Part 3 If you pay peanuts you will get monkeys

What happened to Motif? If you believe that copy trading can disrupt fund management you have to answer this question. “Motif allows individuals and investment advisors to invest in stock and bond portfolios built around everyday ideas and economic trends” (source Crunchbase). Despite Motif raising  $126.5M from top tier investors such as Goldman Sachs, JP Morgan, […]

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Big Tech use their balance sheet to get into Fintech #CME#Google #CBOE #Fintech50Index

The Press Release headline says: CME Group Signs 10-Year Partnership with Google Cloud to Transform Global Derivatives Markets Through Cloud Adoption The sub headline says: Google also makes $1B equity investment in CME Group CME is a behemoth in derivatives, ranked 10 by market cap in Fintech50Index, but legacy finance does not have a good […]

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Part 1 Copy trading may disrupt fund management. 

The idea – like most disruption – is simple. You follow somebody’s trades and give them a share of the profits. This enables a new breed of fund managers to invest first then gather assets later, which is the exact opposite of how it works today. Today a fund manager startup first gathers assets from limited partner investors […]

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A Fintech side-effect: Excessive Corporate Control by the Big Three

The growth of the ETF sector is well documented and the robo-advisory fintech growth merits a piece of this `success`. According to my estimates, last year digital investing from startups and incumbents represented roughly 12% of the entire ETF market. This is of course, is from the point of investors’ point of view. Earlier this month I looked at facts and figures for ETF issuers.

Clearly, incumbents dominate ETF issuance. Very few standalone Fintechs are involved in issuing ETFs and their market share is negligible. Those include Sofi, Salt Financial, Ark funds. The growth of passive investing is not limited to the ETF wrapper. Other indexing investment products have also been growing, with mutual funds dominating. Vanguard is has pushed the industry towards such investment products with low expense ratios. Vanguard boasts an average expense ratio of 19bps compared to an industry average of 108bps. Robinhood has pushed the industry to commission-free trading. Most large asset managers have currently, significant platforms with commission-free trading investment products (from Fidelity, Vanguard, Charles Schwab).

Efi Pylarinou is the founder of Efi Pylarinou Advisory and a Fintech/Blockchain influencer – No.3 influencer in the finance sector by Refinitiv Global Social Media 2019.

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Customers – Investors should be extremely happy with all these developments. However, there is one major concern whose ugly head may not be noticeable. An elephant is in the room, here too. Its name is `The Big Three`. The concentration power of three US-based companies, Blackrock, Vanguard, and State Street, and its ramifications has gone largely unnoticed.

Blackrock just passed the $7 trillion AUM. An increase of $1.5trillion from last year.

Vanguard just passed the $6 trillion AUM and State Street the $3trillion AUM.

These three corporates manage $16 trillion AUM. This is a 45% increase from 2017 ($11 trillion AUM)!

Through a visualization produced by Corpnet Research what becomes clear is that `The Big Three` are the largest shareholders in 40% of all publicly traded stocks in the US[i]!

Screen Shot 2020-01-20 at 10.36.07

The growth of low cost investing, the disruption of the brokerage business model and the digitalization of the investment process, has created this excessive concentration in the Big Three asset managers.

Blackrock, Vanguard, and State Street have corporate control over 40% of the US stock market! These giant index fund businesses have too much shareholder voting power. That is one of the reasons that it matters a lot what the Fink says about climate change and ESG. In this case, we like his commitment but let’s be aware of this Corporate Governance entity in the room

The Harvard Law school forum on Corporate Governance is also researching this theme. In their paper The Specter of the Giant Three they look closely into this issue and estimate that the Big Three could well cast as much as 40% of the votes in S&P 500 companies within two decades.

Even though, the Big Three own less shares than 40%, their impact is amplified because they exercise their voting power 100%, whereas smaller asset managers do not. The Big Three currently collectively hold an average stake of more than 20% of S&P 500 companies and each one of them (BlackRock and Vanguard) now hold positions of 5% or more of the shares of almost all of the companies in the S&P 500.

Even more interesting is that this corporate governance problem was identified initially as the “Problem of Twelve”[ii] — the likelihood that in the near future roughly twelve individuals will have practical power over the majority of U.S. public companies.

In just these last two years, the problem has become more acute. If we continue to focus on democratization (access, low cost) of financial products and services with no innovation in corporate governance, we will end up pretty much in the same corner as we have with the Big Tech companies.

We need more fintechs innovating in the shareholder voting process. We need to increase the shareholder voting participation and make it 100% transparent for majority shareholders that are already required to publicly disclose their holdings.

The Big Three references

BlackRock, Vanguard and State Street Own Corporate America

[i] Hidden power of the Big Three? Passive index funds, re-concentration of corporate ownership, and new financial risk

[ii] The Future of Corporate Governance Part I: The Problem of Twelve

 

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Mortgages for `Branch-Never` clients is the next re-bundling item  

`Allocating capital and managing the risk on the debt side of our personal balance sheet is larger, more complex, and determines whether we reach our goals or how far away do we end up. This is primarily where we all need advice (human, bionic, hybrid) in the first place, and subsequently in the investment segment of our finances`

This is an excerpt from a post I wrote nearly 3yrs ago The vertical integration of SoFi has the core entry point right! One of the points I was making is that offering mortgages first and then expanding into wealth management, is the way to go during this digital transformation and cannibalization of several financial products. Simply because the value add of advice on the debt side is significant and easier for the end customer to understand.

Efi Pylarinou is the founder of Efi Pylarinou Advisory and a Fintech/Blockchain influencer – No.3 influencer in the finance sector by Refinitiv Global Social Media 2019.

Since then, the digital mortgage market has evolved – US players like Roostify, Mojo mortgages, or ElliMae – and several partnerships have been established. For example, Ally Financial partnered recently with digital mortgage disruptor Better.com; or HSBC with Roostify.

Since then, the market reality is that several Fintechs in the investment part (e.g. robo-advisors) have cannibalized products and services, while increasing customer acquisition costs. As a result, they have been forced to expand their initial laser focused offering. Which brings me to the recent announcement of Wealthfront, the digital-only standalone robo-advisor, that plans to add mortgages to its offering.

Screen Shot 2019-12-16 at 10.20.06.png

Wealthfront started on the asset side of our personal finances and is now enriching its offering on the liability side. Sofi did the reverse. Wealthfront, however, has been analyzing data for its clients around home pricings and mortgages, as part of their saving goals towards mortgage down payments. So Wealthfront is not starting from zero. They see demand (they always have been) on customers that are `Branch-Nevers` as they call them.

At the same time, Varo Money the mobile-only banking app (with no banking license yet) has been offering unbeatable free checking and high-yield savings accounts, and plans also to add mortgages and more once they get a banking license. Both Sofi and Wealthfront have added cash and savings accounts.

What a mashed-up market!

From unbundling, integrating, then re-bundling and consolidating. Over and over again.

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How innovative can Goldman Sachs be with its planned robo-advisor?

Maybe Goldman Sachs leads the way so that Digital Advice reaches the $1.26 trillion projected by 2023.

The large players are moving down-market, slowly and steadily. Goldman Sachs moved Marcus into their asset management division last year and has just announced that they will launch a robo-advisor with a $5k minimum next year. They acquired early on, Honest Dollar for digital retirement savings and Clarity Money, a PFM app. Both are mobile offerings.

Goldman at a high-level glance

goldman.jpg

Efi Pylarinou is the founder of Efi Pylarinou Advisory and a Fintech/Blockchain influencer – No.3 influencer in the finance sector by Refinitiv Global Social Media 2019.

The details of their planned robo-offering are not known yet and Goldman`s offering with the masses is a work in progress.

 Will Goldman develop a first-class Mobile digital advice app?

 Now that would be a great First in the US market. My intuition tells me that Goldman Sachs will integrate its existing partnerships, like the one with Motif, into this offering and use its existing brand name to build a pipeline of new customers. The partnership with Motif (established earlier this year) aims to launch innovative ETF products and indices based on machine learning and artificial intelligence.

  • Goldman Sachs Motif Data Driven World ETF (GDAT)
  • Goldman Sachs Motif Finance Reimagined ETF (GFIN)
  • Goldman Sachs Motif Human Evolution ETF (GDNA)
  • Goldman Sachs Motif Manufacturing Revolution ETF (GMAN)
  • Goldman Sachs Motif New Age Consumer ETF (GBUY)

Goldman and the newly acquired network of United Capital, are a great launchpad for the upcoming GS down market offering. Imagine it is Christmas next year and your mass affluent dad, aunt, or older friend already banking with GS and or UC, offer you a new investment account at GS which you can be fund with only $5k. Goldman remains a very sticky brand name that is envied by many in the market, and it will become accessible to the masses. The second trick up GS`s sleeve is that their product offering is not only the basic, mass-produced ETFs only but the innovative, in-house branded forward-looking ETFs too.

Smart products via a low-cost offering, by a top brand name provider. And if GS`s offering is mobile-first, then it has a great chance to leapfrog the existing pack.

Resources

https://www.etfstream.com/news/5822_goldman-sachs-and-motif-partner-for-the-next-wave-of-innovation/

 

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Not another Crypto Exchange; by BondEvalue & Northern Trust

  We like We foresee adoption of Blockchain not Bitcoin Digital Currencies not Cryptocurrencies Stable Coins not CBDCs Blockchain not Bitcoin LIBRA not Cryptocurrencies CBDCs from China & the BRICs not the US These are picks of business media talk from the past and the present. As Ajit Tripathi, said to me in a conversation […]

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Transparency, Transparency, Transparency in portfolio performance

Four years ago, I started preaching about Transparency in wealth management. In the Global Transparency movement in Portfolio Performance from the Daily Fintech archives in October 2015, I asked for `…  a world in which Barron’s top advisor annual rankings take into account performance. Believe it or not, right now these rankings don’t include performance […]

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