FINANCIAL SERVICES FACE DISRUPTION

In the past five years we have seen digital investment platforms, robots giving financial advice, and the rise of cryptocurrency. How will financial services deal with what is coming around the corner? By Daniel Smith.

The world of wealth is changing fast. In the past five years, digital share trading services opened the stock market to all, the Financial Markets Authority approved robots to give advice, and cryptocurrency went from sci-fi nonsense to a serious asset class.

But the biggest change of all is perhaps yet to come.

The transfer of wealth from the baby boomers, the richest generation in world history, to younger generations will come with massive changes to the way money is invested, saved and used.

Traditional financial service providers are scrambling to make sure they can keep a piece of the wealth management pie when the dust settles.

Darcy Ungaro is a financial adviser who is gearing himself to advising the next generation.

‘‘We are at the intersection right now of a huge transfer of wealth from one generation to another. Now in financial services we can either just wait for these people to come to us, or you can learn how the new generation are already thinking and behaving and come alongside them,’’ Ungaro says.

Ungaro says the baby boomers are starting to pass on significant parts of their wealth to their children and grandchildren, both through inheritance and gifts.

He says this is leading to a new generation of financial thinkers, who have wildly different perceptions of wealth that traditional advisers need to get used to.

One of the biggest developments is the adoption of cryptocurrencies and blockchain technology, Ungaro says.

‘‘Within five years any traditional financial advice model or fund management business will have either adopted blockchain technology, or they will be replaced by it.’’

According to Ungaro, the greatest opportunity presented by blockchain technology is the way it upends traditional meanings of value.

Because of blockchain, people can decide a digital token of a popular meme is worth $105,000, and a particular type of computer code, called a bitcoin, is worth $86,000.

‘‘The future of money is anything of value and the meaning of value is starting to change. Is it really about what a government says a piece of paper is worth?

Or is it a digital photo that would be worth

$33 million? It could be anything as long as everyone agrees,’’ Ungaro says.

This kind of thinking is not solely for

crypto-enthusiasts. The Reserve Bank has signalled it is also looking into the possibilities of cryptocurrencies.

In a discussion document in September, the Reserve Bank said that as large parts of the economy already use digital currencies, it would not be too difficult to imagine a cryptocurrency linked to the New Zealand dollar through the Reserve Bank.

This digital coin would be called a central bank digital currency, and would operate much like general cryptocurrency, except its worth would be tied to the New Zealand dollar, rather than to a decentralised idea of value such as bitcoin.

The Reserve Bank acknowledged in the report it still needed to work through operational risks such as cybersecurity, data

outages and

privacy risks that were inherent in digital format.

But while the changing face of money could be years away, what is already here is a swath of young investors accessing the market through easy to use online investment services.

A report by the Financial Services Council at the start of this year revealed 1.5 million New Zealanders were using micro-investing services such as Sharesies, Stake or Hatch.

Richard Klipin, chief executive of the Financial Services Council, says that number is likely to have increased since then.

‘‘The way that New Zealanders think about creating wealth has fundamentally changed. For the Gen X, and baby boomer generations, if you had money then you had to find yourself an adviser or a stockbroker to be able to invest. But for the under-40s and certainly the under-30s that is not the case at all,’’ Klipin says. Klipin points to the success of Sharesies, which recently reached $1 billion

of funds under management, to illustrate just

how much the

landscape of financial services is changing.

‘‘All markets benefit from disruption if the consumer benefits. In this case you can clearly see the benefit of investing small amounts of money in a cheap way that democratises access.

‘‘But does this keep the larger players on their toes? You bet it does,’’ Klipin says.

Kristen Lunman, managing director of Hatch, says the traditional financial services knew the revolution of access to the sharemarket was coming, but they did not realise how big the change was going to be.

‘‘For far too long the financially elite have had access to stuff that most people don’t, such as the high buy-in cost of world-class investments. The new investing platforms are just giving access to wealth-building opportunities to all that the financial elite have had for a long time,’’ Lunman says.

But access is only phase one. In the future, Lunman plans to target investors with large chunks of money who were traditionally the safe bets as customers of the old guard in financial services.

‘‘If you had $1m, would you wake up in the morning and put it all on Hatch? While absolutely people do that, not all people would. For those big sums of money many would still need to talk to a human,’’ Lunman says.

But in the next stage for online investment services, Lunman is looking at how to use artificial intelligence (AI) technology to help people make big financial decisions.

She predicts that this could become a reality within the

next five to 10 years.

While for now, humans may have to remain in the loop, Lunman can see a hybrid of financial advice, heavily influenced by AI, paid for by users.

Grant Williamson, director at Christchurch investment advice

service Hamilton Hindin Greene, says while the new online investment apps have changed the game, they have not changed basic principles of financial advice.

‘‘There is more to financial advice than just picking stocks. Our advisers are often meeting face-to-face with clients, spending time working out their specific goals and risk tolerance. It is more than a computer can do at this stage,’’ Williamson says.

He agrees new investor apps will increase competition, but traditional human advice will not disappear, he says.

‘‘There is room for development in traditional asset management. There are many ways investors are able to access the market and manage portfolios. Some investors in the younger generation may not want the face-to face-relationship and would rather deal strictly online.

‘‘But when you start talking about large amounts of money that people can come into later in life, investors do want to talk to another person and have trust in the human being that is advising them.’’

Brad Olsen, principal economist for Infometrics, says that investing platforms have probably forever changed the way the average investor approaches financial services.

The democratisation of information and trading will mean there will be less weight put on expert views, and more weight put on the individual views of the investor, Olsen says.

‘‘It does raise those risks about how much people have understood their investments. We do know that financial regulators are concerned about this.

‘‘But the more information available in the public domain the more we will see people making large decisions explicitly without referring to expert advice,’’ he says.

Olsen’s concern is that the younger generation operating on their own have already been shown to make some big blunders when markets correct.

He points to Financial Markets Authority research that shows millennials were the largest demographic to panicswitch their KiwiSaver funds during the market downturn at the start of the Covid-19 pandemic last year.

‘‘With the cost of housing so high, for many in this generation their KiwiSaver or their investment fund is their only hope of buying a house. Which, I think, explains why we saw so many young people switching into conservative funds when markets went down last year.

‘‘It highlights that a lot of New Zealanders have a more defensive mindset than they may think,’’ Olsen says.

But he says it will be difficult to tell what particular services the younger generation of investors will want until they have spent some more time in the market.

‘‘People certainly enjoy the excitement when the time is good. But when the times aren’t so good, that is when you need to have your wits about you, especially regarding risk.

‘‘For our younger investors, that is a key element that needs to be understood as quickly as possible,’’ Olsen says.