We always want to complete things, and it makes everything interesting when it comes to the psychology of money. It is the reason why all the offers you get are for 9.99 or 99.99. It makes you feel it’s cheaper than 10 or 100. It is also why we stand at the gas station filling the car with fuel and are never happy if the pump reads 37.98 or 38.02. We want exactly 38 in the tank, not – or + .02 either side.
Part of the reason I mention this is that we are moving to a world of electronic ledgers. In so doing, we must remember the psychology of money, as money is a real thing. Money dominates our lives and allows us to reward our desires or to have to postpone them. How do we control our balance in a digital world?
I wonder this myself. I have multiple credit card accounts, a wide range of investment vehicles, a small number of loans and a mortgage. I have no idea of my net balance.
Sure we have aggregators who can do this, but why would I trust an aggregator with all my financial information? Equally, who can I trust with my complete portfolio of debits and credits in a snapshot, who can advise me at a micro transaction level, every second of every day.
This is where it is claimed there is opportunity. It is an opportunity for someone to bring together the micro and the macro level of money and engage the consumer, the mass affluent and the high net worth with a real-time ledger and balance system.
Some will say they’ve already cracked it, but most lean towards either a macro view or a micro view. We either have a robo-advisor or a PFM. Some will say they’ve cracked it, but do they have the client engagement? As regularly mentioned in this blog, a new name without a licence is not a trusted name. I recently attended a conference where an influential CEO said that FinTech firms are about as trustworthy as a guy on a street corner selling from the trunk of his car. I wouldn’t quite go that far but there is a grain of truth in the statement.
The U.S. has recently seen the rise of companies like Wealthfront, Betterment, FutureAdvisor and Personal Capital. They are the robo-advisors. They offer wealth management and micro PFM in a combination that is meant to be the killer app. Their features are finely tuned – you can find many comparisons but this one from Nerd Wallet gives you the low down – but if their focus is on your assets, then maybe they aren’t all they seem.
Equally, they are not regulated in the same way as traditional institutions. For example, in May 2015, the U.S. Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA) released a joint alert warning investors to make sure they understand the risks, limitations and fees charged by automated investment tools before using them.
There’s lots of advice in the alert from making sure that you understand the robo-advisor’s outputs are only as good as the inputs, and that it may not be the right financial tool for you. Some of the robo-advisors are registered with the SEC and responded to this alert to clarify their position. Here's Betterment's statement:
The joint alert is one of the first publications from either the SEC or FINRA that recognizes the category of automated investing, which we created when we launched in May 2010.
The benefits of automated investing for consumers include low costs, ease of use, and broad access.
It still wouldn't cut it for some however, because we’ve had aggregation tools around for a long time – Yodlee were big back ten years ago – but none of the aggregators have thrived in Europe. This is because European regulators don’t like some of them. Just look at the ruling on the EU-USA data sharing act this week – US-Europe data-sharing pact declared illegal – and you can see how we are no longer blindly trusting our American counterparts to protect our data. That's why the SEC alert gave one piece of advice that screamed out to me: “unless you are accessing an account that you established, do not provide bank or brokerage account numbers, passwords, PINs, credit card information, Social Security numbers, or other personally identifiable information”. An untrusted company without a licence having access to PINs and passwords is like giving the guy with the car the key to your house. That ain’t good.
So will the robo-advisors thrive outside the USA? Will they even survive in the USA? This is a good question. The most likely outcome is that the robo-advisor will end up as some sort of Trusted Third Party, TTP (see PSD2). A TTP has light license, whilst a bank has a heavy one. Either way, you gotta have a licence.