Wealth & Finance International - Issue 1 2018 5 This year alone we’ve seen massive changes in the Fintech industry. Things are moving more rapidly towards being able to manage most of your important financial affairs online – whether that’s setting-up a pension, managing your money or making an investment. It’s a highly unpredictable space and the pace of change will be dependent on several factors, yet we can already see several interesting challenges, trends and developments for Fintech, and robo-advice more specifically, in 2018. News that Natwest has launched a robo-advice service is just one of the many signs that the major banks are making a leap into this space, and this will play a big part in the fintech landscape over the next year as ro- bo-advice becomes even more main- stream. However, high street banks have struggled to keep customers at the heart of what they do and slapping a robo-advice sticker on their service offers isn’t a quick fix to this. The customer must always come way before the bottom-line if the robo-ad- vice offer is to succeed in the coming year. This means keeping offers affordable, accessible and transparent, with minimum investments that aren’t way out of the realms of what most people can afford to save. We’ve seen the FCA doing increasing- ly more to encourage digitalisation and innovation in the market. This is a clear recognition of the impact challengers are already having. If the FCA is looking at how it authorises individuals and companies working in the sector, achieving this level of authorisation should include clear emphasis on how companies can benefit consumers. In such a crowded financial landscape, it’s a more essential than ever that the FCA are facilitating the growth of con- sumer champions and how this plays out in 2018 will be a crucial shaper of the industry. There are some hurdles that fintech businesses should look out for in 2018. A main one being that robo-advice is still very much in its infancy. This is down to the constraints of capital and resource of the providers; whose capital investment decisions are heavily scrutinised; but also down to customers’ trust in managing their finances digitally. To develop a sense of trust amongst consumers, the industry should be thinking of establishing some form of supervision of the systems that are being used. It’s important to remember some robos offer a hybrid model where you can speak to a person for Andrew Brettell, Founder of The Money MOTco (www. themoneymotco.co.uk) talks us through why this year both companies and individuals should consider overhauling their finances. Is it time for a RECAP? Looking back, 2017 was another positive year for investors, particularly those with a high degree of exposure to global equities in their portfolios, which is why it may be an opportune time for them to review their Risk, Equity Exposure, Costs, Asset Allocation and Performance. Many people have assets in different places, predominantly in either portfolios managed personally or in discretionary portfolios managed by professional fund managers, as well as in pension schemes. Accordingly, any analysis needs to be holistic, in order for the con- clusions to be meaningful and worthwhile. As we move into a new year, now is the perfect time for investors to re-assess their investment goals and look closely at the key considerations which will deter- mine their investment outcome in 2018, rather than leave it completely to chance. Risk The higher the level of risk taken, the greater the potential gains or losses which may occur as a result. 2017 has been a classic year from a risk/reward perspective with the highest returns being achieved by Emerging Market equities, which tend to exhibit riskier and more volatile traits than those in developed markets, and the lowest emanating from cash, which is generally perceived as being risk-free. Although it is possible to calculate risk mathematically, the measures used are generated from historical data and can therefore only act as a theoretical guide to future returns. However, it is important for investors to keep their appetite for risk under review, in order to ensure that it is consistent with their investment objec- tives, which inevitably change over time. Equity Exposure One of the most important decisions in investment management is how much to invest in equities versus bonds and cash, and this is inextricably linked to the individual’s risk tolerance. A low-risk portfolio is one which holds a small per- centage in equities and a large weighting in cash, whilst a high-risk approach might be one which involves “gearing”, that is, borrowing money to invest in equities, with all the associated upside potential and downside risks. Future returns, both positive and negative, will be determined largely by the degree of exposure to equities, so striking the right balance is of critical importance and should take into account the prevailing macroeconomic background and stock market valuations, as well as the investor’s goals. Costs Investors should be cognizant of fees and charges, which can significantly erode the value of portfolios in the long term. For example, if the value of a £1,000,000 portfolio with no fees attached grows at a compound rate of 5% per annum over a period of 20 years, it would be worth almost £500,000 more than a portfolio achieving the same investment return, whilst incurring a relatively modest annual fee, by industry standards, of 1%, even before taking into account VAT. Asset Allocation Deciding on how to much money to allocate to different stock markets or other asset classes, such as commodities or property, as well as bonds and cash, together with the associated currency implications, will have a material effect on returns. For example, the US has been one of the most rewarding markets in which to invest over the past five years and the portfolio weighting in this market would have been a key driver of perfor- mance, further enhanced by the strength of the dollar. Performance Whilst 2017 was a very rewarding year for equity investors, and absolute returns were relatively easy to achieve, the ques- tion which they should now be asking is whether the returns generated were consistent with their risk parameters and also how their portfolios have performed relative to market indices, as well as industry benchmarks. The above summary has only touched upon a few areas on which, in my opinion, investors should be focusing at this time. It is easy to become complacent when markets have been performing well and assume that the good times will keep on rolling, but it was arguably a similar story at the end of 1999 (when, inci- dentally, the FTSE 100 Index also hit an all-time closing high of 6,930, compared to the record closing high of 7688 on 29th December, 2017) and 2007, so perhaps it really is time for a RECAP. News reassurance and clarification. The human element is important to be able to understand and manage the risks of robotics. If anything, it won’t be the so- phistication of algorithms or robots that determines the success of robo-advis- ers. It will be people. The robo-advis- ers that stand the test of time will be those that can combine the intelligence and emotional nous of expert advisers with bots to provide personalised advice and services that actually meet an investor’s individual goals. Fintech has benefited from a very benign environment, with low cost of credit and record levels of venture capital money taking advantage of low interest rates. This will inevitably run its course, so fintech businesses need to think about how they’d succeed in a more challenging environment if this were to change suddenly in the next year. Another interesting development that will present a challenge for the sector is PSD2, or the Revised Payment Service Directive. Next year, banks will need to allow their traditional customer base to use third party providers to manage their finances. PSD2 started as an EU initiative to break down banks’ monopoly on their user’s data. It allows merchants, like Amazon, for example, to retrieve customers’ account data from their bank with their permission. That means they can make a payment directly for the customer, without having to redirect them to another service like PayPal or Visa. It will be interesting to see how these big players can overcome this set back. As people become more comfortable carrying out these sorts of transac- tions digitally, all financial services companies should be looking at how they can embrace new technologies. A recent survey from L&G showed that nearly half of mortgage brokers see robo-advice and technology as the big- gest threat to their business in the next three years – instead of seeing Fintech as a threat, all would benefit from see- ing the opportunities it presents. In 2018, the growing use of technology should be embraced as it can only be a good thing for the industry, and more importantly for the end consumer. It can help to benefit customer relation- ships, as their experience improves and the costs are lowered. Building trust, adapting to more challenging times ahead as well as an abundance of patience are the essen- tial ingredients for long term success.