Is the investment industry at risk of digital death?
With technology increasingly encroaching on almost every aspect of people’s lives, it’s not surprising that companies like Facebook, Amazon and Apple have grown significantly over the last 10 years.
Mobile phones have become so smart they’re making other platforms redundant, and echoes of this type of change are being felt elsewhere.
International fund selector and author JB Beckett reckons fund research is just an Apple Watch away.
“I literally sold all of my old classic automatic watches because I realised that, in one stroke, Apple had made them completely redundant,” he said.
In future, Beckett says, the only reason to use classic automatic watches will be for prestige or nostalgia.
In his book #NewFundOrder, Beckett dissects how the industry has tried to adapt to technological threats and dangers. These include advances in computing power and quantum computing, but also how the human condition – bad biases and behaviour – have led to bad outcomes for investors.
Beckett admits that when he first started presenting on the topic, many people felt his ideas were science fiction and called him a “whack job” who didn’t know what he was talking about.
“I have some credibility as a fund selector and that definitely helped, but I was no doubt ‘out there’ in terms of some of the things I was saying.”
But when Morningstar introduced its “Q ratings” – the first true robo ratings – earlier this year, his ideas didn’t seem so strange anymore.
With fewer than 200 human fund analysts globally, Morningstar can only cover a very small percentage of the total fund market, which includes more than 100 000 funds. The Q ratings will be applied to the funds human analysts don’t cover.
“They’ve mapped the human processes into their algorithms, but what happens if the computer starts to outperform the human analysts? Human analysts are expensive.”
If this were to happen, he says, it could be a step change in the way the industry is run and the way funds are selected.
This seemingly well-meaning man had encouraged friends and others to join something that was utterly unsustainable, says Beckett.
“We don’t really like to talk about it – whether it is boiler rooms or Nigerian letters or frauds or Ponzi schemes, or even just the miscalculation of risk,” he adds. “But we can’t ignore these things. They almost destroyed us in 2008. We allowed financial innovation and our pride and ambition to get ahead of ourselves as an industry.”
He believes the investment industry was forced to realise that humans are inherently quite flawed, and that this led to dysfunctions in asset management – with, for example, asset concentration on the one hand, and fund selectors opting for the “safe choice” due to concerns about underperforming the benchmark.
Against the background of technological advances and the psychology of bad human behaviour, there was a risk that asset management wouldn’t evolve fast enough, he says.
He believes there has to be far better adoption of fintech and integration with human processes – data has to be used to strip out noise and misinformation. This could be helpful in addressing behavioural biases when selecting asset managers on behalf of customers.
The investment industry also needs to become more “long term” in its thinking, and should prioritise sustainability.
Beckett adds that the industry must work together to identify best practice and strive towards professionalism. It must also get its head around technology and look at how it can be used to deliver optimum economic value to investors.