The Role Of Technology In The Economic Recovery Process

Financial planning advice provided today is no better than betting on lottery!

There was something almost regal about banks and financial institutions. They seemed invincible and it was a privilege to do business with them in the past. Doing business with them (the banks) meant I had to have an impeccable track record of delivering on time and on budget. I was reprimanded when I called my banking client to remind him about the overdue invoices, “I am busy,” the banker said, “I am running a multi-million dollar business and please don’t tell me that I owe you $50,000.”

Several years later, I am almost amused by the turn of events - the banker lost his job and at the rate the banks are collapsing, there may not be any banks left in the future. At first, the whole idea seemed absurd but after some deliberation I realized that it may be just as probable to suppose that banks may just go back to their core banking functions and may divest their non core businesses such as investment banking, stock broking and fund management. Or it may be a chance for technology companies to participate in this new paradigm shift.

I went through some intensive learning in fund management and administration some five years ago when I developed Protégésoft’s Financial Portfolio Builder. Amongst the things that I learned, I was particularly intrigued that financial institutions had multiple revenue streams. I was told that this was part of wealth creation and that they (the bankers) were providing a great service to the “destitutes of the world.” (A statement that reflects the sheer arrogance of these bankers) The fees included front end fees or sales charge, yearly management fees, trailer fees, brokerage fees and performance fees to name a few. I must admit that they’d figured out so many ways to milk the cow, the investor. This was in 2004.

The new FPB system was rolled out within a year and the bank made 22% annualized returns on their investments from 2005 to 2007. However, it is important to note, during the same period, the mutual fund managers for India and China funds were posting returns of 120% to 150% returns per annum. Therefore the 22% returns generated by the automated system was eclipsed by the supernormal returns that these fund managers were posting. By contrast, the Indian and Chinese economies while posting phenomenal growth rates each year weren’t growing as fast as their stock markets. The stock markets were obviously overheating. It was the great gold rush for Indian and Chinese stocks.

As history would have it, the stellar growth of these markets was driven partly by greed and its insatiable appetite for new investments. A huge amount of wealth changed hands during this period. What was remarkable was that, investors using FPB weren’t as badly affected as the rest in the recent stock market crash. They managed to hedge against any potential loss through systematic risk rebalancing prompted by the system

There was also another system that was developed by Protégésoft which tracked errant trades by financial advisors. The data set revealed that there have been excessive churns by financial advisors when we ran the monitoring routines for the same period of 2005 to 2007. Advisors were motivated to churn so as to earn additional commissions from each trade. The effect of such churning activities by investment advisors made the stock market extremely volatile and led to its collapse. If the sample data was anything to go by, it exposes the economy to more shocks in the future and there are many more fundamental problems that need to be addressed before the financial markets stabilize again.

Since November 2005, I have been making a series of lectures about how technology was transforming the Financial Services Industry. The main message in these lectures was that fund and portfolio management had a high propensity to change consistence through info-mediation – meaning there was a high probability that the manner in which financial advice was given would change from the traditional channels of distribution to a digitized media over time. We have the technology today that can handle end-to-end functions of fund and portfolio management. The factors affecting such a change were attributed to two things:
i. The increased awareness and knowledge amongst investors over what was available in alternate media; and
ii. Due to competitive pressures from other financial institutions and downward pressure on costs and fees charged.
What I didn’t envisage was the fact that a severe economic downturn like the current one would hasten this process.

The benefits of info-mediation are manifold:
i. Info-mediation reduces the cost of distribution of financial services and such a reduction in cost would mean that more capital is available for investment into good corporations.
ii. More transparency in the administration of funds and portfolios as investors are empowered to self-manage through the use of technology.
iii. The elimination of errant traders and advisors.
iv. Improved compliance and governance of the investment process.

What is the real cost of financial advice? In 2004, I would have rattled off all the different costs associated with financial advice. But today, I’d say that the real cost is the price we’ve paid to a failed financial system. There are thousands of people who have lost all their wealth in the last few months. Investors have absolutely lost confidence in the financial systems. There has been an utter lack of governance and adherence to the regulatory requirements and compliance. The stock markets were fueled by greed and what was even more shocking was that the financial intermediaries were the real culprits. The real cost is the wealth that has been wiped out as a result of the current economic depression. We cannot attribute the cause of this economic malaise to a single entity or event or country, it was due to how we have collectively made all the wrong decisions.

It is uncertain as to when we would see any economic recovery. However, when we do recover, I hope we wouldn’t make the same mistakes again – at least not for the next 75 years. What we really need is not to make a billion from the stock market, but to have consistent economic growth and to minimize volatility in the financial markets.


Protegesoft is currently working with HP on the Itanium platform to deploy full portfolio management services directly to the investment community.