Harnessing a new breed of investors
As the pandemic moved the world to a more virtual setting, a new breed of investor was born. This retail army of investors is coming from a younger generation and during the pandemic, they had disposable money and more time on their hands to investigate online options and make the leap into the world of investments.
The platform industry must harness and continue to engage with this new generation which will define the wealth management world over the coming decades. To do this, we must understand millennials, who will naturally demand a higher level of real and instant connectivity with their providers.
As digital natives who grew up online and with access to mobile technology, they will hold wealth management and banking technology to higher standards than the previous generation. They want access to simple-to-use, real-time analysis through multi-channel platforms. This means a consolidated view of their entire financial situation, being able to interact with advisers when required and being able to track the performance of their finances versus their goals – and being able to do this from anywhere.
Technology will play a big role in making investments more accessible to this larger audience. This means investment and platform providers must go beyond standard smartphone apps and, instead, re-imagine the interfaces with which they engage with clients.
We think gamification will be a big part of this digital transformation, where investors interact with their personal financial objectives through an investment firm’s game-based applications. This method can use incentives to reward engagement and harness techniques in the form of interactive games to encourage clients to work toward their respective investment goals. In this scenario, behaviour might be mapped via a simulation to illustrate the benefits for savers. This type of aid enables savers and investors to visualise the rewards of investing both time and money into their financial goals and creates a wired emotional response to flex their saving muscles.
Open banking set to transform platforms
If you have not heard of APIs (application programming interfaces), you will soon, as this is radically changing the investing experience through platforms. APIs allow platforms and banks to share data, allowing digital propositions to create new applications and tools. They vastly increase the speed with which systems can communicate with one another.
We are seeing the rise in native APIs, which can move information in real-time between providers, and this will accelerate in years to come. The collection of data is allowing wealth and asset managers to break new ground. Innovative firms like Wealthify are taking advantage of technology and data to provide enhanced propositions to audiences with an increasingly younger age profile.
APIs are critical in fuelling what is called the ‘Amazonisation’ of financial services – a process whereby platforms can create one-stop shops where you can access all your information. This allows clients to get a consolidated view and makes decision-making more effective – if, for example, you are getting a mortgage, instead of completing the affordability assessment, you can give the mortgage provider access to your accounts via open banking, and it can run software over the data to complete the analysis and make a more informed decision for both the borrower and the lender.
We believe we are just at the beginning of API innovation, and new collaborations between providers will link different areas of financial services creating an increasingly fuller picture for the consumer of their finances.
Responding to new investment dynamics
Millennial investors have less of a taboo about speaking around investing and will engage on media channels to share investment experiences. Many want to be able to invest in the companies that are shaping their lives, such as Facebook and Apple.
Access and efficiency are essential for creating enhanced customer journeys that respond to the changing dynamics of investor demand. For example, ETFs (exchange-traded funds) and ETPs (exchange-traded products) are increasingly expanding the investment universe by creating a more diverse product range. For example, BlackRock’s iShares range recently launched a semiconductor ETF that taps into artificial intelligence, cloud computing and the internet of things. Meanwhile, digital platforms are increasingly allowing investors to share trades and investment portfolio performance statistics on social media channels.
Platforms are now also increasingly using fractional shares. They are an essential tool for young investors to begin their investment journey. Fractional shares let investors buy a portion of a stock, making it easier to diversify even with small amounts of money.
Fractional shares can also tap into the ETF and ETP growth and the diversity of product type. We see fractional investing, used alongside pound-cost averaging, as foundational to meeting long-term financial goals.
Advocating for education and democratisation
It was not just Reddit-inspired day traders that came to the fore during Covid-19, we also saw a record number of new Stocks and Shares ISAs and pension wrappers opened. We believe to ensure investment longevity; platforms must put education at the forefront of their offering.
This advocacy will be vital in ensuring the new generation is not scarred by negative early experiences in investing, where they are exposed to too much risk. Without education, access itself is not enough to ensure financial well-being.
True investor democratisation is about leveraging financial instruments such as ETFs and fractional shares to invest early and often – time in the market is almost always more profitable than timing the market. But alongside this new architecture, the industry and the regulatory bodies also have a responsibility to ensure investors are adequately safeguarded.
The industry also has a unique opportunity to help shape a better world for the next generation through the accelerating growth of ESG (environmental, social and governance) and ethical funds. This is supported by a trend whereby the new millennial generation wants to align their investments with their interests and life goals. Millennials also want access to a wider range of alternative and socially responsible investment products, which they believe will have an impact on key issues such as climate change.
For example, a Morgan Stanley Institute for Sustainable Investing survey estimated 95% of millennials are interested in sustainable investing. Platforms can help investors tap into these trends by expanding their universe of ETFs and other tradable instruments, which encompass a whole range of ESG products, from climate change strategies to impact funds.
The rise of cloud power
Platforms are increasingly benefitting from the use of cloud computing. Cloud can support front-, middle- and back-office functions – everything from business applications and client relationship management systems to data management solutions and accounting systems.
Cloud computing can have a number of benefits for platforms, notably a low infrastructure investment, increased flexibility and reduced maintenance. Cloud computing is uniquely flexible and scalable, and one of its greatest benefits is that firms only need to pay for the resources and capabilities they require, at the time they need them. In a traditional infrastructure model, firms must invest in advanced servers and storage devices which generally come with a high fixed cost.
We have already been working with partners on opportunistic cloud strategies, as there are times our clients need more power. For example, this technology allows platforms to create efficiencies during periods of varying processing power demand – from quarter-end, when platforms are producing customer statements for their entire client base, to general ad-hoc statement requests.
Collaboration can overcome challenges
Tech moves so quickly, but often on the shoulders of collaboration. In financial services, the need for partnerships is even more pronounced to overcome complex challenges. This has led to more and more platform providers embracing partners.
There has been a move away from a single big tech provider in the platform space to a much more hub-and-spoke model, where there is more collaboration of the larger providers with smaller more agile and innovative technology suppliers, bringing in small specific products. We expect this to continue as technology demands evolve.
We believe modularisation strategies that will enable companies to build and scale broader portfolios of offerings for customers will bring more diversity in products to the platform market.
Technology and customer expectations are changing rapidly. Therefore, it is difficult and expensive for platforms to create their own in-house tech solutions. The best strategy for platforms in this environment is to partner with the right firms to accelerate the growth of their proposition, so they can concentrate on their own core competencies and USPs.
There is always a risk that if you try to do everything, you become a jack of all trades and master of none at a time when people are expecting mastery. Those who can collaborate will emerge as the future winners.
Alex Kerry is director & head of Winterflood Business Services