When there are multiple solutions to a problem, choose the simplest one — John C. Bogle, The Little Book of Common Sense Investing: The Only Way to Guarantee Your Fair Share of Stock Market Returns (Little Books. Big Profits)
Technology is forcing a reinvention of financial services in more ways than one. Gone are the days when a bank could sell a single product to a client and forget about it. These days, it all about clients that hold long term, meaningful and multiple relationships. Often, the route to develop meaningful relationships is to empower clients to make choices on their own. That is why — the world of financial services today has to become the modern day version of a ‘guru’ or a teacher that educates, empowers and then lets clients decide what’s in their best interest. This article envisions a future where the success of the financial services industry will lie in creating a new breed of educated clients. That education will primarily consist of teaching clients to declutter their financial lives and to choose the best options that work for them.
Finance As A Service
If you have ever used investing apps such as Robinhood or Titan, you cannot help but notice the focus on education. Customized newsfeeds based on your stock holdings, explanation of investing philosophy, investing 101 are all table stakes now. The idea is a very simple one: inspire brand loyalty by creating an educated client base. A client base that can make more meaningful and informed choices while saving on transaction costs such as brokerage fees. This incredible level of customization and client education is possible because of the advent of technology. FinTech providers without a brick and mortar base have a very low marginal cost of servicing the client even after the client has terminated his or her relationship with that provider.
The difference between a product and a relationship is the extent of customization. While products are mostly widgets, relationships by their very nature are built on customization. For instance, a plain vanilla fixed rate mortgage is a product. However, a mortgage whose repayment is customized to match the cash flow of a sophisticated borrower is a relationship. Compared to a product which can be sold by marketing it, a relationship is characterized by the amount of tailoring that goes into making a made to measure offering. It often involves educating the client on his options in the broader market, the options that the particular financial services provider can provide and finally advising the client on his best option. That best option may not be the one the particular financial service provider may be offering.
The Best Interest
The internet ushered in a very different conundrum. The problem of choosing between a multitude of options. While optionality is great, everyone needs a teacher to unlock the power of optionality. What do I mean by that? Let’s say a student has a long list of programming languages to choose to learn. Only great teachers can show case the true power of each language. In doing so, the student can then make an informed decision on which language to learn.
The power of optionality is the power of choice. However, customer education is of paramount importance to truly unlock the power of choice. Beyond the tests of consumer protection regulations (such as Treating Customers Fairly Act or Consumer Financial Protection Bureau etc), there is a stricter rule of common sense. Although there are regulators, the broader society offers businesses a license to operate. Therefore, every product manager must ask their own self this : would you as a consumer buy your own product? From the answer to that question will arise many other questions such as : have I created a valuable product ? Have I communicated the product well and, is the product in the best interest of the consumer? Simple rules of thumb include: naming products in a way that makes sense, explaining all the features in a simple and easy to understand language and using less asterisks to hide adverse features or legalese.
Technology has ushered in the power of customization. However, some of the best choices are deceptively simple. Let me give you an example- very few people created sophisticated excel spread sheets to capture the features of their credit cards to maximize their rewards. For the vast majority, holding a card that simply offers 2% cash back on all purchases is a simple and easy way to manage rewards. It is the incredible sophistication that simplicity brings. The kind that Jack Bogle ushered in when he created indexed funds.
Thus, the world of financial services has to balance two objectives i.e to provide their clients with simple heuristics or rules of thumb to understand and master their personal finances and to create a more sophisticated client base that are lifelong learners ready to tackle more complex financial products.
The Road To Salvation
In ancient Hindu mythology, a ‘guru’ is considered the most important person in society. That is because a truly great guru can set you on the road to salvation.
Even though content providers such as Amazon Prime or Netflix have sophisticated recommendation engines which keep getting better as machine learning improves, I spend at least 15 minutes struggling to decide the one documentary I would love to watch. Maybe I am too picky. Maybe, the problem is more universal than most people think. I tend to think its the latter only because the time we have in this world is in limited supply.
If you have watched Marie Kondo’s show on tidying up, it is a revelation. Many would thing tidying up their own homes is pure common sense. Unfortunately, it also requires consistency and discipline.The world of personal finance is no different. A client today is faced with the difficult problem of choosing from a bewildering array of credit cards, mutual funds, stocks, bonds and other investment options.
Today, more than ever, a coach is needed in many aspects of life. We are afflicted with the problem of too much choice. While Artificial Intelligence (AI) is increasingly getting more adept at predicting our choices, good human coaches are in short supply. It is time the world of financial services recruits more ‘gurus’ who can lead their clients to financial salvation.