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.

Preface xiii Acknowledgments xix About the Author xxi Part One Personalize Personal Finance Chapter 1 The Theory of Innovation: From Robo-Advisors to Goal Based Investing and Gamification 3 1.1 Introduction 3 1.2 A vibrant FinTech ecosystem 5 1.3 Some definitions, ladies and gentlemen 8 1.4 Personalization is king 9 1.5 The theory of innovation 11 1.6 My Robo-Advisor is an iPod 13 1.7 What incumbents should consider when thinking about FinTech innovation 15 1.8 Conclusions 17 Part Two Automated Long-Term Investing Means Robo-Technology Chapter 2 Robo-Advisors: Neither Robots Nor Advisors 21 2.1 Introduction 21 2.2 What is a Robo-Advisor? 22 2.3 Automated digital businesses for underserved markets 25 2.4 Passive investment management with ETFs 26 2.5 Algorithms of automated portfolio rebalancing 29 2.6 Personalized decision-making, individual goals, and behaviour 30 2.7 Single minded businesses 31 2.8 Principles of tax-loss harvesting 33 2.9 Conclusions 36 Chapter 3 The Transformation of the Supply-Side 39 3.1 Introduction 39 3.2 The investment management supply-demand chain 40 3.3 How intermediaries make money 42 3.4 Issuers of direct claims (debt owners) 44 3.5 The institutionalization of the private banking relationship 45 3.6 The digital financial advisor 51 3.7 Asset management is being disintermediated 54 3.8 ETF providers and the Pyrrhic victory 57 3.9 Vertically integrated solutions challenge traditional platforms 59 3.10 Conclusions 60 Chapter 4 Social and Technology Mega Trends Shape a New Family of Taxable Investors 61 4.1 Introduction 61 4.2 Generational shift (X, Y, Z, and HENRYs) 62 4.3 About transparency, simplicity, and trust 65 4.4 The cognitive era 67 4.5 Conclusions 70 Chapter 5 The Industry’s Dilemma and the Future of Digital Advice 71 5.1 Introduction 71 5.2 Wealth management firms: Go digital or die 72 5.3 Asset management firms: Less passive, more active 75 5.4 Robo-Platforms: Less transactions, more portfolios 76 5.5 Digital-Advisors: Empowered customization 77 5.6 Robo-Advisors: Be human, be virtual, take care of retirement 79 5.7 Conclusions: Clients take centre stage, at last 81 Part Three Goal Based Investing is the Spirit of the Industry Chapter 6 The Principles of Goal Based Investing: Personalize the Investment Experience 85 6.1 Introduction 85 6.2 Foundations of Goal Based Investing 89 6.3 About personal needs, goals, and risks 91 6.4 Goal Based Investing process 96 6.5 What changes in portfolio modelling 97 6.6 Personal values 100 6.7 Goal elicitation 100 6.8 Goal priority 102 6.9 Time horizons 102 6.10 Risk tolerance 103 6.11 Reporting goal-centric performance 105 6.12 Conclusions 108 Chapter 7 The Investment Journey: From Model Asset Allocations to Goal Based Operational Portfolios 109 7.1 Introduction 109 7.2 Main traits of Modern Portfolio Theory 113 7.2.1 Asset diversification and efficient frontier 114 7.2.2 The Mean-Variance model portfolio 117 7.2.3 Final remarks about Mean-Variance 118 7.3 Main traits of Black-Litterman 118 7.3.1 The equilibrium market portfolio 119 7.3.2 Embedding professional views 121 7.3.3 The Black-Litterman optimal portfolio 122 7.3.4 Final remarks on Black-Litterman 122 7.4 Mean-Variance and mental accounts 123 7.4.1 Final remarks on Mean-variance and Mental Account 123 7.5 Main traits of Probabilistic Scenario Optimization 124 7.5.1 The PSO process 124 7.5.2 The investor’s risk and return profile 126 7.5.3 Generation of scenarios and scenario paths 128 7.5.4 Stochastic simulation of products and portfolios over time 128 7.5.5 Potential and admissible portfolios: Allocation constraints 129 7.5.6 Adequate portfolios: Risk adequacy 130 7.5.7 Objective function: Probability maximization 131 7.5.8 Final remarks on PSO 135 7.5.9 Conclusions 135 Chapter 8 Goal Based Investing and Gamification 137 8.1 Introduction 137 8.2 Principles of Gamification 138 8.3 Gamification of wealth management 140 8.4 The mechanics of games 141 8.5 Conclusions 143 Concluding Remarks 145 Bibliography 147 Index 151

Praise for FinTech Innovation "The wealth management industry is being redefined as we speak. While robo-advice will drastically change how financial institutions serve mass-affluent clients, goals-based wealth management is becoming the golden standard for high-net-worth firms. Paolo Sironi's book provides a holistic and comprehensive look at these complex industry changes." —Alois Pirker, Research Director, Aite Group "FinTech Innovation is a FinTech survival guide for anybody who manages, invests or saves money. Disruption in Asset Management is coming fast and this book highlights how to benefit from innovation such as Robo-Advisory and Goal Based Investing. This is a must-read book by Paolo Sironi, a global FinTech Thought Leader!" —Susanne Chishti, CEO, FINTECH Circle; Chairman, FINTECH Circle Innovate; Co-Editor, The FINTECH Book "This is a thoughtful and superbly executed look at how financial technology has brought welcome changes to the world of investment management. This is essential reading not only for next generation investors but all investors who want to fully understand how money – their money – will be managed going forward." —Mark Landis, Founding Partner, Wavelength Capital Management LLC "Paolo Sironi succinctly captures FinTech's role in the escalating disintermediation of the Wealth Management industry, while offering a logical rationale for what may lie directly ahead. The convergence of investment advice and planning via potential real-life simulations will create a new path for Global Wealth Managers. Goal Based Investing may very well offer regulatory and revenue solutions for a rapidly changing industry." —Mark Cipollina, Executive Director, Head of Investment Advisory UK, Standard Chartered Bank "This book presents a bold new vision on Fintech and Goal Based Investing! Just in time for the largest wealth transfer in history. Goal Based Investing and FinTech solutions are in the minds of every millennial and baby boomer who is millennially-minded." —April Rudin, CEO/Founder, The Rudin Group "It's simple. If you want to know what the future holds for wealth management, ask Paolo Sironi. His latest book presents a personal vision of financial advice that all market participants must heed to stay relevant, and ultimately to stay in business." —Aki Ranin, FinTech blogger and Entrepreneur