“LEGO” – Enabled Bricks for Applications

Technology today, with its 4 G LTE speeds, content-rich media enablers, transportation providers,¹ emerging mobile platforms (the computer power in our pockets is simply mind-blowing!) and cloud storage ability (witness AWS, Dropbox), is facilitating the construction of secure and scalable applications (apps). Allowing us to separately, and individually, take relevant front-end and back-end frameworks – or “Lego” pieces (as I like to think of it) – enables the construction of whatever the mind can imagine. A “dream come true” for any architect or designer; it would be like having, at your fingertips, Michelangelo as artist and all the tools required (design, drawing, engineers, workers) to build the Sistine Chapel, for all to be awed at! This would be “art” in any sense of the word; elegant and as precise as any mathematical model out there. We additionally have open source technology to thank (e.g. with operating systems like Linux, database management systems like SQL, apps like OpenOffice.org and not forgetting programming languages like Ruby, Python, C++ and application programming interfaces (APIs)) for allowing software components to interact or “speak to each other”.

Bringing the “Lego” pieces together will enable any number of WealthTech solutions, for any market player, in any part of the world today. But the greatest beneficiaries will be the “unbanked”. Global Findex has estimated that there are close to 2 billion unbanked people worldwide. In Asia, the rate of the unbanked as a percentage of the total population is almost 20% in China, 40% in India and 60% in Indonesia. Contrast this to the US unbanked rate of almost 5% – “the perfect storm” is enabling the coming together of mobile-enabled, scalable business models and WealthTech solutions for the unbanked population waiting to be served, especially on their mobile phones. Alibaba’s Ant Financial, Tencent’s WeChat, DBS Bank using IBM’s Watson to roll out “Wealth Advisor”, as did ANZ previously, and OCBC’s OneWealth app are all excellent examples of how the “Lego” pieces are being brought together in the WealthTech space and how they scale fast.

So How are the “Lego” Bricks Being Put Together?

With the assistance of regulatory approvals/sandboxes (e.g. Singapore’s Monetary Authority of Singapore (MAS) and Malaysia’s Securities Commission (SC)), and a dose of healthy competition (or incumbents hungry for M&A), “white labelling” technologies can be applied to bring those “Lego” pieces together. Securities 8 is one company offering white labelling solutions for B2B models in Asia today. In this case, with the relevant licences contributed by partnerships between a start-up and an incumbent bank. In WealthTech, for a robo-advisory-linked app, the asset manager can now work with independent custodians and broker/dealers to see through initiation of any number of investment ideas (Motif perfected the art of going with “themes” that the man or woman in the street can understand without too much trouble), all the way to execution of a trade – all at the click of a button! The business models can go B2B, or B2C with the right technology “bricks”. The key is that we need “symbiotic” working relationships and greater understanding between regulators, market players, licenced institutions and technology-enablers.

Once the “Lego” Pieces are Found, and Relationships Linked… What are the Opportunities Moving Forward? Where Can WealthTech Go Next?

First let us consider the incumbents and the issues they face with legacy systems and processes. To make this work, any institution will have to improve on what’s in place – by integrating the digitization and technology available to enable new WealthTech strategies. The platforms of robo-advisor companies bring together client advisory, asset management operations and platforms, and then attempt to apply rule-based models (initially) and, in the best of circumstances, artificial intelligence (AI) or programming intelligence to facilitate predictive analytics, in a digitized WealthTech app. This sounds easy enough in theory, but is not actually easy to apply. As has been expressed many times before by many senior bankers, making legacy systems work is harder than starting from scratch. Some incumbents are finding it easier to simply buy start-ups (and maintain them as independent and separate units within the financial institution), rather than to have to literally “rejig” their existing systems, with umpteen levels of committee approvals (something quite normal for a large-sized bank in Asia).

So, applying a start-up mentality, and initiating or investing in a WealthTech business, is paramount to the “Lego” pieces being brought together. For some, legacy systems will have no problems working eventually, but progress will no doubt be faster without the legacy issues. For a start-up with a clean slate, or a WealthTech asset or investment manager, the possibilities of bringing the “Lego” pieces together, if understood well, can literally be endless.

For example, the robo-advisor template and business model of today, which applies rule-based models for investments in a basket or baskets of exchange traded funds (ETFs), mutual funds, specific “themes” – based on parameters like your risk appetite, age or investment goals and targets, will tomorrow see data scientists crafting AI-driven models, to potentially outperform even the WealthTech managers (a.k.a. robo-advisors) of today. Once again, with the accumulation of 24/7 financial markets, big data, programming languages (RStudio, Python, Java, C++), all open source, will be key enablers and part of our “Lego” bricks to bring together.

Imagine AI being able to comb through research reports, and file documents or rate reports to pre-empt a fixed-income or equity investment or rating upgrade/downgrade. Quantopian today applies AI in coming up with trading ideas. Crowdsourcing relevant technology with equity participation for the “winning strategy” becomes a working business model. After all, what would the lifespan for a good trading or investment strategy be if the process was automated and open source? So technology does, and will continue to, enable the streamlining of more interesting investing ideas, until the opportunities are traded away, for the next idea to bloom.

For a user/customer, finally “tailoring” an investment strategy to meet their retirement goals or riding on the latest investment theme/wave, a small taste of participation may seem wonderful. This would explain successes like Betterment or Motif Investing. However, the ability to use predictive analytics to perhaps find the next Google, Facebook, Apple or Amazon – within acceptable time frames – would be a dream come true for the next venture or investment fund. The “holy grail” of investing theory eventually coming to fruition. The ability to take Warren Buffett’s investment theories and concentrate investment risk would not seem so bad now, with the right app.

But those “running big money” have not let the opportunities pass them by either. They have been nimble, in spite of their size. Those few may have watched developments in the robo-advisor space but appeared to focus more on the B2B model to leverage different types of AI-enabled WealthTech solutions – Bridgewater Associates very smartly hired the chief engineer behind IBM’s Watson to lead a unit that would apply AI to look into more predictive trading strategies. Remember that ANZ and DBS Bank used IBM Watson as well. BlackRock and Goldman Sachs are also using AI-based platforms (like Kensho), while players like Deutsche Bank and UBS are using AI-based systems called Sqreem to play in the WealthTech space, unbeknown to the average person (still somewhat awed by the “new” robo-advisor platforms).

With all the “infinite” opportunities, we need a word of caution on the application of risk management and mitigation to accompany the WealthTech solutions being put together. Hence, a growing field in RegTech/RiskTech is also now being promoted and watched with interest, more so by the regulators. After all, there had to be a “Lego” tool to police the other “Lego” tool. A combination of FinTech solutions, to facilitate better monitoring and minimization of risks for the “Lego” bricks being brought together, piece by piece. As we have heard time and time again, “with great power, comes great responsibility”. And so, responsible we must be, to ensure success in our automated WealthTech world. Some of us enjoy bringing all the “Lego” pieces together, in a FinTech/WealthTech world with endless opportunities.