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The trends of the year 2015 show that people have been increasingly offered more and more customizable options in
By Ahmad Sabree
the ﬁeld of wealth management, and the service of having a good fund manager alone and decent returns on investment is no longer enough. Sharia screening and compliance guarantees are great value adding features but can they remain the key selling features of Islamic funds? FinTech is disrupting wealth management in general with the rise of “robo advisors” that can to everything fund managers do and more. It should be expected that if conventional fund management is being disrupted then Islamic funds are next in line. Islamic Wealth management has much to gain from Fintech, but being up to date and quickly responding to the trends is crucial to stay in the game. FinTech Financial Service Disruptions In a Forbes article dated nearly a year ago titled “FinTech Trends: Wealth Management and The Rise of Robo Advisors”, the author explains the rise of “robo advisors” in the wealth management industry. Basically robo advisors are advanced computer programs that can invest and manage funds the same way registered investment advisors do, and sometimes even better. In addition, the robo-advisors add value by providing the same services at lower costs, with simplicity and even have the bonus potential of making investing “fun” through interactive user friendly interfaces. With the rise of available tech based features in the wealth management industry, it can only be expected that customer expectations will shift to consider these things as the new norm. Major institutions have taken serious heed of the current and potential future disruptions of FinTech to the banking and wealth management industries. The response is no longer one of waiting to see what will happen, but rather of action toward a formidable competitor. In the banking industry some of the most diligent adaptors to the rise of FinTech is Citi bank who have dedicated a whole ofﬁce of 40 key handpicked staff to a new FinTech development ofﬁce that is under its retail banking division. A Fortune article detailing Citi's engagement and participation in FinTech explains the following, “The most wrenching period for the big banks is almost certainly yet to come. In March, Citigroup's own research department put out one of the direst assessments yet. The 112-page report, titled “Digital Disruption,” was produced for the bank's investment clients and reads like a Jerry Maguire manifesto. The gist: Radical change is coming.
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Citi says that ﬁntechs have nabbed $9 billion in business so far, a small percentage of what banks bring in each year. But in just four years, Citi analysts predict, ﬁntech revenues will leap more than 10 times, exceeding $100 billion. By 2023 ﬁntech will account for 17% of consumer-banking services in North America, or $203 billion.” For the wealth management industry the name of the key disrupting service is “robo-advisor”. In essence these advisors are algorithmbased wealth management web based services that require no human interaction. In August of 2015 the $4.7 trillion strong wealth management giant BlackRock acquired FutureAdvisor, a robo advisor platform with $600 million under management in 2015. The move was intended to attract the “mass afﬂuent” investors with less than USD 1 million in investable assets who want high quality ﬁnancial advice without the high prices that senior brokers charge and millennials who are considered as a crowd who would like ﬁnancial services but prefer them intermediated by digital mediums rather than dealing with brokers. The move should come as no surprise to those who have been following the news in the wealth management industry, Bloomberg published an article in May with the provocative title, “Robots Will Strike Asset Management Firms First”. It states, “According to a survey from the CFA Institute, Wall Street is getting a bit worried about ﬁntech replacing its jobs.
The majority of respondents, which included more than 3,000 chartered ﬁnancial analysts around the world, view asset management as the industry most at risk from disruption by ﬁnancial technology. Fifty-four percent of respondents said the sector would feel the biggest changes, followed by banking, securities, and insurance.” The writing on the wall seems to clearly indicate that wealth management is even more prone to disruption than banking. The same survey found banking only 16% at risk of disruption. FinTech Wealth Management Innovations OCBC bank is an example of a bank taking initiative in aligning itself with current trends. They have launched an app to help customers stay up to date on markets they have invested in, along with insights from OCBC experts who explain macroeconomic and global developments. The app allows customers to view the status of their investments, receive alerts on markets they have invested in and info on how changes may impact their investments. This is just an example of a FinTech step taken by one bank, there are others who have taken on even larger FinTech initiatives, all of which should send a strong wake up message to the Islamic banks of the world. In the industry of Islamic ﬁnance we have seen innovations such as the Arabesque fund, which is the world's ﬁrst “ESG quant fund,”. It was invented by professors, from universities such as Harvard and Oxford, and professionals from ﬁnance, mathematics, and sustainability ESG, working together to develop the next generation in asset management. The technology integrates environmental, social, and governance (ESG) data with quantitative investment strategies. The fund holds ﬁrm to Islamic ﬁnance ideals and refrains from any derivatives, securities lending, shorting, or leverage, while still outperforming 95 percent of our conventional peer group. The BIMB i-Global Dividend fund provided by Bank Islam Malaysia Berhad has a minimum investment amount of USD 10,000. This is far beyond the reach of the millennials that the mainstream FinTech robo advisors are tapping. One of the signature features of the robo advisors is that they require minuscule fees compared to traditional fund advisors. Some, like online investment advisor Betterment, have no minimum balance requirement and tailor their services to beginning investors, and some lower their fees as investments grow.
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Investment Crowdfunding as a wealth Management component In today's environment of disruption, no idea is too farfetched. Consider for a moment the idea of how investment crowdfunding could ﬁt into the world of Islamic wealth management. If unit trust or mutual fund managers are given instructions or permission from their investors that x% of their invested funds should go to investment. Crowdfunding platforms that use Islamic ﬁnance methods invest in ethical and social impact projects such as real estate, affordable homes construction and SME ﬁnancing. Platforms like EthisCrowd.com or KapitalBoost.com who audit their projects before hosting them online would be prime candidates for such investments to ﬂow into. In exchange, investors will have a chance to actually invest in the real economy, know exactly what the projects are, have a social impact with their investments and at the same time gain proﬁts in a Sharia compliant way. This theoretical concept can easily be integrated into a ﬁntech solution, the only barrier would be to ﬁnd the right tech providers to create it. The roboadvisor solution may be the avenue that can make this idea a reality. Islamic Finance and wealth management : The Human Touch is Still Needed in the World of “Robo Advisors” All is not for fund managers, as research has shown in a report conducted by Salesforce suggests that the majority of millennials actually do prefer having an advisor. Results showed that 81% percent wanted their advisor to either manage their money completely independently, or collaboratively with them compared to 86% for Gen-X'ers and 89% for Baby Boomers.
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Even young ﬁrst time investors feel more comfortable consulting a real person for ﬁnancial advice. However that does not mean that visits to brick and mortar branches is the ideal way to attract and serve the millennial investors. Islamic wealth managers have the chance to ride the trend and go the route of industry leaders like Vanguard and Schwab who have made major adjustments in strategy in response to the growth of “robo advisors” like Betterment and Wealthfront, to ﬁt what younger investors are looking for. Vanguard and Schwab have recently launched robo advisor platforms of their own that include an option to interact with a human, if desired. They've slashed fees, and now offer a wider array of investment vehicles than the incumbent roboadvisors. Islamic investors have a unique worldview and investment values that cannot be inserted into algorithms. Islamic ethics of investment need to be understood from scholars and therefore their role remains critical. Technology can't create an investing worldview from a person's particular needs and goals, nor can it hold their hand and urge them to stay calm. These human qualities are still very valuable to investors young and old, therefore the optimal prospect for the future of Islamic wealth management seems to be the adoption of a good combination of the best of FinTech and consulting.