The keys to succeeding in the world of investments are:
1) Investing only in what you understand - Warren Buffet tip #1
2) Performing due diligence and analysis
3) Obtaining information and making decisions in a timely manner
While the above three factors are easily understood (may even be considered common sense), successfully executing on them is challenging.
This white paper / posting articulates strategies and tactics that enable investors to accumulate more wealth over time, while adhering to the three factors identified above. It also recommends Process and Technology changes that Investment Services Providers can implement to help their clients succeed and beat out the competition.
Investor Needs and Pain Points
As per Investopedia - "Investing requires saving money to invest, then developing a diversified portfolio. Portfolios need to be adjusted periodically based on life changes, but the focus should remain on the long term".
More and more people have to invest for retirement or prosperity. The gig economy, full-time jobs offering no pension, and supplementing company, union and government pensions are some of the key drivers. However, historically investing in equity and creating a diversified portfolio was only possible if you were wealthy. Others relied on company pensions, government, savings and family. Over the years, innovations in financial instruments (e.g. Mutual Funds, Index Funds, ETFs, Fractional Shares) and services (e.g. Discount Brokerage, Direct Investment, Robo Advisors) have made it accessible to the middle class and the young.
The chart below clearly articulates the benefits associated with investing as opposed to saving. However, it also identifies some of the challenges associated with investing - 1) lack of know how, 2) time commitment, and 3) lack of data / tools. The new financial instruments and services in general have addressed the financial gap issue, but not the knowledge and time commitment issues.
Investing has also become increasingly challenging (from a know-how and time commitment perspective) as types of financial instruments and underlying assets (more and more companies are publicly listed) continue to grow. COVID-19 has further complicated this issue by increasing uncertainty and volatility. For example, NASDAQ has reached all time record highs post COVID-19. However, volatility has become and remains substantially higher.
Financially savvy / professional investors, fund managers, etc. have also been impacted by this increased market volatility.
Investment Services Provider Evolution and Challenges
Investment service providers are also facing numerous challenges. New entrants are threatening incumbents - e.g. Robinhood raised $600 million at $8.6 billion valuation. The increased volatility and uncertainty are harder for the service providers to manage.
Answering client questions relating to ever expanding list of underlying assets and types of financial instruments, and addressing concerns relating to uncertainty and volatility is impacting customer support quality and cost.
Subsegment specific challenges are listed below
Incumbents - Banks / FIs, Investing / Wealth Management Services: The younger generation is opting to use lower fee service providers offering Direct Investment / Discount Brokerage Services. They are also losing some existing customers. These trends are impacting revenue growth and profitability.
Challengers / New Entrants - Direct Investing, Discount Brokerage, Robo Advisors: These players in general offer lower service fees and innovative products; and are able to attract a number of new customers. However, total assets managed by these companies remain low, as they do not address customers' lack of knowledge and time related concerns. Many stop investing with them after a bad experience (usually a result of bad investment or insufficient risk mitigation).
Reference Solution Framework
This section identifies the key capabilities and activities required to successfully manage investments. The findings are presented in a solution framework so as to enable repeatable processes that can lead to many successful investors.
Company / Industry Insight
When investing, especially for the long-term it is critical to understand the company that you are investing in; and the trends shaping the industries in which the corporation is operating. This is a foundational element, and interestingly there are many individual retail investors who may understand specific companies / industries better than professional.
For example, tech employees may have better insight into tech companies and industry trends. They may prefer to manage a portion of their investments by selectively investing in individual tech companies.
Foundational Business and Financial Knowledge
Ultimately the value of a company is determined by its financial performance (technical factors may drive cost over the short-term). For those who lack the financial knowledge, working with advisors (Human, Robo or Hybrid) is the best path to success.
Investors may acquire financial expertise while working with advisors and/or through investor education. Semantic Brain solutions enable knowledge acquisition via individual asset level automated analysis, data visualization and risk identification.
Technical Analysis & Portfolio Management Know How
When a user acquires (or already has) foundational business and financial knowledge, educating them on technical analysis and portfolio management is much easier. Semantic Brain enables education is this space based on 1) investor input (i.e. questionnaire responses), 2) investment behaviour analysis and 3) individual asset / portfolio level automated analysis / data visualization / risk identification.
Quantitative and Qualitative Monitoring
Long-term investors need not trade frequently, however, all direct investors need to monitor their investments (also watchlist and market). Reviewing and analyzing relevant data is not feasible for many potential investors due to time constraints.
Semantic Brain continuously analyzes financials / technical trends / volatility, identifies relevant events and information, summarizes them and alerts the investors to solve the time problem.
Financial / Technical / Portfolio Analysis
We recommend automatically performing financial / technical / portfolio analysis on all investment decisions. Information should be visually represented where possible, and translated to common verbiage where applicable (i.e. if user is not financially savvy then text and graphs should be modified accordingly).
Rational, not Emotional Decisions
When users have the necessary information and have performed the required analysis they are more likely to make rational (as opposed to emotional) decisions.
Reference Architecture
Investment services providers need to evolve their digital capabilities and incorporate AI to enable client success, manage costs and scale. Having an open and modular architecture will make this possible. Existing components could also be leveraged, and best of breed products can be incorporated any time in the future.
Key recommended capabilities for investment services providers include:
Periodic reports (e.g. every 2 weeks) covering investment behaviour and outcome
Ongoing monitoring and alerts at portfolio, watchlist and market levels
Integrated and enhanced Conversational AI (i.e. Chatbot)
- Add financial / technical / portfolio analysis
- Integrate / add Search and Chatbot
- Single UI
Service providers need to also consider providing investors a note taking tool optimized for wealth management
- This will help ensure due diligence and analysis
Reference Usage Models
Phase 1 - Direct Use
Intelligent systems used by financially savvy professionals (including retail investors and their advisors)
Phase 2 - Assisted Service
Intelligent system makes recommendations and presents information to the advisor such that their interactions with clients is more efficient and effective. Seamless integration substantially reduces Advisor work effort.
Phase 3 - 3-Way Interactions
Seamless 3-way interactions where advisors work in parallel to intelligent systems.
Semantic Brain In Action
Financial / technical / portfolio analysis enabled via natural language interface. NLP enables user education, ease of use and flexibility.
Understand a company quickly by obtaining key events and information
Make financial notes and refine knowledge
Summary & Recommendations
Investors
Investors need to adhere to the 3 key principles of success, which are
1) Investing only in what you understand
2) Performing due diligence and analysis
3) Obtaining information and making decisions in a timely manner
For those wanting to directly invest in company specific stocks this means that they need to choose a limited number of sectors and a few companies that they understand and can monitor on an ongoing basis. Avoiding complex financial instruments such as options and emerging markets (esp. emerging markets you have no experience in) could simplify portfolio. Adding ETFs or other funds is recommended to reduce both risk and volatility.
We also recommend the use of Note Taking and Analysis tools for due-diligence and analysis.
Investment Services Providers
Investment service providers need to augment their advisory and support capabilities to cover
Financial / technical / portfolio analysis
Ongoing monitoring and timely alerts
Periodic reporting
Investor education
Financial notetaking
Industry trends dictate that best (with financial acumen and offering products, digital platforms, AI, value for services) in this industry will thrive, while others will cease to exist.
Comments