Innovations in the fintech space are one of the core components of modern-day business practices and will continue to surge in importance. When the pandemic hit the global stage in 2020, every industry had to evolve, even those as traditional as banking and finance. No one has felt this disruption more so than financial advisors, who’ve had to not only reinvent their business strategy but help their clients with pandemic-induced challenges along the way.
The pandemic showed the importance of financial advisors adapting to the needs of their customers and the changing conditions of the world at large. Staying up-to-date on trends like mobile wallets, contactless payments, trusts and fintech AI can make or break an advisor or firm’s ability to attract and retain clients.
In this guest piece for The Fintech Times, Dan Wright, fintech leader and executive director of strategy for Accutech Systems Corporation, explores the innovations we can expect to see in 2022, and suggests how advisors can get ahead.
The “greatest wave of market democratisation in modern times” faced a cold reality in January 2022 that no amount of fintech mobile applications, cryptocurrency or nonfungible tokens can guard against: A bear market doesn’t care.
24 January saw the Dow Jones Industrial Average plunge more than 1,000 points before a historic rally pushed it slightly into positive territory to finish the day. That was the good news. The bad news is that rally brought it up to being down six per cent for the year, and supply chain bottlenecks, labour struggles, soaring inflation, the lingering pandemic and trouble in Ukraine promise further market volatility at best.
Retail investors had been on a tear despite the pandemic. A host of market innovations, particularly in the past year, has made it easier to invest in numerous ways. But as further turbulence looms, the value of an advisor and trust management professional will become front and centre. These innovations can offer great promise but also great peril. Advisors are experienced allies who know their clients well, their objectives and their financial plan. By leaning into that familiarity and experience, advisors can help investors make the most of these innovations rather than become a victim of them.
Easy apps — easy to make money, easy to lose it
The availability of financial offerings online only is escalating. The Swiss arm of banking company BBVA in the past year launched a digital investment account that lets users build portfolios based on themes, such as climate change or technology, while also providing a cryptocurrency wallet. PayPal is expanding its features from just being a payment app into offering investment capabilities and other services.
These moves follow the surge in popularity of apps like Robinhood, which give investors a quick and affordable way to make trades. The downside is the ease of investing can draw inexperienced investors into the riskiest trading. The “gamification” of trading also has drawn scrutiny from the Securities and Exchange Commission. Volatile markets magnify these risks.
Advisors can remind clients that apps make the task of investing quick and easy but the discipline of investing takes time and research.
The crypto challenge
Bitcoin and other cryptocurrencies in the past year emerged as the darling of many investors. NFL superstar Tom Brady and other celebrities have been touting new crypto exchanges.
In fact, over the past five years, the total number of global crypto funds has grown by 800 per cent, according to the 2021 Global Fund Management report published by Coinbase.
But even Tom Brady can lose, as January showed.
Bitcoin, the world’s largest cryptocurrency, on 25 January was down almost 50 per cent from its record high in November. The entire crypto market had lost more than $1trillion in value.
Advisors can elaborate on just how risky cryptocurrency investing remains and why the free fall is drawing the attention of regulators.
The seduction of fractional shares
Few recent innovations have broadened investing opportunities as much as fractional shares. Online brokers enabling the purchase of portions of a stock have allowed people to get in on the Amazons and Alphabets of the world that trade for thousands of dollars per share.
The benefit, of course, is being able to own strong companies with terrific long-term outlooks, hence why their shares are so pricey.
The potential pitfall is that because an investor can buy a stock doesn’t always mean they should. Pricey stocks also can be risky stocks, say for companies that gain sudden popularity on the internet (Remember GameStop?)
Advisors can help clients understand whether any stock is right for them and their objectives.
ESG funds: Not as simple as it may seem
The popularity of ESG investing has grown in recent years, not only in the expected millennials but in boomers too. And the good conscience behind the motivation could be commended.
But environmental, social or governance investing can get complicated. For one, as George Mason University finance professor Derek Horstmeyer pointed out in the Wall Street Journal, ESG funds tend to overweight other stocks and sectors as they avoid certain holdings. This can expose investors to taking on more small-cap risk, interest-rate and inflation risk and single-stock risk than investors in a standard fund.
ESG investing also can prove difficult in knowing where to draw the line. Say an investor doesn’t want to support a petroleum company. What about a large retailer who needs to burn a lot of gas to ship a lot of goods? How far down the impact stream does the investor want to go?
Even what constitutes an ESG stock of fund can have varying degrees of interpretation. Advisors can help their clients better understand these complexities.
The meteoric rise of index funds
Even the prospect of investing in straightforward index funds has become more complicated. Many advisors over the years have recommended index funds as a low-cost, lower risk to investing. But the choices have exploded.
In 2000, 380 US index mutual funds and exchange-traded funds existed, according to Morningstar data cited by AARP this year. In 2020 the number grew to 2,387.
Some index funds are narrow, say by sector, not broad. Some charge premium fees. Some have different tax considerations.
There certainly are more options nowadays with index funds. But the options can yield far different outcomes.
The value of an advisor
To be clear, all of these innovations have merits. They can make it easier for people to invest in ways they want to invest and in companies they want to invest in. And more people taking an active role in their financial future is a good thing.
But they also present risks, emphatically so in a turbulent market. Financial advisors and trust management professionals know this and can help clients better navigate their path going forward. Advisors can point out how these financial tools and resources can come up short or give an incomplete picture of the risk.
A host of innovations gained momentum in the past year and helped investors get into the market during boom times. Advisors can help them better weather any rough seas ahead.
