By @SimonCocking. Great interview with Paolo Sironi author of FinTech Innovation: From Robo-Advisors to Goal Based Investing and Gamification. Published by Wiley, available here

A survival guide for the FinTech era of banking

FinTech Innovation examines the rise of financial technology and its growing impact on the global banking industry. Wealth managers are standing at the epicenter of a tectonic shift, as the balance of power between offering and demand undergoes a dramatic upheaval. Regulators are pushing toward a ‘constrained offering’ norm while private clients and independent advisors demand a more proactive role; practitioners need examine this banking evolution in detail to understand the mechanisms at work. This book presents analysis of the current shift and offers clear insight into what happens when established economic interests collide with social transformation. 

This is a timely book with the current rush to automate so many of the banking processes. We spoke with the author to explain a little more around some of the key concepts and questions raised by the book.

paolo-sironi

Well done on the book, what has the response been to it so far?

Fabulous, it went out of stock and Wiley had to make a second re-print. From early November it will be distributed at WHSmith at London airports (Heathrow and City) so it is getting to the mainstream.

How do we manage the risk of algo-flashes, like, mostly recently when Sterling lost 1% over night, possibly due to sentiment analysis picking up negative news about brexit?

We have an issue here. While Wealth Managers need to stretch the investment horizon because they sell more and more beta which is unstable (passive investing, because alpha is not there or too expensive for independent advice). Asset Managers need to fight back and shorten the investment horizon (less value analysis and more mainstream Algo trading with sentiment analytics or entropic trading). From an investor perspective, if you learn to invest for long term you stay course (flash crashes re-absorb quickly = you don’t care) but if you want to tame the markets (myopic buy and sell) you get hit and burnt. As Ashvin Chhabra said in his last book The Aspirational Investor on Goal Based Investing: If the markets don’t really care about you, as surely they do not, then why should you spend all your time and effort trying to beat them?

If everyone were to use robo-advisors, would this result in larger rises and falls as a series of algorithms all follow the same trends?

Robo-Advisors today are not Algo-trading mechanisms at all. On the contrary, they invite to invest for long term using passive investing and minimize intra-period trading. They try to gain back long term investing bypassing behavioural finance biases which lead to frequent trading (out investment behavior might eat more potential returns than market downturns). That is why the book links Robo-Advice with Goal Based Investing as machine trading is not necessarily good for individuals.

Where do you feel an increased automation of trading might take us? Will it increase market fluctuations or achieve something else?

Markets became bumpier than ever in last twenty years, due to fast trading and large dislocations of liquidity. High Frequency Trading need highly liquid markets, which is not always the case. But machine learning trading could do the game. This is not just HF yet sophisticated rule based, nor just “sentiment analytics” to trade on Twitter news, but cognitive capability to chose among investment strategies according to knowledge so that (like in a game) you can reward and punish the machine to learn from mistakes and avoid to stick to investment style while world is turning. Highly conceptual, some are attempting.

What are the best strategies to head off more potential future algo-flashes?

Machine learning with embedded gamification principles.

What aspects of this industry are you excited about? What might it look like in the next 5 to 10 years?

As a pro I action, taxable investors don’t need to invest (as private individual) but they need to retire with comfort. This requires planning for saving (which is 1 – paying) and for investing (which is smart saving). I think individuals will learn to plan ahead using digital solutions which will help to understand uncertainty which is non measurable risk. Banks and WM will have to sell knowledge, not return … because they hold the first but don’t own the second!


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