Portfolio Adviser • October 2016 • On The Money

Simon James is a founding partner at Gore Browne and chairs its investment advisory committee. Having started his career at Grieveson Grant in 1980, during the 1990s he worked at Foreign & Colonial where he was managing director with responsibility for the global retail business. He then spent two years in Munich at Foreign & Colonial’s former owner, HypoVereinsbank, doing strategic planning for the investment businesses of the bank.

It is reasonable to expect that the fintech industry will tread on the turf of discretionary investment managers and disrupt the business models of incumbents.

By definition ‘disruption’ in any industry is an unexpected event, and it may be futile trying to predict how it might erupt in our industry.

Typically, it springs from a new player with no discernible track record. They disrupt because incumbents have left them room to enter and cannot respond effectively for either structural or cultural reasons.

Private client investment management is ripe for disruption. The business models are constructed in the wrong way: they build from the centre out, rather than from the client in.

This is the space where entry is possible, and the structure and culture of the big firms resists acceptance of this.

Many of the big firms industrialise processes as they strive to centralise power and increase shareholder returns. In this way they undermine the trust of their investment managers, break their links to clients and so destroy value.

But perhaps this is corruption of the model, rather than disruption. Much centralisation has occurred in recent years as our industry has made improvements to the treatment of clients, but it has gone too far.

Homogenisation of investment portfolios increases risks, and standardising service is not fair to clients.

We need to ensure we use IT cleverly so that we do not price smaller clients out of the tailored end of the market.

Disruption will not be caused by the existing robo-adviser models, but we should learn from what they do well to make the lives of our managers and clients easier.

We should recognise that clients are aware of the progress in other industries to personalise services, and we should expect our clients to ask for bespoke approaches from their investment houses.

We should open-source idea generation and decisionmaking, taking control away from the centre. We should listen to the ideas of those who look after the clients, and to the clients themselves.

We need to invest in our investment managers and the tools they use so they can enjoy their work and foster relationships with clients.

Where else should we look? Artificial intelligence should enable us to run scenario analyses for portfolios that far exceed the scope of models driven by model portfolio theory, upon which so many base their investment choices. Big data should improve our analyses of those choices.

Blockchain has the potential to undermine the infrastructure of the industry, freeing up smaller firms from a dependence on big institutions and enhancing personalisation. Security is an ever-bigger issue in the cyber age and we need to consider whether our current practices are anywhere near adequate.

The key for us all is to remain open-minded, flexible in response and open to change.