The wealth management industry is undergoing profound changes. Technology, coupled with advances in financial thinking, can now offer everything, in the words of the subtitle of Paolo Sironi’s FinTech Innovation (Wiley, 2016) , “from robo-advisors to goal based investing and gamification.” Sironi, who works at IBM as a thought leader for wealth management and investment analytics and who earlier wrote Modern Portfolio Management: From Markowitz to Probabilistic Scenario Optimisation, explains these innovations to both wealth managers and investors.
Goal based investing is, in the author’s view, “the long-term game changer in the process of transformation of the wealth management industry.” An alternative to modern portfolio theory, it is personalized and probabilistic. It takes into account personal values, goals, time horizons, risk tolerances, and goal priority. Importantly, it “must allow for a recursive revision of every decision-making step.” Its risk measure is “the probability of achieving or missing a goal.”
Goal based investing can, at least in part, be reduced to an optimization problem. For instance, probabilistic scenario optimization is “a step-by-step process of portfolio filtering and ordering according to a probability measurement criterion … the end result is the asset allocation that shows the highest probability of achieving an investment goal, while complying with given allocation constraints and risk limits.”
Sironi suggests incorporating gamification into the investing process. As he writes, “Financial Gamification can be a powerful mechanism to learn how to tame emotions in order to size up higher return opportunities, face the potential realization of risks and losses, decide which risk management action seems better suited to mitigate them, and most of all visualize how uncertainty can affect our beliefs beyond personal knowledge, professional expectations, and measurable risk. … Gamification speaks the language of Goal Based Investing and sits squarely at the crossroads between digital technology, behavioural finance, and motivation theory. Its capability to help individuals modify their investment behaviour is an attractive feature in facilitating the revolution in investment perspective advocated by Goal Based Investing, and learning to focus on the best actions towards an individual’s goals rather than greed and fear stemming from attempts to tame the markets.” Goal based investing gamification is still visionary, but Sironi believes it could be “the ultimate case of innovation at the crossroad between FINance and TECHnology.”
I have intentionally focused on the “fin” side of “fintech” in this post. In so doing, I have been unfair to Sironi, who devotes about half of his book to technology. Of the four strategic imperatives he sets forth for asset management firms, the first three are: go digital, become income-oriented, and go robo-technology. For individual investors, however, the changes that will undoubtedly make the most difference will stem from harnessing technology in the service of financial innovation. Sironi gives a compelling glimpse into this promising future.