What's going on with all this FinTech bonanza? Wall Street is said to be fearing Silicon Valley on their core business while GAFA are bidding for the most respected bankers. Bernard Arnaud was the Founding Father of Fintech with ZeBank. No doubt, finance is upside down. For example, uberization of asset management is on its final steps with ETF taking over hedge funds. Let's have a look why u guys will be working on fintech in the near future, be a client of Marie Quantier and talk around about it.
First of all, FinTech is not a menace. Banks and funds are here to stay. Need a proof? Remind the example of the italian bank: Monte dei Paschi di Siena. They've been around funding and structuring since 1472. With the right state of mind, the others will adjust too. Still, as we know the old model is broken, what are the right ways to invest our money in 2015?
For long, investing in hedge funds was a no brainer for the ultra high-net-worth individuals. Since then, part of the hedge funds was a disappointment and part of the richest 1%, the most financial savvy ones, has injected cash directly in equity of prop' houses to avoid regulatory costs. They invested their money in limited companies and a couple of traders with big computers run the capital quietly without the burden of setting up a fund. It's closed end and not publicly marketed.
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If you have no access to the smartest hedge fund managers, are the "robo advisors" the right place for you? We don't think so.
In 1949, Benjamin Graham, one of the fathers of modern finance, said:
It has been an old and sound principle that those who cannot afford to take risks should be content with a relatively low return on their invested funds. From this there has developed the general notion that the rate of return which the investor should aim for is more or less proportionate to the degree of risk he is ready to run.
Benjamin Graham adds to his previous comment:
Our view is different. The rate of return sought should be dependent, rather, on the amount of intelligent effort the investor is willing and able to bring to bear on his task. The minimum return goes to our passive investor, who wants both safety and freedom from concern. The maximum return would be realized by the alert and enterprising investor who exercises maximum intelligence and skill.
The trade-off that any individual investor has to cope with is here perfectly described. One has to arbitrage between “time, skills & effort” and “performance”.
However, have you ever been asked by a financial advisors about your "risk profile" to define your portfolio solely on it? I have. They called it "profiled mandate". I call it being taken for a fool. Seriously, since when the performance of the securities we invest in depends on our own appetite for financial risk? Robo advisors, want to sell us that big, fat lie. We deserve better.
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A third way has also appeared. You might know it under the name of “smart beta allocation”. The idea behind is to be partly passive thanks to ETFs and still get a better return by rotating from asset allocation to one another depending on the market conditions . This trend has been so powerful that for the first time in history the 25-years old ETF industry collected in 2015 more cash than the 66-years old hedge fund’s one.
The new trade-off, the one any FinTech should offer its clients, is “technology” instead of “time, skills & effort” and keep “performance”.
The advantages of such an approach are simply thrilling. For the very first time, one can have it all. ETFs, as a diversified basket of securities, protect us against most of the bankruptcy and the concentration risk. Besides, thanks to the FinTech's technological usual suspects - machine learning, big data & high performance computing - individual investors can now monitor the market conditions and manage, in no time and from an smart phones, the downside risk, challenge the best asset managers, make more money and show off a bit.
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