LONDON (Reuters) - British fund firms are falling behind in the so-called ‘fintech’ revolution, fearing that a boom in investment via phone apps could spawn the next financial mis-selling scandal.
With smartphone apps already transforming the way people bank, tech-savvy savers are impatient for similar software to aid easier and cheaper ‘on-the-move’ investment.
But while fund managers are eager to innovate to win new business, they are concerned that offering full-service money management at the touch of a screen could lead to customers choosing unsuitable products.
That could land firms in trouble with regulators, who require strict financial checks on potential clients.
“We have all embraced mobile banking and many of us wouldn’t be without it but increasing ease of consumption in investment funds in a similar way isn’t necessarily in everyone’s best interests,” said Sri Chandrasekharan, global head of HSBC Global Asset Management.
“I have concerns about how technology of this kind could compromise fiduciary safeguards if a client buys into a fund via a mobile phone app without a full understanding of the attendant risk-reward,” he added.
The Financial Conduct Authority (FCA) requires fund managers to gather numerous facts on clients before any investment recommendation, such as inheritance tax or retirement planning, existing investments and how they intend to manage portfolios.
In doing so, the managers are expected to build a picture of a client’s financial health, how much they understand about the fund they are buying and the potential for losses.
Crucially, this duty of care extends beyond the point of sale but also over the life of the investment or relationship with the client - a responsibility fund firms could struggle to discharge if their products are bought and sold through an app.
“Our rules and guidance are what we call media-neutral, which means that irrespective of the way a service is delivered, consumers receive the same level of protection,” an FCA spokesman said. “As a result, if a fintech firm is offering a regulated service, they need to abide by the same rules.”
Britain is an established hub for fund management, and embracing technology is viewed as critical to helping fund managers connect with a younger generation of savers known as millennials, many of whom have fallen into an ‘advice gap’ after a shake-up in how financial advisers are paid.
UK-based investors must pay upfront fees for advice and fund firms are no longer allowed to pay commission to the advisers who recommend and sell their funds.
But earlier this month, just two years after the reforms were introduced, Britain’s finance ministry opened consultation on consumer access to financial advice due to fears the perceived expense of using advisers had deterred prudent retirement planning.
Some fund firms are already responding to the demand for investment without recourse to an adviser.
Online investment ‘supermarket’ Hargreaves Lansdown has attracted a loyal following of savers who want to invest with little or no interaction with advisers - but only if they are willing to make independent investment decisions.
If clients opt to use this kind of ‘execution-only service’, which is far less lucrative for wealth managers, the firms who offer it cannot be held accountable for bad investment calls.
But the promise of faster, cheaper distribution and bigger market share via the web and smartphones has been overshadowed across the industry by worries that certain clients could buy unsuitable products and lose more money than they can afford.
“If a client which shouldn’t be in a position to invest in a particular product, but is able to because of a new technology and loses money, then the system has failed structurally,” said David Norton, head of investments at wealth advisor AES International.
“In that sense, it could enable the next mis-selling scandal easily,” he added.
The world’s largest fund firm BlackRock is advancing further still, pumping millions of dollars into another fintech innovation known as ‘robo-advice’ - a concept designed to provide automated, algorithm-based wealth management guidance that could be easily delivered by phone or online.
While the possible benefits are well trailed, few expect robots to replace human advisers any time soon. “In the medium term, you’re going to have to support it with a person,” said Richard Keers, chief financial officer at Schroders. “That person might be in front of you, might be on the telephone, might be on a Skype link.”
Some managers argue that many of those clamoring to use online, mobile or ‘robo-advice’ to bypass direct contact with a financial adviser are ironically the investors who most need face-to-face, bespoke guidance.
“I can’t see how it can be quite as holistic and look at everyone’s circumstances, in their entirety,” Richard Marwood, senior investment manager at AXA Investment Managers.
“I just don’t see how you’re going to be able to do that on some kind of flow chart.”
Editing by Pravin Char