Technology companies will offer investment services

Morningstar's vice president of research, John Rekenthaler, makes some interesting predictions.
By Morningstar Analysts |  06-03-19 | 
 

This column makes three predictions of technology companies:

1) Eventually, they will branch into investment services.

2) The commoditization of investment management will help their efforts.

3) However, they will need to change how their treat their customers.

By “technology companies,” I do not mean the traditional sense of hardware manufacturers, but instead the modern colossi: those companies that reach consumers through the Internet. Examples include Amazon, Microsoft and Google--among the world’s wealthiest, most-powerful firms.

They have taken their first, tentative steps toward being involved with investment services. Tangibly, Amazon has partnered with Fidelity to create a “virtual reality financial advisor,” and Microsoft and BlackRock have joined to build a retirement platform. Google has not directly entered the fray, but it has dabbled with various consumer-finance projects, leading Forrester to suggest that Google is a “potential threat to established wealth management firms.”

From my perspective, the threat is more than potential. It is real, although not yet imminent. Each Internet giant already touches more investors than does any existing financial-services firm. The rewards for convincing those customers to share their investments as well as their personal information are enormous, because, after all, that is where the money is. On a $1 million portfolio, even a modest annual fee of 5 basis points (0.05%) generates $500 in revenue, nearly all which heads straight to the bottom line.

Youth Movement

The possibility is very much there. Perhaps not with baby boomers, who were raised when investment advice was covered by brick and mortar, and who accumulated their assets as discount brokerages and direct-marketed mutual funds came to the fore. Handing over their investments to an Internet firm may prove a step too far. However, it certainly is not with the following generations, who know Amazon better than they do Morgan Stanley or Vanguard.

They are likelier to believe in Amazon, too--even for investment matters. A Facebook study found that only 8% of millennials admitted to trusting financial institutions. That is lower than the 13% of under-25s in the U.K. who would consider an investment offer that came through social media. In other words, the young are fonder of social media’s equivalent of boiler-room calls than they are of traditional investment-services providers.

Packaged Goods

That’s taking faith in technologists too far. However, the underlying belief is reasonable. The days of investment artistes are gone. To be sure, boutique firms remain. For the foreseeable future, some active managers will stand out from the crowd by offering meaningfully different portfolios. Most investor assets, however, will be parked either in outright index funds, or in well-diversified actively run funds that, for all practical purposes, behave like index funds.

And why shouldn’t Amazon (or Google, or any number of other technology companies) vend such investments? If there is one thing at which Amazon excels, it is selling packaged goods. The company is not much in the habit of creating those items (its media library aside), but it could build its own investment portfolios if necessary. Or it could hire an outside manager, at an exceedingly low expense ratio (given how many assets it would be likely capture). Either way.

Similarly, as the success of target-date funds has demonstrated, much investment advice is a commodity. Not all, of course. As investors become older, wealthier, and have larger portfolios, their financial situations become more complex, so that an investment solution that suits their neighbors may not suit them. But in most instances, what applies to one 35-year old middle-class investor, to cite an example, will apply to the next.

In short, as the Internet generations accumulate wealth, traditional investment-services providers will wrangle with technology companies for control of those assets. Each technology firm will have different strengths, and therefore will approach the marketplace in different fashion, but the rhetorical lines can be foreseen. The existing providers will tout their subject-matter expertise, while the technology firms will promote their familiarity. Their pitch: Invest with the company that you know (and that already possesses much of your data.)

Culture Shock

Now for the challenge: How to improve the customer experience. Today’s technology-company customer services are, in a word, abysmal. The most-effective, although still insufficient, assistance comes from online chat programs. Then come the organizations that have long telephone trees, which ultimately connect with poorly trained call-center representatives who are not permitted to make decisions. At the bottom are those firms that will not answer the telephone.

Those who run investments for a living realize that their clients cannot be treated so cavalierly. When investors are worried about their portfolios, they are really worried. They cannot be shunted off into a virtual corner, referred to a Frequently Asked Question board, or told that they will receive an email response within the next 24 hours. They need an answer now--and from somebody credible.

That problem sounds easy enough to address: Siphon some of the additional revenue that comes from delivering investment services toward hiring, training, and maintaining a topnotch support staff. I suspect, though, that the change will not come easily. It means a cultural shift. Technology organizations are accustomed to Internet connections. They live, breathe, and think the web. Retooling their service model will require retooling their mindsets.

In addition, although distrusted today by young employees, the current investment-services providers have many years with which to make their acquaintances. Their industry may resemble the opera, which appears to have a grim future because its audience is old, but which continually replaces its departed views with a new crop of seniors. That may prove so with investment services, as well.

I predict the battle, but not the outcome.

This post initially appeared in Morningstar.com

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Bharanidharan Sridharan
Mar 12 2019 06:17 PM
This is great insight. 7 years from now, it is inevitable that tech giants like Google and Amazon will be mass-selling financial products and services - why? because 85% of the population still don't know what they need in terms of planning their finances. This is where Amazons of the world thrive.
Having this said, it won't be easy. Forget regulations, forget gaining trust for managing money (they are of course critical). What's most important is the packaging - right now, in advanced markets, only fund managers who specialize (PMS, private?) still survive, while in emerging markets, active fund managers are still making a mark. Personalization for finances is quite different from personalizing hobbies, interests and spending patterns. In fact, the more you educate the customer to save, the less you spend. Clear conflict of interest for Amazon!!!
However, a big vacuum to reach out to mass with semi-personalized advice exists (personalization will come from how well Amazon knows the customer's habits).
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