Thursday, January 31, 2019

Dr. Krause’s FinTech Topics Class to Evaluate the Digital Robo-Investment Products – Will This Be Another Version of ‘The Fleecing of Millennials’ or Will This Have a Happy Ending?

Students in Dr. Krause's FinTech Topics course will be soon popping the hoods on the various robo-adviser and digital banking products to evaluate their true costs and effectiveness

The New York Times article I posted recently on LinkedIn about “The Fleecing of Millennials” certainly created some strong opinions on both sides of the topic. I also believe that the recent Baillie Gifford newsletter written by Tom Coutts on “Riding the Gravy Train – Who Guards the Guards?” has the same potential for controversy.

Coutts forwards the concept that maybe the investment industry has reached its peak (similar to peak oil) and it may have reached the point where the industry has extracted the maximum rate of return from its clients’ assets. The incredible growth of low-cost funds over traditional investment products is exhibit 1 in the argument that investors are fighting back against hidden fees and mediocre performance.

Image result for millenials and financeCoutts posits that the investment industry might have seen its best days and that as fees fall, so too will profit margins (and salaries). Commenting further he stated that “It seems to us that most funds’ fees are too high, most so-called investors’ time-horizons are too short, and most firms operate with their eyes focused inwardly on their own interests rather than outwardly on their clients.”

Image result for robo fintechWhile some of us are just beginning to ask the question of whether the traditional financial industry creates value above what it extracts – or whether it is just a facilitator taking fees for low value-added services - millennials are voting with their feet. 

Millennials are seeking financial advice, but they are also more likely to trust digital advice from automated investment services (robo-advisors and mobile banking apps) than their parent’s generation.

US market research company, Forrester, recently surveyed online adults in twenty markets to determine their need for, and perception of, financial services. The resulting report tells it all, “Millennials want financial advice, with or without humans.”

Image result for Gordon GekkoThe Michael Milken / Gordon Gekko / Liar’s Poker / Bernie Madoff / Wolf of Wall Street personalities (real or fictitious) have created an image of slick, pin-striped, ‘greed is good’ robber barons – out to line their pockets at the expense of the average Joe or Jane.  Because the younger generation is skeptical of the lack of transparency and are demanding value for the fees they are paying, maybe this is a situation where we might be seeking the reverse of the “Fleecing of Millennials.”

I have an assignment due soon from the students in my spring semester FinTech Topics course where they are going to be doing deep research into the true fees and costs of the robo-investment and digital banking products. They will study performance relative to fees and provide an evaluation of the value of these new banking and investing products. We’ll be certain to post their results soon – it should be interesting to see what this group of millennials concludes about digital versus traditional finance.