Do current digital financial product offerings really solve real investment problems that individuals face? There’s been a race to the bottom in digital fintech (and, frankly, all of finance) to bring fees down to zero. But, despite an industry-wide obsession with adding value, there has been little focus on the value that customers Actually derive from these new “free” products and services.
Is “free” what millennial investors want? Or, perhaps, these “solutions” emphasize the wrong point. Perhaps younger investors see no value in current product offerings and therefore don’t want to pay for them (up-front). Of course, I’m cheeky with the “initial” reference since selling your trade order (via the Pay for Order Flow or PFOF model) means none of us are really get a free lunch.
The real problem, in my opinion, is the lack of transparency in the whole investment process. Why should investors pay for something if they don’t fully understand it? More importantly, why should they pay for something if they don’t fully see the value in it?
Be it traditional mutual funds, ETFs, or even traditional robo-advisors, digital investment platforms have focused on offering “free” services to deliver added value to investors. Ironically, the reverse has happened: going “free” has forced these platforms to become asset-collecting businesses rather than customer-focused businesses. Simply put: if an asset or wealth management company is experiencing very low average revenue per user (ARPU), to achieve acceptable levels of profitability, the company needs to focus on volume. And a focus on volume leads to a lack of focus on value.
The limited focus on value delivered to customers has, in turn, created limited product differentiation. Compared to private products offered to high net worth individuals, the Millennial customer receives the bare minimum. Forget access to hedge funds. When have you ever heard a product aimed at the retail investor market use terms such as risk-adjusted returns or minimization of extreme exposure. They don’t because those terms are too complicated to understand; rather, they don’t because they are not available.
What is the result? A complete commoditization of investment solutions for the average Millennial client. This reality helps explain the widening wealth gap between high net worth individuals and the rest of us. High net worth individuals get access to the best investment solutions, fund managers and more, while the rest of us get basic, vanilla products.
Therefore, the future of the investment management industry, especially one focused on millennial clients, will lie in embracing subscription models as a way to market the relationship between client and manager. fund (or asset manager). I call this trend the “Netflix-ication” of the investment management industry.
From the perspective of young investors, the concept of subscribing to investment solutions is simple and transparent. After all, almost all of our paid services are now subscriptions. Imagine the possibility of simply subscribing to the investment manager or investment strategy of your choice and having your money invested. No, I’m not talking about social trading where we follow our favorite influencer… I’m talking about having your money managed by one of the leading money managers in a jiffy (to subscribe!).
From the investment management industry side, the subscription model is very disruptive. Right now, the big mutual fund complexes are way ahead of everyone else since the business model is purely asset-raising. This means that the more assets you have, the easier it is to get them. And, if you depend on asset gathering to achieve marginal levels of profitability, the size of your assets under management becomes a wide economic gap that limits market innovation. Is it any wonder that three to four companies control most of the assets under management?
By introducing a subscription model, the myopic focus on asset collection is shifted to what really matters: the value users believe they are getting. At this point, managing churn is what’s important, not hitting sales targets. The subscription model eliminates the need to focus on growing assets under management to generate greater profitability. Now all that matters is the value delivered to the customers.
Another dramatic effect of the subscription model is that by removing reliance on fees, we remove the natural cyclicality of the asset management business model. Currently, asset management activity mirrors the Sin curve trends of the US stock market. The high correlations between investment manager profitability and the behavior of the US stock market create a feedback loop that drives a focus on reducing costs and maximizing profitability rather than client value. Contrary to some conventional misconceptions, in down markets, very good money management is very important. The beauty of the compound interest phenomenon is that as long as you don’t experience too many lows, you don’t need to seize the “big high” days. Your money keeps growing.
Hush… Don’t tell anyone, but it’s the secret of a successful investment! Corporate pros like to obfuscate the concept to make it sound clever – and they call it the focus on risk-adjusted returns.
The future of the investment management industry lies in the subscription model: greater transparency for clients, better profitability for service and product providers and, above all, greater value for investors. .