke investment solutions."

Technology will also enable firms to offer more proactive risk management services. For example, using big data analytics could allow them to identify suspicious trades early on to avoid regulatory sanctions. Also, new technology allows for a more seamless integration of front- and back-office processes, which can help reduce costs and improve efficiency.

"Risk management is an area where technology can have a big impact. Banks are using machine learning algorithms to identify relationships between trades, in order to better understand and control their risk. As well as this, they are using data visualisation technologies to help identify rogue trades, or other anomalous activity."

Technology has the potential to transform the industry in many ways. The next generation of financial technology will enable new service offerings, as well as change how consumers interact with their accounts. Furthermore, existing services will be enhanced by greater automation and using big data analytics. Finally, investors will be able to access a fuller range of services by leveraging technology to create new partnerships with fintech firms.

"In the future, innovative models will integrate investing with elements of social media, interactive gaming and education."

Overall, investment in technology is increasing exponentially as incumbents seek ways to remain competitive with upstart companies. Too, using technology is allowing firms to improve their back-office operations, as well as enhance the services they offer to consumers. Finally, investors will benefit from greater access to a fuller range of services that leverage technology.