P2P – It’s not Just for Millennials Anymore

Anyone with a teenager or young adult in their family has probably at least heard of Venmo (a PayPal company), a person to person/peer to peer (P2P) payment network, where all you need is one simple piece of information such as a person’s email or cell phone number to initiate a payment. Venmo is the acknowledged leader in P2P transfers in the U.S. and has experienced rapid growth, particularly in the past few years. In Q4 2016, Venmo facilitated $2.6 billion in payments, 126% more than in Q4 2015.

Banks (and Apple) Enter the Fray

Recent estimates of the potential market for P2P payments exceed $1 Trillion causing competition to heat up for Venmo. Just this month, both Apple and a consortium of banks each announced the launch of their own P2P capabilities. The consortium includes the largest banks in the country, including Bank of America, Citi, Wells Fargo and JP Morgan Chase, as well as partnerships with MasterCard and Visa. Their offering, Zelle, has been six years in the making. Initially, Zelle will be integrated within the mobile banking apps of participating financial institutions, although that could conceivably change over time. It’s in the banks’ interests, though, to keep it as part of its overall consumer offering. This adds to the value and convenience banks can bring to its customers. In addition, for potential users outside of the millennials, there is comfort in association with established bank brands. To some extent, the same could be said of Apple, which stated that its P2P function (Pay Cash) would be integrated into iMessage in iOS 11, putting it head to head with Venmo, which already leverages iMessage for its functionality.

Cash May No Longer Be King

This may be the next evolution in banking. The introduction of ATMs in the 1970s revolutionized how people bank and how branches are used, although interestingly, the reports of the death of the bank branch have been continually “greatly exaggerated.” But with the rise of P2P and the digitization of financial transactions, it is possible that we could see a decline in ATMs and a move to a cashless world. So the next time you’re out with your friends and one of them forgets his or her wallet, show them you’re on top of financial trends and tell them to just Venmo/Zelle/Pay Cash you.

Ways to Reach Your Customers May Be Growing

P2P networks may also represent the next phase in selling financial services products to consumers, similar to the way ATMs are used. If consumers have to go through the sales message in order to get to the P2P function, just as ATMs display a sales message before you login, this represents a growing, captive audience.

Artificial Intelligence and What Wealthy Clients “Really” Want

This week Cetera Financial Group, one of the country’s largest independent broker-dealers, announced a pilot program for a new client profiling tool called Decipher. In the announcement, Decipher was described as a “unique, interactive technology that transforms the client discovery process, providing enhanced insights into client needs and concerns.”

Decipher works by combining facial recognition with artificial intelligence. Clients log in at a computer with a camera, answer a series of questions and view preset situational videos. The Decipher program maps clients’ reactions against a database of facial expressions signifying emotions. It then provides a readout into client emotions and behavior patterns regarding financial goals, decisions and concerns.

The use of biometrics, including facial recognition, has become increasingly common among financial institutions. But applications have largely been confined to relatively simple functions like managing account access and making sure account information is secure from unwanted intrusion. Decipher dramatically expands the role of these technologies, apparently using them to determine how clients “really” feel about their financial goals and how much risk they can tolerate.

The obvious concern with Decipher is whether the results can be trusted to be accurate and how accuracy would ultimately be measured. A scenario, for example, could be envisioned where a client’s verbal characterization of their risk level is very different from what the Decipher algorithm says it is. In such instances, does the advisor side with the man or the machine?

Cetera claims that “the new Decipher offering supports the DOL Fiduciary Rule’s key objectives and Cetera’s Best Interest Advice Model.” Consider again the scenario where the client’s self-perception differs from Decipher’s assessment. In such a case, would the advisor be in violation of the DOL Fiduciary Rule by listening to what the client says about themselves rather than Decipher? And on what grounds would this decision be defended?

It will be interesting to see how Decipher is received and used in the field and to what degree investors accept the judgment of a machine particularly when it contradicts their own “conscious” beliefs about themselves.

Up the Down Learning Curve











“If you don’t read past this first paragraph, remember just two things: You almost never move up a learning curve, only down. And the steeper the curve, the easier the learning.”      –Computerworld Magazine

Thank you, Computerworld, for clarifying what a learning curve is all about. Too many times, too many people get it wrong.

The classic learning curve, also known as the experience curve, is defined by Merriam-Webster as follows:A curve plotting performance against practice; especially: one graphing decline in unit costs with cumulative output

1. The course of progress made in learning something

2. The term was first applied in manufacturing to measure the progressively shrinking cost to units of output as the manufacturing process becomes more finely tuned.

The learning curve goes from the top left of a graph to the lower right and demonstrates how quickly unit costs can be reduced. The steeper the curve, the faster production costs can be lowered, at least initially (we learn more quickly at first, then the rate of learning diminishes). The idea is to get down the learning curve quickly, not to climb it.

But you’d hardly know it from how it’s often used.

Exhibit A: A well-known regional securities firm published a guide titled Helping Investors Climb the E-Learning Curve.

Exhibit B: From a highly visible wealth manager: “No matter how much you study and analyze, you cannot understand the market until you have money at risk. There are no fast or easy ways to get around the learning curve.”

Exhibit C: From the vaunted Harvard Business Review, in an article that coins the “sales learning curve”: “A large sales staff hinders more than it helps a company climb the [learning] curve.”

Are we splitting hairs? Not really. When it comes to wooing new investors, wealth management firms and advisors want to convey that they’re already well informed or quick studies, or both. They need to demonstrate that they’re well down the learning curve not good at climbing it. And in a highly regulated industry where every word and action is subject to scrutiny, managers can’t afford to err.

Understanding Fee Pressure: Asset vs. Wealth Management

This week, Morningstar released its annual U.S. Fund Fee Study. Findings show that, on average, investors in long-term mutual funds and ETFs last year paid lower fund expenses than ever before. As the chart below shows, average fund fees have been steadily dropping since 2000, hitting a record low average expense ratio in 2016 of 0.57%. It seems increasing numbers of investors are opting for low priced passive vehicles particularly the cheapest ones from cost cutters like Vanguard and Blackrock. Further, investors who do choose active products are buying the least expensive options.


But while asset managers are feeling pressure to lower fees, the story does not appear to be the same on the wealth management side. A spate of industry studies from Fidelity, SEI, Cerulli and others have suggested that advisory fees (the amount that RIAs and financial advisors charge to manage clients’ wealth not counting underlying investment product charges) have remained relatively stable in recent years. These studies have also found that there has not been significant fee pressure from wealth clients nor a rise in client attrition due to onerous fees.

It is important for both asset and wealth managers to understand these current pricing trends and the different implications for their marketing strategies going forward. Wealth managers, in particular, should avoid proactive fee cutting in the face of perceived threats from Robos and other low-cost providers. Instead, they should continue to showcase their unique value, expertise, and oversight, and focus conversations on the value they add in helping clients meet their financial goals. The challenge for asset managers is more stark. There is a rapid race to the bottom in pricing for core index managers and it is unlikely that any but the largest scale providers will succeed. For active managers, particularly those that have not lowered prices, asset retention and new sales growth will depend on the ability to create alpha.

Living in the Digital World

A recent article about what would seem to be the most mundane and non-digital of products illustrates how the digitalization of the world affects all businesses. The article was by Ravin Gandhi, CEO and Founder of GMM Nonstick Coatings (GMM), one of the world’s largest suppliers of nonstick coatings to such companies as Calphalon, Farberware, KitchenAid, George Forman and others. The lessons he gives regarding the need to stay competitive in the digital environment, while in a manufacturing context, pertain to any business, including the financial world.

Why should a B2B company even care?

The first question one might ask, is why would a company like GMM even care about what’s going on in the digital world. It’s a B2B company with a stable, high-quality client base and probably not a lot of competition. The answer to that question, the same answer to many questions about competing online, is “Amazon.” Many of GMM’s clients, who previously sold mostly through bricks and mortar, now sell more and more online, often through Amazon. And if GMM raises its prices, for example, because of rising prices of raw materials such as oil and silicon, forcing GMM’s client to subsequently raise its prices on Amazon, it risks being eliminated as a vendor based on Amazon’s algorithmic methodology.

So how does a company respond to a radically changing market environment? Gandhi has three key tactics that are widely applicable:

1.No matter where you are in the supply chain, you better innovate like Bezos (CEO, Amazon)– this is especially true in the financial services world, where underlying technology is changing rapidly for back, middle and front offices. From fingerprint, face and voice technology recognition to portfolio optimization and tax overlays, the landscape is constantly shifting. Those who can’t keep up and adapt, well you know how that ends….

2.Know that last year’s low-cost manufacturing information is worthless – a bit like “past performance is not an indicator of future performance,” being knowledgeable about where the next opportunity is coming from and where risk may occur is critical to both organizations and their end clients

3.Creative marketing is a necessity – while this may seem obvious, perhaps the most challenging maxim in a highly competitive industry like financial services is differentiating oneself and getting the message out in innovative and impactful ways

Correlation, causation, both?

A study in 2015 revealed (or confirmed) that former high school athletes have a much greater chance (about 45% greater) of joining the ranks of upper management in later life than their less athletic peers. A useful finding for employers seeking high achievers. Maybe not so useful for parents of high school students.

Have these students ascended to greater managerial heights because of their participation in athletics? Or do those who gravitate to organized sports tend to exhibit attributes that will later serve them well as executives? Ah, the classic nature-versus-nurture, chicken-egg conundrum: Is it correlation (perhaps there are other factors that encourage career success) or causation (the lessons you learn on how to succeed on the field are applicable to the board room)? The study does not conclude causation, so we’re left to accept only the correlation.

Here’s another one. A recent study from the University of Pittsburgh found that social media can be anything but sociable. Millennials who use social media for at least two hours a day are twice as likely than lighter users to feel socially isolated. Does use of social media contribute to social isolation, or do young people who feel marginalized to begin with tend to find refuge in social media? Probably both, but how much of each? Again, the study is inconclusive.

Unfortunately, in an information age stoked by sound bites and Tweets, the distinction between correlation and causation can often get lost. With evidence of correlation alone, we can only imagine how many over-weaning parents have tried to convert their bookish offspring into student-athletes to improve their career chances.

Uncovering correlations may be helpful in predicting the future. Understanding causation is the first step to controlling it. Conflating correlation with causation, however, can lead ultimately to ineffective action and the production of unforeseen and potentially counterproductive consequences.

Which is why any sound research needs to understand the relationships between dependent and independent variables and how together they can predict, or control, or both, or neither.


ESG Picks Up Momentum

One can argue whether Environmental, Social and Governance (ESG) investing leads to better investment outcomes, but one fact that is irrefutable is that assets are on the rise. According to the Forum for Sustainable and Responsible Investing (US SIF), at the end of 2016, there was approximately $8.7 trillion invested in assets using ESG factors, up about 33% from 2014.

Source:  US SIF 

Of this, while the largest portion, over $5 trillion, represented institutional money in separate account and other vehicles. Retail assets are growing rapidly, however, having more than doubled since 2012. While admittedly, ESG assets still comprise a relatively small share of total investment assets, there is no denying they are gaining in share and in importance. According to the US SIF, the top reason cited by money managers for offering ESG investing was client demand (85%), followed by risk (81%), returns (80%), social benefit (73%) and fiduciary duty (63%).

Millennials Want to do Right

Millennials appear to be driving a large proportion of this demand. According to the 2014 U.S. Trust Insights on Wealth and Worth Survey, 67% of millennials (in contrast to only 35% of baby boomers) feel that investments are “a way to express social, political and environmental values.” And another study in 2015 by TIAA found that most affluent millennials were interested in competitive returns from their investments, as well as encouraging positive moves in social and environmental issues. Women, another fast-growing segment in the wealth market, also appear to have a greater propensity for consumption of ESG solutions, with a 2014 study by Morgan Stanley concluding that women investors were twice as likely to be interested in investments for both return and positive ESG impact. For all consumers of ESG, climate change appears to be the biggest hot button, and this may be partially in reaction to recent moves by the federal government. So, stay tuned; it’s possible the ESG party is just getting started.

Satisfaction (not) Guaranteed

JD Power just released the results of its 2017 U.S. Full Service Investor Satisfaction Study. The survey measures the satisfaction levels of 6,500 investors who access services through advisors. Rankings cover six areas including product offerings, fees, website, advisor quality, account info and performance.

As the table below shows, perennial winners USAA (although not technically eligible to be formally awarded first place, it still ranks the highest), Schwab and Fidelity again captured the top three spots. Why so much success? These firms, we believe, have an important structural advantage when considered in the advisor directed category. Although the three all employ financial advisors, all are built on a direct market chassis, highly dependent on centralized (online primarily) distribution of functionality, information and data. This means that supporting their advisors is a prebuilt direct connection between firm and client. This connection insures consistency and reliability in line with the company’s brand promise across client touchpoints even when the client is working through an advisor. The advisor becomes simply an extension of the firm, another channel option to access the firm’s offering.

The contrast between this model and that of most broker dealers is stark. For traditional broker-dealers, the client’s primary relationship is with an individual broker, or brokerage team, not the firm. The advisor/broker controls the client’s relationship with the firm, service level and the products they use. Client satisfaction is, as a result, primarily a function of the quality of the brokerage force. Inconsistency in broker quality lowers satisfaction scores for the firm overall.

Direct firms also generally have an advantage in the quality and breadth of client communications and electronic interactions. Broker-dealers typically allow their brokers to distribute communications and in many cases to personalize or private label them. This model compromises consistency in clients experience and further decouples the content and messaging of the communications from the firm.

Note that among firms using the more traditional broker-dealer model, Edward Jones had the highest investor satisfaction rates. While clearly not a direct marketer, it could be argued that Edward Jones advisors are the most closely aligned with the parent brand and approach as any on the street. And that their service level as predefined by the parent company is more consistently delivered across the brokerage force.


Machines that Feel?

As we look at the breathtakingly fast developments in artificial intelligence, we can’t help but wonder about artificial emotion: how long will it be before machines can feel? We’ve often thought that once motivation and desire can be programmed, look out. An army of nefarious bots will organize and take over, thinking they’re behaving for the greater good, of course.

One of the first steps has not only arrived, it’s quite sophisticated, and it’s called sentiment analysis. It goes beyond text mining and voice recognition to read the emotion that’s behind a writer’s or caller’s words. And through sophisticated algorithms (no surprise there), it’s already helping consumer marketers evaluate how people feel about their products, offers and messaging.

Is the comment genuine or sarcastic? Is politeness masking a deeper concern, or even resentment? Sentiment analysis can evaluate the context almost as accurately as humans, but in a heartbeat and at a fraction of the cost.

Consider the implications:

1.Quicker responses to social media chatter that could damage a reputation

2.Much more efficient voice-of-the-customer analysis

3.Evaluation of consumer or public sentiment that could move a stock’s price

We found this last one particularly intriguing. As it happens, a number of hedge funds are using sentiment analysis to predict the direction of an investment, especially if the sentiment is being expressed by someone influential. With the law of large numbers (or dollars) on its side, sentiment analysis in the service of tactical stock pickers doesn’t have to be perfect, it just has to be good enough.

Digital Dominance

Let’s give Wells Fargo some kudos (they could use a little).

Wells Fargo is the first to upgrade the technology in all 13,000 of their ATMs, allowing customers to withdraw money without a debit card. J.P. Morgan Chase and Bank of America will be following suit, but let’s face it, it’s got to feel good for Wells Fargo to have some positive press. They have devised a secure way to use a smartphone at the ATM by sending a code to the phone that lasts for 30 minutes and must be followed by a four-digit personal ID code. Jonathan Velline, Wells Fargo’s head of ATM services said that the next update later this year will make it even easier, requiring you to merely hold up your phone to a reader on the machine.

This move is not only convenient for everyone and, obviously, a big advance in providing a more secure ATM transaction environment, but is a critical first step in catering to Generation Z (Gen Z). Gen Z you ask? While precise dates for Gen Z differ, most agree it ranges from somewhere in the mid-1990s to now, following Millennials, often the focus of most marketers’ attention. Gen Z, as opposed to Millennials, have grown up in a world less economically secure. They are already concerned about their financial well-being as many of them saw their parents go through hard times over the last ten years.

Probably the biggest distinctions of the Gen Z-ers – their lives are digital. The first iPhone was introduced in 2007, so most Gen Z-ers have no memories of life without smartphones.

They can multi-task better than anyone (sometimes using multiple devices), they have never been in a world without internet, they live on their smartphones and they purchase with their smartphones. Yet, interestingly, in the study Gen Z @ Work by David and Jonah Stillman, well over three-quarters of them would rather have a conversation face-to-face in the workplace. They are the most global, social and connected generation ever. They are digitally smarter than previous generations, as well as more accepting of cultures and lifestyles.

Financial institutions need to be thinking about how to service this generation. Ten years from now, as the Gen Z-ers are poised to be the largest, most-tech savvy generation in the work place, how will the financial services industry service them? We can promise one thing-it will have something to do with their smart devices.