First day and the kickoff for the conference, Kenneth Brandborg, Associate Partner at CMP, shares his learning point form the hot topics and the events at the CFA Institute Annual Conference
By Kenneth Brandborg, Associate Partner | The 22nd of May 2017, Philadelphia, USA
Today was the official kickoff for the 70th CFA Institute Annual Conference – and here is what I learned:
- Behavioral finance is still a hot topic in CFA. Professor Richard H. Thaler gave the opening key note speech on the subject. Very interesting, but as always behavioral fans have a lot of criticism of the old models, but very little on how to improve them.
- The most interesting presentations are the concurrent sessions, where less known speakers have the most edge. I’ll come back to that later.
- American speakers are by far the greatest presenters. I am so impressed. There are no ‘eehhs’ or hesitation. They know their Power Point deck, they know what to say, and they can manage time. That is both impressing and entertaining.
New shared economies and grey rhinos
So, in my last update I wondered if Fintech would be on the radar of this conference. It kind of was, but more as a curiosity.
First speaker today – Arun Sundararajan – gave an interesting insight into the new shared economies, or crowd based capitalism. He had some very interesting points.
Afterwards, Michele Wucker gave a speech on grey rhinos (a highly probable risk) as opposed to black swans (highly improbable risk with massive impact). On a side note, a black swan is an actual specie, grey rhinos are not.
Fintech in investment management
This is what I took with me from the two sessions, and what combines into the case for Fintech in investment management:
Trust is the key, also in business relations
No matter what business you run, trust is the key. No trust means no business. The way to put trust into businesses differs. The financial sector has been living on being heavily regulated. Their trust builds on a government overseeing them a wavering for soundness of the business.
Consumers expect financial institutions to be dishonest.
Currently, that is not going to well. The press is relentlessly hunting the sector to find financial institutions that dodge or seem to dodge legislation. Sometimes they find good examples and sometimes they do not. Either way, the result is the same – distrust.
Consumers expect financial institutions to be dishonest. This is seen in how financial institutions consequently get very low credibility ratings. No matter how harsh the regulation gets.
New platforms and digital companies – new means of creating trust?
On the other hand, we are ready to engage in renting an apartment from a total stranger on Airbnb, although there is virtually no regulation.
The digital businesses seem to have achieved a very high trustworthiness. Why?
Because you get evaluated as soon as you take part on the platforms. You cannot rent a room with Airbnb if you keep getting bad reviews. Bad reviews mean you are out of business, so you must behave.
But where does that put the regulatory tsunami in the financial industry? Is that the right medicine to recoup lost trust? Wouldn’t it be better if we restructured the financial sector in the long term, based on the same trust as the new digital companies?
Maybe more banks and looser regulation would be better, than fewer banks and heavier regulation? It would take a serious reconstruction of the sector. To get there we would need to leave a lot of things behind.
But do we dare that?
The “old school” industry of investment management
The curious thing is that a lot of complicated and capital intensive industries have been disrupted, and still the ‘old school’ investment management industry seems not to acknowledge that they could be next. That is the purest definition of a grey rhino.
When the energy sector and even low risk healthcare, is up for crowd based capitalism, so will investment management. The financial industry is driven by large companies having trust issues in the public. That sounds like an industry ripe for disruption.
Disruption – bringing the solution to the challenge
The financial sector’s worst case scenario is always that the margins will go down and push down earnings when Fintech hits them. But if you look at the new disruptive solutions, they do not only exist because of low margin business. They offer a new and much more convenient and tailor made solution for the individual client.
The investment industry is up for a challenge.
These kinds of solutions are currently only available for UHNWI in investment management. This is partly because of the current setup and infrastructure in investment companies, as a unique solution is expensive and hard to handle.
For most ‘normal’ investors, you end up in a 3X3 matrix filled with standard products. The disruption will certainly leave the client better off, and if we can build (a well-earned) trust in the sector, so will the society that surrounds us.
The investment industry is up for a challenge.
Let’s see, if they are up for it. No matter what, one of the proud historic persons from Philadelphia, Benjamin Franklin, has already given one of the all-time best investment advices: “Investing in knowledge always pays the best interest”.
You can read about Kenneth Brandborg’s initial thoughts and expectations before the kickoff right here.
Kenneth Brandborg, Associate Partner
Kenneth, CFA charter holder, has worked in the financial sector since 2001 with focus on implementation and development of risk management, performance calculation and investment management systems.
Read more about Kenneth and our other CMP consultants here