In what is set to be one of Wall Street’s biggest deals since the crash over a decade ago, Morgan Stanley is intent on buying E-trade in a $13 billion all-stock transaction. The deal will continue Morgan Stanley’s ongoing transformation into a more reliable financial firm that relies more on assets and wealth management.
The purchase of E-trade will carry across 5.2 million client accounts, $360 billion in retail clients’ assets and further customers that may now make use of Morgan Stanley’s vast expertise. Current rivals Charles Schwab and TD Ameritrade are currently mid-merger, so this consolidates Morgan Stanley and E-Trade position in the investment brokerage markets.
Forrester’s senior analyst, Vijay Raghavan told Finance Monthly: “In the wake of the price war that first started when Schwab got rid of stock trading commissions, E-trade was weakened because of its reliance on commissions - just like TD Ameritrade (before it was acquired by Charles Schwab).
“Nearly half of E-trade’s customer base (48%) is comprised of self-directed investors. Self-directed investors prefer robust trading tools, real-time market commentary, and charting tools, to name a few.
“Morgan Stanley’s wealth management business serves an affluent investor base who comprise the delegator segment, relying on financial advisors to make investment decisions for them.
“This acquisition complements Morgan Stanley’s existing affluent customer base, providing them with a wider array of customers with different levels of investable assets. It also gives them a direct-to-consumer brokerage business, and $56 billion in deposits which will help cut down on risk during an economic downturn.”
BrokerChooser is a global online service for comparing and choosing investment brokers. Below, their CEO and co-founder Tibor Bedő talks us through the awards process, discusses the top five awards and the firms that have been selected, providing some insight on the complex world of investment brokering.
Every year we carry out a comprehensive review of the market and of the brokers in it. We then make awards based on nine criteria: fees, trading platforms, product portfolio, security, account opening (ease and cost), deposit and withdrawal (costs and time it takes), customer service (the support across all channels), research (the resources and tools they provide) and education (does the broker offer support services such as webinars and other tool).
This year we collected much wider and more in-depth data on brokers and their services than ever before. Our aim was to make the scoring more precise and better reflect the differences between brokers.
This year we collected much wider and more in-depth data on brokers and their services than ever before. Our aim was to make the scoring more precise and better reflect the differences between brokers.
It was important to use the right parameters for each category. To ensure we got this right, we interviewed our customers about their preferences and, of course, also used our own professional knowledge and insight into the brokerage industry.
There were 24 awards in total. However, the key ones, the winners, and the criteria we used for judging them, are below.
1. Best online broker was won by Interactive Brokers
We considered how brokers performed across all the criteria, particularly fees, product selection and trading platforms. This is the second year in a row that Interactive Brokers have won this category. It won high scores due to its low trading fees, comprehensive product range, and well-developed trading platforms. It is a strong company with a great reputation.
2. Best discount broker was won by DEGIRO
This award is all about the fees and how cost effective the broker is. It is a key consideration with our customers. DEGIRO won this for the second year in a row as its trading fees are low for all asset classes. In addition, there are no withdrawal, inactivity, or account fees charged.
3. Best broker for stock trading was also won by DEGIRO
Stock is one of the most popular asset classes (more than 60% of our clients focus on investing in stocks). The main parameters for this award are fees, stock exchanges availability and the overall quality of their service. DEGIRO won this award due to its low stock fees, global stock exchange coverage, and the high quality of the service it provides.
4. Best forex brokers was won by Saxo Bank
Here we were obviously looking for outstanding performance in criteria that are relevant to forex trading. Our customers told us that these are low forex and withdrawal fees, advanced trading platforms with great charting tools, and wide range of currency pair selection. Saxo Bank has performed well in all these categories.
5. Best discount forex brokers was won by Fusion Markets
This is a new broker category. We created it as many from our customers are looking for great value forex trading. The most important factor here is therefore the forex fees. Fusion Markets charge the lowest commission per lot for buying and selling the currency pairs ($2.25) and doesn't charge any withdrawal fee.
The other awards and their winners were:
Best broker for funds Firstrade
Best broker for bonds Fidelity
Best CFD broker XTB
Best broker for cryptos eToro
Best broker for options TD Ameritrade
Best broker for futures Interactive Brokers
Best broker for beginners Robinhood
Best broker for millennials Revolut
Best broker for buy and hold TradeStation Global
Best broker for day trading Interactive Brokers
Best web trading platform Saxo Bank
Best mobile trading platform Oanda
Best app for stock trading Robinhood
Best desktop trading platform TD Ameritrade
Best broker for research Saxo Bank
Best broker for API trading Oanda
Best social trading eToro
Best digital bank Revolut
Best robo-advisor Betterment
All the winners offer exceptional services but of course there are some brokers who perform very badly. Even investors with a lot of experience can find it difficult to identify the good ones, or the ones that suit them best, without weeks of research. The idea behind these awards is that we do this work for you.
Cryptocurrencies are often compared to gold. They have a number of features in common – independence from governments, limited emission, and a user consensus ascribing value to them. This is especially true in the case of bitcoin, the first cryptocurrency that still retains the status of the “default crypto”, just like gold retains the status of the most important precious metal.
However, cryptocurrencies are also vastly different from metals: they are a lot easier to trade. Below Victor Argonov, Analyst at EXANTE, explains more for Finance Monthly.
Physical gold is extremely difficult to buy, sell, and trade across national borders, and nearly impossible to use as legal tender. Gold turnover is subject to heavy taxation, and many prefer to invest in precious metal accounts instead of physical gold. Cryptocurrencies, on the other hand, are easy to buy and sell, can be freely traded across borders, and their use as legal tender is becoming increasingly more common.
These similarities and differences between cryptocurrencies and precious metals are common knowledge. However, one crucial question remains unanswered – how much they are able to function as a protective asset, retaining their value during crises.
Theoretical Considerations
Currently, one of the key arguments against the use of cryptocurrencies as protective assets is their high volatility. BTC cost $0.1 in 2010, $1,000 in late 2013, $200 in late 2014, $19,000 in late 2017, and around $7,000 today. Even just in 2019, which can hardly be called a particularly volatile year, its exchange rate still fluctuated by a factor of four over the year. Crashes are commonplace on the market, and no matter when you buy cryptocurrency, there is no guarantee that your capital is not going to halve in a month.
On the other hand, the key argument for keeping one's funds in cryptocurrency is its tendency to grow in value as the number of its users increases. Cryptocurrency emission is limited by algorithms. With BTC specifically it is actually decreasing, which minimizes inflation. Currently a few dozen million people on Earth use cryptocurrencies, and their number doubles every year. Even 2018, disastrous as the year was, saw the number of users increase from 18 to 35 million. At the same time, the potential new audience is still huge, and in tandem with guaranteed low inflation it usually stimulates growing exchange rates, regardless of the bubbles that may occur.
The key argument for keeping one's funds in cryptocurrency is its tendency to grow in value as the number of its users increases. Cryptocurrency emission is limited by algorithms. With BTC specifically it is actually decreasing, which minimizes inflation.
The increasing number of crypto users not only boosts the cryptocurrencies' exchange rates and capitalization, but gradually decreases their volatility as well. Here is a rough comparison, which nonetheless illustrates the situation. Over the four years between 2010 and 2013 the BTC exchange rate changed by four orders of magnitude, while in the next four, including the dip in 2014 and the enormous bubble in 2017, it only changed by two orders of magnitude. It is true that even the modest fluctuations in 2019 are huge compared to the traditional stock and currency markets, but this is a predictable consequence of the low market cap, which is currently at around $200B. Even when taken individually, the world's largest companies like Facebook or Saudi Aramco have market caps several times that amount, while those of the global stock and currency markets have several orders of magnitude that market cap. So the current volatility of the cryptocurrencies may simply be a sign that they are still in their infancy.
Practical Evidence
There are many known cases of cryptocurrencies serving as a protective asset, primarily during national currency crises. In 2018 the national currencies of Turkey, Argentina, and Venezuela experienced drastic devaluation. While previously citizens of these countries tried to buy dollars in similar situations, this time many people turned to cryptocurrencies. As an example, in August 2018 the number of cryptocurrency users in Turkey was double the average number for Europe.
The cryptocurrencies' protection against fiat currencies' devaluation is not limited to unstable countries with only a small share on the global market. For example, statistics show that the BTC exchange rate usually increases as the Chinese yuan's rate drops.
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However, none of these examples make cryptocurrency unique. When one country's fiat currency devalues, any other country's fiat currency may serve as a protective asset if it is more stable. What makes gold unique is that its role as a protective asset is universal. Not only does it protect its owners from national currency devaluation, but from stock market crashes as well. Gold exchange rate is not particularly stable and has its own fluctuations, but it is fairly independent of stock index fluctuations. Does cryptocurrency have the same advantage? As practice shows, no.
From 2014 to 2017 BTC's exchange rate usually changed in the same direction as the indices, and often with much greater amplitude. In the fall of 2018 it briefly looked like the situation was changing. The 2017 bubble had already deflated, and the volatility of the digital assets dropped by several orders of magnitude (as it usually happens after bubbles). When American stocks started dropping in price due to the trade war with China, BTC did not follow the market's lead and had indeed served as a protective asset.
However, it was unable to cement that role. November already saw a new cryptocurrency crash that was followed by the infamous crypto winter. Whether it was chance or an expected event, it roughly coincided with the maximum dip in the stock market. The indices recovered due to the negotiations between the US and China in the spring of 2019, and so did the cryptocurrencies.
Very Risky, But Still A Protective Asset?
Overall, the properties of gold and cryptocurrencies as protective assets are very different. If you are afraid of your national currency experiencing inflation, cryptocurrency can protect your capital, but if you are a stock investor, expect cryptos to dip during a crisis as well. The reason for this is simple: despite their advantages, cryptocurrencies are still considered a very risky asset compared to securities and gold. They are exactly the assets the investors try to get rid of as soon as possible during difficult times.
Despite their advantages, cryptocurrencies are still considered a very risky asset compared to securities and gold. They are exactly the assets the investors try to get rid of as soon as possible during difficult times.
On the other hand, in the long term cryptocurrencies are still a protective asset. If you are not afraid of long exchange rate dips and are not prone to dumping all your assets during crashes, you will probably be rewarded over the years. While cryptocurrency growth on the scale of 2010-2013 is unlikely, their exchange rates are still expected to multiply in the next few years. To date, every bubble on the crypto market resulted in a substantial growth of the exchange rates. For example, the BTC rate of $3,000-4,000 during the crypto winter of 2018-2019 was vastly higher than in any year before the 2017 bubble.
The only thing that can seriously undermine the global positive trend of the cryptocurrencies is a complete ban on them by leading countries. However, this seems unlikely. With every year, more and more influential financial communities join the cryptocurrency market, and they would not want to leave it.
The increasing popularity of cryptocurrencies will eventually slow down their upward trend, but is also likely to greatly decrease their volatility and make them more similar to traditional protective assets like gold. How close that similarity would be is, as yet, unknown.
Delving into the latest impacts of Donald Trump’s impeachment trials on investors around the world, Wael-Al-Nahedh, CEO at Spearvest, gives us a rundown on the influence of global politics and the volatility of investment in 2020.
After three years of failed negotiations, sharp words, a prime ministerial resignation and a Christmas general election, at long last the UK government has a clear majority and the overall decision on the country’s future relationship with the European Union (EU) has been agreed. On top of this, China and the US trade deal tensions seem to be simmering down and global markets can look forward into what we all hope will be an extended period of global market stability. Meanwhile the ongoing stand-off between Iran and the world’s biggest economy appears to have quietened down, at least for the moment.
What’s more, in December 2019 and after months of speculation, the world watched as Donald Trump became only the third president of the United States history to be impeached, only to be swiftly acquitted, as was expected to happen given the Republican majority in the Senate.
However, as recent events in Wuhan, China have proven, major challenges can appear suddenly and without warning. The fast-spreading Coronavirus in Wuhan has already had a substantial impact on the Chinese economy. This crisis has led to fears around international travel and public health emergencies, in turn damaging supply chains and knocking investor confidence just as it was starting to bounce back.
This was a reminder that repercussions from local risks can have a global impact on financial markets. Specifically, what are the current challenges and how can investors navigate these situations?
Financial Markets throughout election year
All eyes will be on the US election this year, and many investors will tread cautiously in the US stock market depending on updates and promises in policy, and polling predictions when it comes to the people’s favourite candidate.
In the short term, the election can affect corporate confidence due to Trump’s business-friendly policies, such as his reform on corporate tax, could be at risk of being replaced by more topical economically viable policy.
In the short term, the election can affect corporate confidence due to Trump’s business-friendly policies, such as his reform on corporate tax, could be at risk of being replaced by more topical economically viable policy.
Alternatively, we might see certain sectors flourish from now until election day, as trade deals are renegotiated or tariffs on foreign goods are imposed or revoked. It was announced this week that China will halve tariffs on some US imports as it moves quickly to implement its ‘phase one’ trade deal.
History dictates that election years often offer prosperity when it comes to the stock market, regardless of who is eventually elected. In fact, when examining the return of the S&P 500 Index for each of the 23 election years since 1928, only four have been negative.
US-Iranian tension
US and Iran haven’t had the best of relations for a few decades now, and US sanctions on Iran’s oil exports last year had already crippled the Iranian economy. And, to see the new year in, tensions flared as a US-led drone strike killed General Qasem Soleimani in Baghdad.
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On January 10th, Trump announced sanctions that went beyond oil and gas and now targeted construction, mining, manufacturing and textile goods. As a result, trade with Iran is flatlining worldwide and investors, companies and lenders should do well to avoid any partnership or investment with Iranian goods or businesses, such as the recently blacklisted, Mahan Air.
On the other hand, market impact hasn’t been as severe as one might have initially expected. Oil prices are still below the level they hit in September 2-19 after the Saudi Aramco oil attack.
The situation in China
The most significant impact on the global economy has emerged as a result of a Global Health Crisis, as a new strain of Coronavirus has all but isolated China from the rest of the world. The true impact on the economy resulting of this terrible human tragedy, is as yet unknown.
Short-term impact on the stock market in China has correlated to the global significance of this devastating virus: stock markets in china saw their biggest fall in five years as traders rushed to sell-off Asian equites amid continued fears about the impact of the Coronavirus on the global economy. Investors should keep a keen eye on the spread of this virus, as we could see it affect international markets quite severely should the number of cases of infection increase dramatically in key markets such as the US or Germany, for example.
The virus has also had a substantial impact on oil markets, with prices declining sharply as demand from China dissipates through diminished air travel, road transportation and manufacturing. Given the fact that China under normal circumstances consumes 13 of every 100 barrels of oil the world produces, we can expect the impact on oil markets to further increase should this global health crisis widen.
If not contained, retail sales and travel could suffer consequently in the next few months, especially as industrial production struggles to recover after last year’s extended slump and the consequences of the US-China trade war, which has already cut Chinese economic growth to its lowest level in 29 years.
How to navigate challenges
Such episodes of global nervousness often - counter-intuitively - represent considerable opportunity for those investors who are willing to buy when others are selling. Attractive opportunities typically arise in times of high volatility, which brings to attention the importance of relying on independent and unbiased advice before deciding to invest at a time of great global economic and political uncertainty.
Some of the highest returns in global markets often happen around periods of high volatility in an unpredictable fashion, and that is why thorough planning and a long time horizon give investors a great advantage. Over 10 years, equities have earned excess returns over cash 95% of the time. The return of a buy-and-hold investor in the S&P 500 over the past 20 years has been more than 220%, versus just 42% for someone who sold at each new all-time high and waited for a 5% pullback to reinvest.
Finally, one should always diversify an investment portfolio adding into low-correlated investments, include income-generating hard assets (like real estate), invest with a long-term horizon, and of course increase the understanding of risks.
According to Ian Borman, partner at Winston & Strawn this has meant that, for businesses that aren’t well-known or well-placed, or perhaps under significant stress, securing finance has become more challenging than ever.
Below Ian discusses with Finance Monthly the growth in family offices that have been resorting more and more to direct investment, touching on the complexities surrounding direct investment but also the social and ethical benefits smaller businesses can gain.
Direct investment by individuals and family offices is far from a new concept. Decades ago, my grandfather, a solicitor in the North of England, managed a portfolio of small loans to local businesses for a widow. But in the past several years, the needs of private businesses for capital and of family offices for returns have combined to accelerate this area of the finance market.
Historically, this activity has been focused on the SME sector, which itself has played a larger and more significant role in economic growth than one might think. For instance, in the UK small and medium-sized enterprises account for 99.3% of all private sector businesses and employ approximately 16.3 million people. In 2018, UK SMEs delivered a combined annual turnover of £2 trillion, accounting for 52% of all private sector turnover. Many SMEs are conservatively run, with low leverage.
This powerful economic engine is now at risk of stalling; government figures estimate that the number of SMEs in the UK fell by 27,000 between 2017 and 2018. Slowing growth, combined with the implications of the pound’s uncertain strength, are forcing many SMEs to restructure or invest in improved efficiency. In an earlier day, banks provided a ready source of capital to meet these and other needs, but many traditional financial institutions are still facing capital pressures and have withdrawn from large parts of this sector of the market, especially early stage businesses and turnarounds. Institutional investors, for their part, inevitably end up focusing on larger opportunities.
In an earlier day, banks provided a ready source of capital to meet these and other needs, but many traditional financial institutions are still facing capital pressures and have withdrawn from large parts of this sector of the market, especially early stage businesses and turnarounds.
Meanwhile, family offices have been facing their own challenges. Traditional family office investment strategies focused on public bond and equity markets, and to a lesser extent on hedge funds and real estate. However, these investments no longer provide the returns they once did. In the search for higher yield, more and more family offices are thus looking toward the opportunities presented by direct investment.
Indeed, some family offices have taken to the private market with considerable enthusiasm. Because they are independent and less heavily regulated than banks, family offices can be much more flexible in their consideration of investments across enterprise size, geographies and asset classes. As they move toward more direct forms of investment, some family offices are focusing on sectors such as financial technology, or strategies like turnaround. Those offices are increasing their ability to evaluate and manage targeted investments by hiring specialists from banks and private equity firms.
In some cases, family offices are clubbing together, either in an ongoing arrangement or on a deal-by-deal basis, to create a critical mass of investment capital to justify employing a team of people and to provide discipline in the investment decision-making process. (This professionalism in managing SME investments can be seen in other sectors in which family offices have increased their presence, such as investments in sports clubs and oversight of other family assets, such as yachts, aircraft and art.) Family offices are also reviewing and evaluating their organisation, governance structures and support for family members to ensure that offices can successfully navigate the complexities attached to investing directly in specialist markets.
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The attraction of direct investment to family offices comes from more than just an alignment of capital. Making direct investments also allows family offices to take the hands-on approach they increasingly favor in selecting and managing their portfolios. This hands-on approach allows family offices to more closely align their investment decisions with the values of the families they represent, making investments in the sustainability space and impact investing particularly attractive. Direct investment also gives family offices the opportunity to leverage their network and expertise to support regional growth.
Family offices have made a serious commitment to direct investments, allowing them to invest in an innovative, creative, and socially conscious way and providing welcome news for the SME sector and the wider economy.
Here Martijn Groot, VP Marketing and Strategy at Asset Control , discusses how AI and Machine Learning techniques are finding their way into financial services and changing the way we do things, in particular how we invest.
Ranging from operational efficiencies to more effective detection of fraud and money-laundering, firms are embracing techniques that find patterns, learn from them and can subsequently act on signals coming out of large volumes of data. The most promising, and potentially lucrative, use cases are in investment management though.
Among the groups that benefit most are hedge fund managers and other active investors who increasingly rely on AI and machine learning to analyse large data sets for actionable signals that support a faster; better-informed decision-making process. Helping this trend is the increased availability of data sets that provide additional colour and that complement The typical market data feeds from aggregators, such as Bloomberg or Refinitiv, range from data gathered through web scraping, textual analysis of news, social media and earnings calls. Data is also gathered through transactional information from credit card data, email receipts and point of sale (“POS”) data.
The ability to analyse data has progressed to apply natural language processing (NLP) to earning call transcripts to assess whether the tone of the CEO or CFO being interviewed is positive or negative.
The ability to analyse data has progressed to apply natural language processing (NLP) to earning call transcripts to assess whether the tone of the CEO or CFO being interviewed is positive or negative.
Revenue can be estimated from transactional information to gauge a company’s financials ahead of official earnings announcements and with potentially greater accuracy than analyst forecasts. If, based on this analysis, a fund believes the next reported earnings are going to materially differ from the consensus analyst forecast, it can act on this. Satellite information on crops and weather forecasts can help predicting commodity prices.
These are just a few examples of the data sets available. The variety in structure and volume of data now available is such that analysing it using traditional techniques is becoming increasingly unrealistic. Moreover, some has a limited shelf life and can quickly become out-of-date.
Scoping the Challenge
Setting up a properly resourced team to assess and process this type of data is costly.
The best approach therefore is to more effectively assess and prepare the data for machine learning so that the algorithms can get to work quickly. Data scientists can then focus on analysis rather than data preparation. Part of that process is feature engineering, essentially selecting the aspects of the data to feed to a machine learning algorithm. This curation process involves selecting the relevant dimensions of the data, discarding for instance redundant data sets or constant parameters, and plugging gaps in the data where needed.
An active manager could potentially analyse hundreds of data sets per year; the procedure to analyse and onboard new data should be cost-effective. It should also have a quick turnaround time as the shelf life of some of these data sets is short.
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Addressing these challenges means that traditional data management (the structured processes to ingest, integrate, quality-proof and distribute information) has to evolve. It needs to extend data ingestion and managing data quality into a more sophisticated cross-referencing of feeds looking for gaps in the data; implausible movements and inconsistency between two feeds. For instance, speed of data loading is becoming more important as volumes increase. With much of the data unstructured, hedge funds should be conscious of needing to do more with the data to make it usable. More sophisticated data mastering will also be key in making machine learning work effectively for hedge funds.
This functionality coupled with the capability to quickly onboard new data sets for machine learning will enable funds to save money and especially time in the data analysis process. It will allow data scientists to focus on what they do best and generate more actionable insight for the investment professionals.
Reaping the Rewards
Machine learning clearly has huge potential to bring a raft of benefits to hedge funds, both in reducing the time and cost of the data analysis process and in driving faster time to insight. It also gives firms the opportunity to achieve differentiation and business advantage. Hedge funds need to show returns to attract investment in an increasingly competitive space, machine learning supported by high quality data management offers a positive way forward.
This news comes after a string of regulatory changes in the consumer finance industry introduced by the Financial Conduct Authority, who took over from the Office of Fair Trading in 2014.
Peer-to-peer lending involves lenders acting as ‘middlemen’ between people looking for short term loans and investors looking to earn a return on an investment – often with returns as high as 12% or 15% depending on the amount of risk that they take on.
The peer-to-peer lending industry is estimated to be worth £2 billion in the UK, but has seen the casualty of some big names go into administration in recent years too.
The existing peer to peer lenders will form a separate industry body, replacing the existing regulator that was in force since 2011. The new group will be part of a wider fintech group that will represent companies in their industry.
Why is the existing trade body being replaced?
Following the news that the existing P2P trade body is to be replaced, Innovate Finance said that this was because the P2PFA had ‘achieved its objective of providing adequate protections for consumers.’
It also follows the recent news of additional peer-to-peer lending criteria being implemented in December 2019.
The new group of lenders are the leading members of the 36H Group, as well as a part of Innovate Finance. They have approximately 250 members in total, and also represent other fintech firms such as Dozens, Moneyfarm and Atom Bank.
What are the new FCA regulations?
The regulations for the peer to peer section created by the Financial Conduct Authority (FCA) mean that casual investors are now banned from being able to put any more than 10 percent of their assets into the sector.
The new FCA regulations also require peer-to-peer lending platforms to thoroughly assess the level of knowledge and expertise of investors before they make a P2P investment.
Some argue that this could potentially pose problems for lending platforms, who may decide to close completely if they will be losing huge investment.
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How do peer-to-peer lending platforms work?
Peer to peer lenders receive money from investors and then distribute the cash to borrowers in exchange for a return on their investment.
The lender acts as broker or middleman between a high street borrower and an investor and returns range from 5% to 15% per annum, depending on the level of risk. For those looking to invest in good credit customers, the return is often lower because the chance of repayment is high. If you invest with bad credit customers, the risks of default are potentially higher, but the rewards may deliver a return of up to 15% per annum.
In terms of regulation, the peer-to-peer lending platforms are monitored by the Financial Conduct Authority, but they are not a part of the Financial Services Compensation Scheme.
This means that if a borrower defaults on payment (and this is expected of at least 20% of customers), investors are not necessarily compensated.
Most lending platforms will have their own compensation scheme in place including procedures, separate funds and a customer services team to collect on bad debt.
According to Ketan Parekh, Head of Financial and Insurance Services at Fujitsu UK & Ireland, Fujitsu recently revealed that 71% of financial services leaders believe that technology is vital to the future success and health of their organisation. Below Parekh discusses with Finance Monthly the prospects of fintech innovation in 2020, and the benefits for Financial services companies therein.
Every year new technologies are transforming the financial services industry, with technology such as the Internet of Things (IoT), Robotic Process Automation (RPA), Artificial Intelligence (AI) and blockchain completely changing the services that banks can provide to their customers. For example, Metro Bank is using a selfie technology to allow consumers to open current accounts online, whilst Facebook will soon let you send payments via WhatsApp. With so much innovation on offer, there is a huge opportunity for organisations to take advantage of new technologies to improve efficiency and customer service.
Our recent research of the sector also revealed that over half (55%) of UK financial services business leaders feel their organisation has been a leader in technological innovation over the last five years. And while many embrace the positive effect of technology, there are some risks associated with this rapid innovation. The explosion of new technologies combined with the rapid pace of change and ever evolving consumer demands means some organisations can be left playing catch-up and falling behind on innovation.
Investing in the future
It was recently uncovered that more than half (56%) of UK financial services business leaders worry their organisation could miss out on the benefits of technological innovation, because they haven’t planned radically enough. The truth is - organisations with the right foundations in place will be those to take advantage of what technology has to offer.
With no signs of innovation slowing down, it’s vital that the financial services sector builds on its existing strengths. Although significant steps have been taken already, to succeed in the digital age and bring innovative solutions to the market, business leaders will need to make a sizeable financial commitment. Now is the time for them to put the right plans in place to ensure they are prepared to tap into the innovations to come, and this includes making investments in digital technologies a key priority for the business.
Although significant steps have been taken already, to succeed in the digital age and bring innovative solutions to the market, business leaders will need to make a sizeable financial commitment.
Customer first
Financial services leaders have been faced with no small challenge. Currently, over half (55%) of financial services business leaders admit they are not able to predict what customers will want from their organisation in the future. Today their customers are hunting for convenience, and seeking innovation, new digital services, low rates, speed and security.
Take retail banking for example, where some banks are now beginning to roll out systems that learn the behaviours of their individual customers, and can recognise in real-time the ‘signature’ abnormal behaviours when these customers are influenced by scammers. It’s clear that financial services organisations are innovating but these organisations must ensure that the technology they offer actually meets the demands of individual customers.
Keeping the top spot
Financial services leaders have been faced with no small challenge. Their customers are asking them to innovate and provide new digital services, alongside threats in the form of data governance, protection and public trust. Yet one thing is clear - financial services leaders must continue to put the organisation at the forefront of innovation.
It’s now the time for them to put the right plans in place to ensure they are prepared to tap into the innovations to come. When organisations ensure they prepare, plan and put the customer first, successful technological innovations are possible. This way organisations will be able to stay ahead of competition and keep the UK’s financial service organisations at the forefront of innovation.
The proliferation of impact investing- investments that generate both financial returns and social or environmental good - has been considerable over recent years. Indeed, the impact investing market as a whole is now estimated at $502bn, almost double that of the previous year.
However, there is a growing demand for fund managers and pension schemes to be equipped with clear and standardised tools for measuring the social impact of their investments. Such tools would empower investors to question their own pension schemes and fund providers on where they are investing, the types of companies and assets that they are investing in, and the true social impact they achieve. This will be an important step for the impact investing market and will go a long way towards improving transparency and stimulating access to a broader range of investments.
Impact investing is coming of age
It’s no surprise that an increasing number of investors are looking to allocate their pensions and savings into funds that have a positive social impact. The rationale is hard to refute; the evidence suggests that impact investing is compatible with both doing well, and doing good, and can withstand the same scrutiny as traditional investments.
It makes financial sense to invest in firms that are aligned with these values.
The logic is that the long-term risk-adjusted returns are superior because the investment approach is in tune with the forces shaping the global economy; for example, the intensified role of the climate change agenda, the drive for reducing poverty, addressing inequality and expanding global access to quality healthcare and education. Put simply, beyond generating social good, it makes financial sense to invest in firms that are aligned with these values. Recent data from Morningstar found that sustainable and social impact funds performed better than their non-sustainable sister funds. Indeed, 41 of the 56 (73%) Morningstar’s ESG indexes have outperformed their non-ESG equivalents since their inception. Profit, and purpose, therefore, go hand in hand.
Measurement is key
However, as more financial institutions such as pension funds and asset managers get on board with impact investing, ensuring that investors have clarity on the social impact of their investment is crucial.
Currently, there are several different methods proposed for improving transparency and the UN Sustainable Development Goals (SDGs) are a valuable starting point. The goals signal a commitment to 17 global objectives, ranging from addressing hunger to stopping climate change, and are used to drive public and private investment towards creating a sustainable economy and society. While SDGs are helpful in providing the basis of a common framework, they are extremely broad, acting more as a benchmark than a quantifiable strategy.
Another method is Social Return on Investment (SROI). The method was developed from traditional cost-benefit analysis which produces a narrative on how an organisation creates or destroys value and a ratio that states how much social value (in £) is created for every £1 of investment.
There are several other proposed methodologies, but none seem to fully provide a monetary estimate of a company’s impact that is measurable, comparable and is delivered through an appropriate level of resource. At Triple Point, drawing on various methodologies, we’ve proposed our own measurement strategy which includes estimating the monetary value of Impact. This involves the following steps:
- Identify potential impact
As part of our pre-investment process, identify the key societal benefits that we believe an investee company will generate.
- Establish Key Performance Indicators
Our KPIs relate to these key societal benefits. We select KPIs in consultation with investee companies, to ensure data can be collected without undue burden on the business.
- KPI tracking and quantification
After a period of time, KPI data provides the starting point to confirm the existence of a measurable positive social change and its scale.
Establish what would normally have happened, versus the positive change the product has created, to assign a quantity of positive change.
Calculate an initial monetary value of social Impact by using reference data or making reasonable data assumptions.
Adjust the initial monetary value for factors that contribute or detract from the positive impact being measured. They include duration (how long the impact will last) and depth (the level of change the impact creates).
A further adjustment is made to reflect the stake we have in the company and over the reporting period.
The estimate of Monetary Value of Impact is produced in pounds and pence as a result of the investment.
We accept that the resulting, seemingly precise monetary value for impact is based to some extent on subjective inputs. Thus, the results need to be treated with due caution. Nevertheless, we believe this is a step in the right direction in terms of quantifying impact.
While no method is perfect, we believe our approach creates a valuable starting point in terms of introducing some precision to impact measurement. Clearly, impact investing represents a transformation in the mainstream perspective and approach to investment and mirrors a much deeper shift in people’s attitudes. Clearer measurement, by spurring investors to demand better insight into the investments made on their behalf, will help ensure the capital they commit has the maximum positive impact, for their benefit and for society as a whole.
Professor of Corporate Finance, Sophie Manigart, and post-doctoral researcher, Thomas Standaert, found that governments that invested but had no input were more successful in stimulating growth in companies and providing more resources to the private risk capital market.
Whereas, the researchers found that governments that invest directly in a company and have complete control of all of the decisions tend to yield the poorest results. Businesses that raised funding this way did not grow faster than companies that raised no funding at all.
The research findings came from a previous study on both literature on government investments, but also from a dataset of 345 Venture Capital funds established between 1996-2017. The researchers analysed how a number of European companies developed after receiving venture capital through four different models, ranging from full government control, to government investment, but independent decision-making. The researchers compared the performances of each firm, up to five years after the initial VC investment.
The four key investment models that the researchers analysed were:
- Direct and solitary – where a government invests directly in a target company and all decisions are made by the government
- Direct but in partnership – the government invests directly in target companies, but in partnership with private investment funds
- A passive government role – the government co-invests in target companies with private players who take all decisions. The government plays a passive role and is hands-off when it comes to most investment decisions; the government merely follows the private sector.
- A government invests in a fund-of-fund and does not mingle in investment decisions – this goes a step further than the third model by having governments invest in private funds that are managed entirely by equally private fund managers.
Professor Manigart says: “Government intervention in the risk capital market is needed in Europe and worldwide, but governments should respect the role of private players and not become dominant decision makers. Governments who simply provide this funding, but let the firm work independently and autonomously are much more likely to see growth, which can only be a benefit for investors, the firm, and customers alike.”
"Governments who simply provide this funding, but let the firm work independently and autonomously are much more likely to see growth, which can only be a benefit for investors, the firm, and customers alike.”
The researchers state that governments need to apply the fourth method more often in order for the target companies to be more innovative and successful. A good example of this model being implemented successfully is the Canadian government, who pioneered this model with the launch of the Venture Capital Action Plan, which has resulted in over $900 million in private investor capital being added to the ecosystem.
Government aid is genuinely effective for businesses, even companies like Apple and Tesla would not have survived without government funding. If there’s no financial help, then it could be argued that there would be no high-tech developments and innovations in society. Therefore, it is important that governments look to invest in the most effective way possible for growth in these companies, so that high-tech, social projects and high-employment companies have the greatest chance of growth and survival.
Below Zoe Wyatt, Partner at international tax specialists Andersen Tax, discusses the inevitability of blockchain, whilst exploring banks' attitudes towards the emergence of new financial technologies, and highlighting how the two can, in fact, work hand in hand.
The first industrial revolution in 1780 began with mechanisation. It was followed by electrification in 1870, automation in 1970 and globalisation in the 1980s. Today, we have digitalisation of the industrial process and tomorrow there will be ‘personalisation’ (industrial revolution 5.0): the cooperation of humans and machines through artificial intelligence (AI) whereby human intelligence works hand-in-hand with cognitive computing to personalise industrial processes.
This might involve the creation of bespoke artificial organs operated by computers talking to one another, automation of the manufacturing process, or self-executing contracts (smart contracts), and so on.
John Straw, a disruptive technology expert involved in developing the 5.0 model, recently claimed that blockchain could render the financial services industry irrelevant, thereby killing off the City of London and constricting the tax revenues that fund the NHS. Straw makes some headline grabbing comments, but do they have any substance?
Blockchain is the technology that underlies cryptocurrencies, such as Bitcoin, and whilst it has existed for approximately ten years, it remains relatively new.
In simple terms, blockchain is a digital archive of information pertaining to an asset, individual and/or organisation. But this is no ordinary digital ledger. Its technology features:
- the ability to validate data entered on the blockchain as correct and complete at the time of creation;
- data that cannot be changed; new blocks of data are added sequentially and chained to the last block. The story the data tells can be added to, but its past cannot be modified;
- multiple parties must consent by a majority or pre-defined basis on the validity of additions to the blockchain;
- multiple copies of the data, in encrypted form, are stored on the computer systems of numerous globally disseminated individuals/organisations participating in a particular blockchain network;
- respecting the privacy of that data;
- although there is potential for a malicious attack on a specific computer to successfully change data held on its copy of the blockchain, other participants in the blockchain network would be alerted and the true blockchain restored. In this sense, the blockchain is immutable
- an accessible audit trail.
These characteristics diminish the role of intermediaries who are traditionally used to validate data and ensure that it is kept safe. Therefore, Blockchain has myriad potential applications: investment in blockchain start-ups, which are developing solutions for the financial services sector, is staggering.
Blockchain has myriad potential applications: investment in blockchain start-ups, which are developing solutions for the financial services sector, is staggering.
Technical issues exist in overcoming scalability, transaction speed, and energy consumption. However, these will be resolved in the near future as companies develop ways in which the blockchain can be stored ‘off-chain’. This will ensure that it does not need to be downloaded entirely by a node to verify a transaction using AI, amongst other tech, to guarantee that the immutability of blockchain is not undermined. It also creates scalability and reduces energy to such a degree that even the idle computer in a car or mobile phone can be used to verify transactions.
Blockchain technology can be deployed by the financial services sector to:
- Assist with almost real time settlement and reconciliation of transactions as the intermediaries used to verify and authenticate parties to a transaction and the source of funds are removed
- Program self-executing commercial agreements
- Trade stocks and shares in real time
- Reduce costs for financial transactions through efficiency gains
- Remove time limits and payment failures
- Track financial transactions, preventing fraud and money laundering
- Diminish exposure to currency movement
- Minimise risk of inflation or currency depreciation where it is separate from the state and/or bank.
Although blockchain technology has the power to change the entire traditional banking system, it does not represent disaster for the City of London. Although traceability of transactions and, therefore, tax evasion cannot yet be mitigated entirely, blockchain can indeed help to resolve some critical tax evasion and avoidance issues.
HM Treasury has already developed a proof of concept for VAT using blockchain technology. This should eliminate large swathes of VAT fraud. Given the advent of digital identity, tighter anti-money laundering (AML) procedures administered on blockchain and a widely adopted digital currency, tax evaders will have nowhere to hide.
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Blockchain and smart contracts have the capacity to completely transform the audit and tax industries, including multinational corporations’ in-house CFO/finance functions. When coupled with AI technologies, this will enable the digital preparation of accounts and tax return, and the performance of audits. In turn, this facilitates absolute tax transparency, making it easier for tax authorities to raise and conclude enquiries more efficiently into, for example, transfer pricing on intra-group transactions.
Most importantly, the tax and regulatory systems need to evolve somewhat faster than we have so far seen on other new business models and supply chains.
To realise these benefits, seamless interoperability of different technologies is required, together with cooperation between multiple parties, as opposed to a single banking system. This will allow for comprehensive management of the risks that Straw prophesises.
This begs the question – is there a formula that traders rely upon to effectively manage their investment portfolios?
According to Giles Coghlan, Chief Currency Analyst at HYCM, in short, the answer is no. Below he explains why the size and complexity of financial markets means it is virtually impossible to stay on top of every major and minor trade occurring across the world’s key markets.
Investors can consult with online tools that provide live updates and succinct summaries of asset price movements; however, having access to this knowledge will only go so far. The big challenge is understanding how to use this information to inform trades and investment strategies.
With the US-China trade war, the US Presidential election, the spread of the coronavirus, and the UK’s withdrawal from the EU just a few of the major events likely to shape 2020, now is an important time to understand the techniques regularly used by traders and investors when confronted by certain political and economic conditions.
The stock market is all about cause and effect
Staying on top of market movements can best be achieved by first understanding the basic principle of causality. By this, I mean that one event, trend or market movement will inevitably contribute to another, leading to a constant hive of activity.
For example, decades’ worth of quantitative evidence indicates that during volatile trading periods (often brought on by an unforeseen political or economic event), investors rally to hard assets like gold and oil. This model was played out in the opening weeks of 2020. With military tensions between the US and Iran rising, market demand for gold surged considerably. As a result, its price per ounce reached $1,600 USD on 7th January 2020 – its highest price in nearly seven years.
In the above scenario, investors rallied to gold due to its ability to retain or increase its value in times of market turbulence. This is why it dubbed a ‘safe haven asset’. What’s more, a similar observation can be made when confronted with the opposite scenario.
History regularly demonstrates that during periods of market stability, investors tend to look to stocks and shares. While much more sensitive to sudden movements and shifts, these soft assets also allow investors to leverage growth in different sectors by actively investing in different companies. Investing in stocks and shares can also bring with it the added benefit of dividend and stock repayments.
History regularly demonstrates that during periods of market stability, investors tend to look to stocks and shares. While much more sensitive to sudden movements and shifts, these soft assets also allow investors to leverage growth in different sectors by actively investing in different companies.
Understand what type of investor you are
For early-stage investors, there is a tendency to think that acting fast when reacting to a sudden market movement can deliver significantly higher returns. While this is true to an extent, it also fails to consider the huge level of risk involved with such a tactic. Professional traders and seasoned investors understand this, which is why they are prepared to take on any losses that could be incurred as a result.
Alternatively, for those using the financial markets as a way of building up solid, long-term returns, engaging in short-term trades is a very high-risk strategy that could incur significant loses. Not accounting for these loses might then result in an investor having to restructure his or her investment portfolio and ultimately change their financial strategy.
There is no right or wrong answer here. High risk, high return investors approach the markets in a completely different manner than low risk, low return investors. Regardless, it is important to identify what type of strategy you’re adhering to and stick with it.
For example, renowned investor Warren Buffet stayed committed to his value-orientated strategy during the 1990s by deciding not to invest in the dot-com boom. In the short-term, he did lose out on immediate gains from tech companies that were increasing in value and size. Yet in the long-term, he also avoided the dot-com crash, where many of the online companies that initially emerged began to crumble.
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The same can be said when faced with a sudden market shock. The key rule to remember here is not to panic but rather trust the financial strategy you have in place. Acting with your heart instead of your mind is never a good idea in the world of investing.
Use the market to your advantage
There is ultimately no perfect formula or strategy that is universally applicable to all investors. However, by learning about past events and understanding how different asset prices reacted, there are plenty of underlying lessons that can be taken onboard.
Above all else, creating and adhering to an investment strategy that aligns closely to your financial goals cannot be overlooked. And if you are ever in doubt, be sure to speak with a financial professional.
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