Chapter 6: The Pitfalls Of Investing 4.0

The global banking industry is currently undergoing tremendous change in all aspects of the value chain, be it payment, lending, saving or financial aggregation. Contributing to all this change is the pressure from fast-growing FinTech companies, open banking platforms and new application programming interfaces made possible by game-changing rules like the second payment service directive (PSD2), with the result that the traditional barriers between incumbents and smaller financial service providers are beginning to vanish. At the same time transaction costs are diminishing. Increasingly, traditional banking services can now be offered by small FinTech companies focusing on a particular market niche, thus making the famous quote attributed to Bill Gates, “banking is necessary, banks are not” becoming truer every day. At the same time, it has become common wisdom that the only real assets left for banks are the following two: They still have a significant customer base while at the same time they oversee large quan- tities of funds. When talking about co-operation between incumbent firms and FinTechs, for the latter one these two assets are the only things that truly matter. In banking, trust, confidence and reputation remain key. These attributes extend to asset management and advisory services. Innovations in this area are characterized by the rise of Robo-advisors. These new players offer a passive rule-based approach to investment. The fact is, this is not a new concept. For many years, asset managers have been applying passive, algorithm-based investment approaches in fund management. What is new is that this service can now be made available in a cost-efficient manner to small investors. So, if the innovation does not come from a new or disruptive investment style, what really explains the expansion of Robo-advisors? The answer is that the innovation these “new kids on the block” can offer lies in the purely digital touchpoints to their clients. Via the Internet personalized frontends, online marketing campaigns, and a seamless digital customer journey are enabling Robo-advisors to increasingly win over clients from traditional banks or wealth managers who cannot offer such a digital experience. Moreover, many Robo-advisors validate their “new” investment approach by citing behavioral finance experts and academic studies, which have concluded that active asset management does not offer any systematic yield pick-up to passive investment. While this might hold true for highly liquid large cap equity markets, this is usually not the case for smaller, less liquid markets. Here active asset management still makes a great deal of sense. In these less transparent market niches, good research and active fund management will always pay off. This was already proven by Eugene/Fama in the scope of their ground-breaking “Efficient Market theory” academic research paper.