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Investing Innovations Are Disrupting the Market

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Investing has been defined as the art of making informed decisions with capital. Thanks to the rise of fintech – a catch-all term to describe new technologies and innovations in finance – making informed judgments with capital is easier than ever before. Everyone, from non-accredited investors right up to the most well-known institutional funds, is investing in different ways as a result.

The disruption isn’t specific to one area of finance; game-changing innovations are seen everywhere from asset management to capital raising. A recent Accenture report categorised the new technologies into three groups: Artificial Intelligence (AI), the Internet of Things (IoT) and Blockchain, each of which, in turn, is leading to a vast swath of new applications in the investment industry.

Artificial Intelligence: The end of ‘natural stupidity’

The defeat of world chess champion Garry Kasparov to the IBM supercomputer ‘Deep Blue’ on May 11th, 1997 was a landmark moment. Not only was it the first time that a computer had beaten a chess grandmaster under official regulations, but it was also a sign to the world that the most advanced artificial intelligence of the day had caught up on the best that human intelligence had to offer.

Deep Blue was 21 years ago. The most successful investor in the world in 1997 was Warren Buffett – just like today. So, unlike human investors, artificial intelligence has moved up several levels. In investing, its rise is best exemplified by robo advisors, AI-enabled financial advisors which use sophisticated algorithms and up-to-the-minute data to provide clients with investment advice.

This makes investment options and advice scalable like never before, all while providing investors with a similar or better return on investment. The service is also significantly cheaper, with management fees coming in at under 50 basis points, compared to traditional wealth managers, who can charge anything up to 5%. MyPrivateBanking estimates that robo advisors could manage up to 10% of all investable wealth by 2025.

IoT: Allowing investors to obtain data on everything

The most significant impact of the Internet of Things (IoT) is likely to be felt in the realm of insurance. In a 2016 PWC survey, 65% of CEOs in the insurance industry believed that the IoT was going to be strategically important to their organisation in the coming five years. By providing genuinely personalised insurance plans – made possible by IoT technology – insurers can, in turn, make more informed decisions on premiums.

The total size of assets held by the US insurance industry make this hugely significant. At the end of 2016, the industry’s total assets were $6.1 trillion, including $727 billion of common stock. When insurers have better data on their risks, this money – the accumulation of millions of US insurance policies – is also less risky, meaning markets will be less volatile.

Other applications for IoT can already be seen in commodities trading. Ongoing data provided at each stage of the value chain – from sophisticated crop or weather forecasting on the supply side to changing inventory levels on the demand side – allow traders to forecast where commodity prices are headed far more accurately than
would have been possible in the past.

Blockchain: Far more significant than Bitcoin

Wild fluctuations in cryptocurrencies – including some of the slowdown (thanks most likely to impending regulation defining certain cryptocurrency transactions as securities) in coin and token offerings- has followed much of the initial hype and run-up in the sector. Amidst all of the hype surrounding tokens, Bitcoin, Blockchain and its importance to the future of investing and the finance industry in
general, has been under-reported. McKinsey says that blockchains have:

[T]he potential to dramatically reshape the capital markets industry, with significant impact on business models, reductions in risk and savings of cost and capital.

In layman’s terms, Blockchain means that the mountain of paperwork, which adds millions of dollars to financial industry costs, can be replaced by blockchain – a digital system which is cheaper, more accessible and above all, safer than the current processes used in the financial industry.

Little wonder then that so many of the world’s largest financial institutions are investing en masse in blockchain technology. The
bigger the institution, the bigger the potential savings. 
Banco Santander, the biggest bank in Europe, estimates that it could save $20 billion annually by adopting blockchain. When repeated across all banks, it’s clear that tremendous amounts of capital could be freed up for value creation elsewhere.

Summary: a new era of investing

In 2009, former Chairman of the Federal Reserve Paul Volcker quipped: 

[T]he ATM has been the only useful innovation in banking the past 20 years. 

Ten years later banking and the investment industry at large are being disrupted by innovation. When Volcker made his famous remark, checks were still widely in use – now they’re being phased out. That’s just the beginning.

The fundamentals of investing will never change: the aim is to seek out investments which maximise net present value. However, the tools at investors’ disposal to achieve this continue to grow. The cost to invest continues to fall. Timely, accurate and relevant information is becoming more accessible to everyone. All of which points to an exciting new era of investing.

 

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