‘Fund 3.0’ - From Product to Solution to Experience

What investment funds could look like by 2025 

For most savers, investing is a daunting task: in which market to invest, when to buy, what to purchase? The jargon used in the industry, the need to choose between asset classes, and the multitude of seemingly equivalent investment funds make it even more complicated and cumbersome. But does it have to be that way?

Yesterday, you had to type a password to unlock your mobile phone. Today, you just have to stare at it. Simplicity. The news you read online and the next song that will play have automatically been picked, based on your preferences. Convenience. So when it comes to managing your money, why is the process still so painful? After considering typical challenges when investing, a solution will be proposed.

The problems

Objectives: Identifying what to save for. Some objectives are obvious, like retirement, and some are harder to face, like the consequences of an illness. 

Timing: The timing of most cash inflows and outflows is uncertain.

Risk-appetite: Your willingness to take on risk is highly subjective, and your ability to do so is easily miscalculated. Yet both shape your investment experience.

Offering: With thousands of investment vehicles on offer, the average investor is overwhelmed. Too many options lead to paralysis and suboptimal choices.

The solution

In an attempt to deal with some of those challenges, Asset Managers are moving away from the concept of ‘product’, towards the concept of ‘solution’, let us call it the ‘fund 2.0’ approach. The logic goes along the lines: “It is not about the products I am able to manufacture, it is about the solutions I design to fulfil investors’ needs”. 

The move from ‘products’ to “solutions’ sounds encouraging but it is still insufficient as it does not address the main pain point: as a client, I do not want ‘solutions’ to my problem. I want my problem gone. In other words: “Do not tell me about different asset classes, fund features or snob me with jargon. Get it done, and according to my personal needs”.

An ‘e-fund’

This is where we move from ‘solution’ to ‘experience’, or a ‘fund 3.0’ approach: the problematic situation and the cumbersome decisions to solve it are taken away from the client, for him to enjoy a pleasant experience simply. The core idea is to consolidate all the investment vehicles an investor has, from bank deposits, mutual funds, ETFs, insurance-linked products, to retirement funds, into one single fund. Let us call it an ‘e-fund’ for now, ‘e’ for experience. The e-fund is all about simplicity, objectivity, and a pleasant experience.

The structure and risk profile of this fund will evolve, taking into account the particularities of each individual investor. This approach goes beyond the concept of life-cycle funds, which typically de-risk towards the later stage of an investor’s life. The e-fund will have your finances ready for the car you have been thinking of buying, the university you want to send your kids to, and the retirement house you have dreamed of. It will even have you covered on the day your health hits a bump.

How it is done

The fund 3.0 approach heavily relies on the implementation of existing technologies such as artificial intelligence (AI), including machine learning and cloud computing, which can be leveraged to extract sense out of big data pools on the fly. But to start with, it will require a large amount of information.

To illustrate the mechanism of our e-fund, we will breakdown the process in three successive phases, which will repeat themselves throughout the life of an investor: accessing, analysing and acting on information.

a) Access

Each step of our digital journey, from surfing the web, paying for groceries by card to a brisk walk, leaves behind a large amount of information. This ocean of data is increasingly fed by internet-connected devices around us – internet-of-things (IoT): think of your weighing scale, the thermostat in your living room, or your bedside lamp. The first step for an e-fund provider is to harvest this data, and to do so, APIs can create bridges between different platforms. With those connections in place, your e-fund provider will directly access your credit card transactions, the step-counter on your watch, or your browser history. 

b) Analyse

We highlighted the challenges of knowing what to save for and defining your risk appetite. Those could be solved by identifying who you are, which, instead of asking you, can be more objectively defined by your actions. Building on the large pool of data created in the first step, algorithms can be implemented to create connections between seemingly unrelated data sets, uncover patterns and establish correlations. You might see yourself as an aggressive risk-taker, yet the list of books you have purchased on Amazon, the car you are driving and the insurance policies you have subscribed do indicate a high aversion to risk. 

A similar approach can be taken to identify your most likely investment objectives as well as the probable timing of money in- and outflows. Your age and education provide an indication of how likely you are to build a household – and hence the need to start saving for your kids’ education. The websites you start surfing, and the profile of your connections on Facebook will feed additional information to identify the type of schools you will be sending your kids to – and how much you will have to save for it.

Your weighing scale, smartwatch, and the embedded IoT camera in your bathroom mirror will help identify potential health issues, while the words you use in emails will be used to determine your psychological health. What about your source of income? Your connections on LinkedIn, online educational activities and favourite shows correlate with your professional success and hence the level of income you should have available.

c) Act

Now that we know who you are and what you do, we will be able to predict what you will do next and what is likely to happen in your future. Let us take the wheel and plan your financial journey. An algorithm, let’s call it an AI-powered system, will be like a smart, unbiased, and rational financial planner paving the way in front of you.

A large part of the investment vehicles used to achieve your goals will be of a passive nature, as I have highlighted in a previous post. Think ETFs, although those will be smart and tailored to your personal needs – forget off-the-shelf solutions. In contrast to today, when still mostly actively managed funds, as well as robo-advisors, the objective of your e-fund is not to beat a benchmark. Its added value is to simplify your life, proactively adjust to your ever-changing conditions, and ultimately deliver a pleasant experience.

Your e-fund will be fully integrated into your day-to-day life. You will use it as your wallet when buying a coffee. The money you received for selling your car will automatically be invested to secure your upcoming tax payment. The system will not be perfect, but it will learn from its mistakes and in a more systematic and rational way than any human could.

Conclusion

The fund 3.0 approach will have dramatic consequences on the structure of the Asset Management industry, the skillset required by investment professionals, and the outcome for savers. Those issues will be explored in a sequel to this article.

In the meantime, let us appreciate the paradigm shift. Like some of my colleagues in the financial industry, I have tried to help ‘educate’ investors about managing their money. Being investment-savvy is technically complicated, time-intensive, and emotions can systematically blur your judgment. What I suggest in this paper is to move beyond the requirement for savers to learn about or care for investing. It is not everybody’s job to manage money, nor does it excite the crowd. Parts of investing are, anyway, better left to non-emotional algorithms. So let the machines do what they are good at: collect data, crunch numbers, and develop scenarios. And let us, humans, enjoy a pleasant financial experience. Not long ago, to drive a car, you had to learn how to change gears. Tomorrow, with self-driving cars, will you even need a driving license?

This article was first published on LinkedIn, October 18, 2018.