FINance & TECHnology Robo-technology and Goal Based Investing lead banking innovation
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PRMIA event in Sydney, 26th May - hosted by Macquarie Bank
FINance & TECHnology
Robo-technology and Goal Based Investing
lead banking innovation
Paolo Sironi
IBM Risk Analytics
Leader Wealth Management Risk Analytics
and Thought Leadership
Agenda
u Digital robo-trends
v Are robots truly
disruptive or not?
w What’s in the future
of advisors?
x Goal Based Investing
© 2015 IBM Corporation
Winners and Laggards
U/HNW
7% annual growth
By The World Wealth Report from Capgemini and RBC Wealth Management 2013.
w strong service/brand competition, blurred line between
on/off shore, Asia, execution quality
MASS/ 43% global wealth is underserved
By Crédit Suisse Research Institute, Global Wealth Databook 2012.
AFFLUENT
w better engagement means workflow changes,
cultural/knowledge gap, digital agenda, obsolete/silos
infrastructure, retirement plans
RETAIL
+100% AUM robo-advisors (2014)
By Aite Group, 2015.
w size matters (tighter margins), digital agenda,
automatisation, millennials, retirement plans
© 2015 IBM Corporation 3
Industry leitmotif
regulation
ADDED PERSO
VALUE NALISA
SERVICE TION
to of
w differentiate w engage w invest. experience w model portfolios
w compete w attract w invest. goals w financial news
w comply w enforce action w invest. horizons w scenario analysis
w cross the fence w establish brand w product selection w financial alerts
w remunerate w personalise w re-balancing freq. w digital access
digitalisation / FinTechs
© 2015 IBM Corporation 4
Robo-advisors can be a disruptive global trend
The display order doesn't represent establishment date, quality nor business dimension
2040 transformed
2030
2020 GBI
2015
robo-4-advisors
robo-advisors
matured
2014 +100% AUM
AUM 2013 noticed
0.01%
2012
venture capital
research
2011 conferences
2010
© 2015 IBM Corporation 5
FINancial TECHnology Some examples not exhaustive of industry reality
FinTechs focus on the digitalisation of the financial system:
PRIVATE EQUITY
S
ROBO-ADVISORS
PAYMENTS
$ ! 4
BIG DATA
LENDING
robo-advisors
MC
h
PROFILE ADVISE RE-BALANCE INDEXING
© 2015 IBM Corporation 6
Are
robo-advisors
truly
disruptive?
© 2015 IBM Corporation 7
Disruptive and Sustaining Innovation
Theory of innovation w sustaining innovation
Goal higher margins and more
performance
Based Investing
demanding customers once
products gain foothold,
improvement cycle restarts
u improvement rate
+ innovation a client can absorb
and a variability around
time
v disruptive innovation
introduces simplified and less expensive products/services,
to appeal to new or less-demanding customers
© 2015 IBM Corporation 8
Who feels threatened? Not only humans
Mutual Funds Active managers Platforms Custodians
Human Advisors
Index ETF … not so active …
h
Indexing 2.0
(
Indexing 3.0 Robo-advisors
JRobo-4-advisors
w algorithms w pers. smart-beta w Millennials w All-In-1 vertically
w zero trans. costs w rule based algo w Baby Boomers. integrated platforms
w tax harvesting w cyborgs
Advisors will focus on gamma (adding
Only true active managers will be able to
value in financial planning) rather alpha
differentiate.
(investment management).
© 2015 IBM Corporation 9
What’s in the future
of advisors?
© 2015 IBM Corporation 1Digital business models are blurring the verticals
w Omni-Channel
w Personalised info
w Peer analysis
w Social media
w Timely alerts
FinTech
Self-Directed
Advised
Retail Mass / Affluent HNW / UHNW
robo-advisor
w Guided re-balancing
w Retirement planning
w Long-term investing
Mild w Added-value reporting
Medium w Prob. Scenario Opt.
Strong
© 2015 IBM Corporation 1From disruption to sustained growth
Goal
Based
Investing
ROBO-4-ADVISORS
ROBO-ADVISORS
Digital
J
isation
© 2015 IBM Corporation 1What
is
GBI
© 2015 IBM Corporation 1Guiding advisors to build client centric portfolios
Achieving one’s goals requires a good balance between ambitions,
risks and understanding of liquidity and investment horizon.
For how long shall I
keep invested?
time
How much risk am I What is my
willing to bear? risk ambition investment goal?
What is the probability of achieving / missing my goal?
© 2015 IBM Corporation 1What’s new in WM? Goal Based Investing
Retirement plans by Nobel Price Robert C. GBI optimisation by EDHEC
Merton: The Crisis in RiskInstitute and
Retirement Planning (HBR, Merril Lynch
2014). (2015)
“The customer needs worry about three
things only: her retirement income goals, how “Merril Lynch goals-
much she is prepared to contribute from her
current income, and how long she plans to based accounts to reach
work.The only feedback she US$ 200 billion
needs from her plan provider is milestone.”
her probability of achieving InvestmentNews
her income goals.” (Nov. 2014)
GBI practice GBI optimisation
by Jean Brunel (2015) by Paolo Sironi (2015)
“New approach to Maximise the
wealth management that probability of
allows individuals to reaching investment
take on a more active goals over time, while
role in the allocation of complying with a risk
their assets” threshold.
© 2015 IBM Corporation 1Intuitive risk based dialogue between advisors and investors
151
Expected Short Fall Probability of
-18% Tracking Error … achieving a goal
Expected Return … losing money
31.000.000 Value at Risk … earning less than …
3.2549%
Sharpe Ratio 40% 60%
32.50% 20% 80%
Volatility
0% 100%
Variance
Probability
© 2015 IBM Corporation 1
6Make probability of reaching goals your investment criteria
Modern Portfolio Theory Goal Based Investing
Equity JP
Equity EU
Cash
40% 60%
Treasury goal
A
US Exp. Return 4.5% pa 20% 80%
Volatility 20% pa 0% 100%
Treasury
EU
Probability
Equity US
Equity JP
Equity EU
Cash
40% 60%
Treasury
goal
20% 80%
B
US
Exp. Return 5.5% pa
Treasury 0% 100%
EU
Volatility 30% pa
Probability
Equity US
© 2015 IBM Corporation 1
7Monitoring portfolios and goals over time
Graphical representation of past performance and future performance (Mark-to-Future).
1Paolo Sironi
Leader Wealth Management Risk Analytics and Thought Leadership
paolo.sironi@de.ibm.com
de.linkedin.com/in/paolosironipso
@thepsironi
www.amazon.com/Paolo-Sironi/e/B00TLMSSA2
www.riskbooks.com/modern-portfolio-management-
from-markowitz-to-probabilistic-scenario-optimisation
Thank you
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