Mass Portfolio Customisation and the Unique Investor - Financial Simplicity

Mass Portfolio Customisation & The Unique Investor

Insist on yourself; never imitate... Every great man is unique. Ralph Waldo Emerson (1803 - 1882)

01Mass Portfolio Customisation & The Unique InvestorCopyright Financial Simplicity Australia Pty Ltd 2012

Not long ago, 165 consumers engaged in a study to assess preference

diversity in determining an “ideal” wrist watch. Participants were given a

list of basic custom options with which they could determine their optimal

design. Although the list of custom choices was brief, 165 participants

produced 159 variations.

This anecdote, one of many about the appeal of customisation,

underscores the importance to consumers of ‘uniqueness’. It emphasises

a ready market for those companies that can genuinely satisfy consumer

desire for personalised products and services.

Sudden, fundamental shifts in operating protocols can occur in every

industry sector. The resulting shocks demonstrate the extent of the gap

between our collective knowledge and the dynamic information pool we

must synthesize in order to expand our operating capacity.

Across the global business spectrum, enlightened companies are engaged

in adding a new unit to the corporate knowledge pool: mass customisation.

In isolation, customisation refers to the process by which individual

consumers can tailor a product – from apparel to automobiles – to their

personal needs without paying custom-built prices. By extension, mass

customisation refers to the ability of organisations to replicate this

process on a very large scale. The commercial possibilities implicit in this

expanded – and scalable - approach are limitless.

Whilst the magnetism of mass customisation had its genesis in the fast

moving consumer goods sector, its potential extends seamlessly to the

global wealth management sector. After all, why should consumers not be

able to manage their investment portfolios via their iTunes account?

Introduction


1. Mass customisation consideredi. Mass customisation addresses parallel consumer needs

Consumer control is core to mass customisation. This motivation reveals the scope

of mass customisation as a powerful financial services tool. Still a relatively new

paradigm, mass customisation provides consumers with the means of achieving

variety and individual tailoring through flexibility and heightened responsiveness.

It exchanges the traditional focus on price for a priority placed on the consumer’s

individual needs and wants – at an affordable price point. The ability to make timely

portfolio adjustments – without incurring traditional high fees associated with

switching - is particularly compelling in the context of continued financial market

uncertainty.

Mass customisation provides companies with novel opportunities to differentiate

their products and services in increasingly crowded markets. Many consumer

surveys, conducted across a range of industry sectors, suggest that the increasing

ability of consumers to customise their own products has created a fundamental,

and permanent, shift in their expectations, setting a new bar. Within the wealth

management industry, should players not be able to clear this new bar, they may

miss out on consolidated, sustained commercial benefits that outweigh the initial

expenditures required by new technologies. The commercial tension between initial

spend and eventual gain is discussed in greater detail in Section 2.

Typical attributes of a “mass customised” operating environment include:

− Personalised preferences embedded in client’s own unique product or service

profile

− Blended modular components to satisfy unique and dynamic consumer needs

− Defined system of macro processes with micro flexibility to allow unique rules

facilitating continuous adherence to compliance requirements

− Integrated business processes to eliminate traditional divisional “silo” approach

to customer service

− Information feedback loops embedded in process structure to ensure new and

enduring components reflect changing consumer requirements


ii. Mass customisation cuts both ways

Proactivity is key to the mass customisation paradigm. However, in order for the

benefits of mass customisation to be sustained, this creative energy must flow

consistently from the consumer to product provider and back again in a continuous

loop. This process is illustrated in the diagram below.

Figure 1.

iii. Empowering consumers

Several factors are driving, and enabling, the mass customisation trend. Specifically,

broadband Internet has facilitated consumer access and interaction. Consumers

are now able to access their services whenever they want and expect an increasing

range of online tailoring tools from which to select. Technology advances are

reducing the expense and difficulty associated with custom design of goods and

services. As a single example, Dell Computers allows its customers to upload their

personal graphics to its website at the time of purchase in order to personalise their

laptop covers to suit their personality or needs.

The rise of user-generated content, combined with the proliferation of on-demand

purchasing in the context of social media distribution channels allows consumers to

specify and receive exactly what they want. Further, consumers ensure that their

on-line social groups, already of impressive scope and ever-increasing dimension,

are collectively aware of how they rate new products or services. Collaborative

community dialogues help to fuel the demand for customised products and services.


iv. The implications of consumer-cooperative strategy

Customisation demands that the consumers articulate their own needs and desires

prior to a personalised solution being determined. As a result, customers become

integrated within their own value creation process. By defining and modifying

individual needs in the design phase, the product, or service, becomes the result of

a collaborative effort between consumer and service provider. In commercial terms,

the whole becomes greater than the sum of its parts: An automatic cost saving

results from the finished product requiring no expensive, after-service modification.

The consumer’s needs, and specific tailoring, have already been included in the

design at no additional cost.

Implicit in, and central to, mass customisation therefore is the concept of

partnership between service provider and consumer. The new reality of consumers

as designers in the process of developing and refining a specific product reflects

an unprecedented level of collaboration between two previously disparate

stakeholders.

In the financial services sector, consumer co-design establishes a vital interaction

between wealth advisor and client. This degree of continued cooperation has critical

implications for sustainable business modelling. A genuine stake in the development

of their own tailored products and services will strengthen incipient consumer

loyalty to their service providers. Increased trust and loyalty are critical to

transitioning consumer relationships into enduring client partnerships, sustainable

through successive business cycles. Clients will be more inclined to stay with a

service provider who can address their specific, and often rapidly changing, needs.

v. Operational realities for wealth management businesses

One of the most critical hurdles for mass customisation is the challenge to remain

responsive to individual preferences within the context of operational scalability.

Traditionally, customisation and low cost have been mutually exclusive. Corporate

inability to handle exceptions has presented a significant barrier to achieving

scalability in customisation. Mass production lowered costs but at the expense of

uniformity. Customisation was the product of designers and craftsman. Its expense

generally made it the preserve of the affluent.


Today, however, innovative, interactive technologies can facilitate automatic

interaction of consumers and service providers without accompanying prohibitive

costs. Individual consumer requirements are deployed using automated systems

which perform required calculations within a fixed solution space: one characterized

by stable but still flexible and responsive processes. Mass customisation not only

facilitates a more personal stake in the outcome of product or service design, it also

ensures that the highly outcomes can be replicated on a large scale.

In a world of declining margins (combined with increasing client expectations), real

income can be difficult to predict and sustain, particularly in changing economic

environments. If a wealth management business cannot simultaneously balance

consumer demand for personalised services with the commercial demands of

scale, its long-term sustainability becomes virtually impossible. Therefore, mass

customisation is the absolute key to growth in financial services retailing.

2. Opportunities presented by mass customisation to wealth managementIn 2009, Forrester Research issued a report highlighting that consumers who

actively seek customised products tend to be significantly younger, better educated,

and wealthier than the average shopper. Other, more recent studies suggest that

younger consumers raised on FaceBook, Twitter, MySpace, iTunes and personal

blogs favour shopping in the world of infinite choice promised by e-commerce. How

are these experiences, and resultant expectations, shaping demand for wealth

management products and services?

i. Multiple stakeholders enhance the opportunities inherent in mass customisation

An important point to note is that mass customisation does not sacrifice speed, nor

design, efficiency. In point of fact, in a mass customisation scenario, technology-

enabled economies of scale permit products and services to be tailored quickly for

individuals (or niche markets) at rates superior to mass production efficiency and

speed.

However, even more compellingly, a paradox of mass customisation is its ability to

thrive in an environment of ever-increasing variation. Whilst customisation, per se,

can become weakened by multiple demands, the technology code supporting mass

customisation has been written to support increasing personal alternatives. Mass

customisation is not constrained by personal preference. Rather, it feeds on it.


Employing a wealth management perspective specifically, an associated benefit of

mass customisation’s embrace of increasing variety is the ability to introduce more

participants into a supply chain without increasing cost. Again, due to the ways in

which mass customisation systems have been developed, the more participants one

introduces into a product development, or service support, supply chain, the more

effective the outcome. Therefore, the more stakeholders and the more variations

required, the more powerful the technology becomes.

Of particular note for wealth management participants is the consequent ability

to develop a genuinely interactive, and iterative, supply chain. An example of how

this might look in practice is illustrated in the diagram below. Again, emphasizing

the point made in the previous paragraphs, it should be noted that the number of

stakeholders is not restricted to those included in Figure 2. Mass customisation

rewards a fluid, and growing, number of participants: In an era of specialization and

rapid change, this is imperative for effective business growth.

Figure 2.


i. Challenges facing investors and their wealth advisors

Whilst the challenges facing investors and their wealth advisors are divergent,

the solutions need not be mutually exclusive. Although global financial markets

may have recovered in part since the Global Financial Crisis of 2008, the negative

psychological impact from such a severe global capital markets contraction remains

strong. Within the turbulence of global markets, investors are looking for a means

of filtering the ‘noise’ with a clear approach to managing their long-term investment

strategies.

Many investors have lost loyalty, trust and confidence in the wealth management

industry. The average wealth investor seeks greater simplicity and transparency. In

other words, “It’s my money. I want to understand what I’m investing in and how much

I’m paying!” Emerging retail investors, particularly the younger generation whose

social networks are vast, immediate and influential; feel that the objective of most

wealth advisors is to separate them from their hard-earned savings. As a result,

whilst Ponzi-type schemes and frauds have been perpetrated too frequently, a far

greater number of investor portfolios suffer from benign neglect.

Wealth advisors therefore face the challenge to their collective ability to build

trust and demonstrate value to wary investors who are realizing now that they

can, and should, be receiving individual attention for their investment portfolios.

Alternatively, investors can, and do, buy commodity products elsewhere and on-line.

However, many wealth advisors today lack effective tools to implement portfolio-

specific decisions quickly and cost-effectively.

A return to the basics of managing an individual’s well-being is critical: wealth

advisors seeking to remain relevant must align their interests to those of their

clients and ensure that each client’s individual requirements are addressed. The

result is a tailored, transparent portfolio co-managed by the client and wealth

advisor in genuine partnership.

ii. Benefits of consumer ownership in the portfolio management process

A growing priority for investors is achieving genuine understanding and control over

their investment portfolios. Traditionally, the ability to achieve this on a sustainable

basis has required significant commitments of investor energy. Although trust is

still a significant driver in what makes wealth advice valuable, what investors really

want is personalised advice which is relevant for them, about them, tailored to their

wants and fears, and fits like a glove, their glove. Greater access to tailored portfolio

management expertise and operational efficiencies can combine to improve client

service.


Customised valued-added services assist in client attraction and retention.

Investors gain from customization the increment of utility of a good that better

fits to their needs than the best standard product attainable. The larger the

heterogeneity of all customers’ preferences, the larger is this gain in utility. From a

managerial point of view, customization can be carried out with regard to fit, style,

and functionality.

iii. Wealth advisors and wealth management businesses of choice

From a strategic perspective in wealth management, mass customisation is a

differentiation tool that can help attract and retain clients. The same thinking can

be applied to wealth advisors, retail and institutional. Whilst self-directed investing

channels are growing as many investors “opt-out” from using wealth advisors that

can only offer a ‘one size fits all’ approach, many experienced or time poor investors

prefer to outsource their portfolio management to a professional wealth advisor.

In responding to the increasing demand for customised services, wealth advisors

need to evolve their wealth management businesses from purveyors of return-

oriented investment products to that of portfolio consultants. To remain attractive

and relevant, their function must include design and management of dynamic

investment portfolios that consider each client’s specific practical and emotional

rules, preferences and constraints. In other words, the forward-thinking wealth

advisor can address the investor who requires “a prudently designed investment

portfolio, not just a compilation of investment ideas!”

These particular benefits of mass customisation to wealth management businesses

include:

− Enhanced client satisfaction and repeat business due to a better response to

consumer needs

− Greater conversion of inquiries to sales due to fewer competitive offerings

− Capacity to access a wide and fragmenting market

− Ability to determine a market leadership as a result of clear consumer value

− Higher retained earnings driven by greater value added at a lower operational

cost

Mass Portfolio Customisation & The Unique InvestorCopyright Financial Simplicity Australia Pty Ltd 2012

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3. Integrating mass customisation into wealth management Mass customisation is a concept with intuitive appeal for business. It provides

consumers what they want how they want it. And why would consumers not want

investment products tailored to their specific needs, especially in the emotionally

charged area of personal investment. However, high-profile implementation failures

through flawed systems and methods have caused some companies to lose interest

in the approach. As a result, there are those who consider mass customisation

fascinating but impractical. This is where the importance of technology with

perspective is paramount.

i. Operational excellence – the importance of supply chain management

Mass customisation technology deploys stable processes to deliver high variety

services in a single, repeatable line. As a result, associated customisation allows for

a cost-effective price for all stakeholders. As outlined earlier, a mass customisation

environment can handle effectively multiple stakeholders in a supply chain. Indeed,

from a commercial perspective, it is in this scenario that mass customisation really

comes into its own.

In manufacturing, there are several ways approach customisation. In wealth

management, each of these approaches is combined to provide a flexible

methodology that is at once modular, multi-dimensional and reversible. This

combination of applied manufacturing techniques result in a system that is scalable

and sustainable.

Central to the process is a Rules Based System is required to combine critical

components (read customisation) at the point of execution. To be practical

customisation must precede uniform implementation of portfolio decisions.

Drawing on portfolio decision-making technologies, an effective system also

provides a central point of reference for identifying, interrogating and validating the

rules as well as for their continued re-use.


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A critical area of value provided by mass customisation in wealth management lies in

its facilitation of portfolio compliance. Mass customisation permits the deployment

of portfolios which, by pre-setting individual rules, preferences and constraints,

are pre-compliant in terms of security selection and asset allocation. Using pre-

compliant models, portfolio rebalancing operations yield immediate and transparent

compliance, lowering business risk. This eliminates the obligation to cross-check

individual portfolios for standard compliance and can reduce professional

workloads substantially.

The operational discipline imposed by mass customisation assists consumers in

identifying their requirements whilst also minimizing the complexity and burden of

choice. This helps establish a critical middle ground. Although consumers perceive

themselves as now “owning” the process, mass customisation technology is ‘owned’

by everyone (including ancillary service providers) in the value chain: this creates

unparalleled client service relationships and, as described earlier in Section 2,

multiple stakeholders, drawing on a variety of information channels, serve to

strengthen the mass customisation framework. As illustrated in the diagram below,

multiple sources of information, driving consequent portfolio adjustments, are

effected within a highly disciplined process framework.

Figure 3.


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Operational excellence, achieved by focus and execution, can beget excellence in

client service. If client focus is enhanced and execution capacity improved, better

outcomes are achieved on a scalable and sustainable basis. In portfolio mass

customisation, consumers become actors within the portfolio design process.

They are first engaged in dialogue to design their unique products or services that

precisely meet their requirements. Hundreds (or thousands) of investors, each with

their own preferences, can have their portfolios updated in a single keystroke. What

the client sees is a completely current portfolio, consistent with his or her specific

requirements. What the wealth management firm sees is a single, iterative process

resulting in less manual operations, more secure transactions and streamlined,

single operation reporting.

ii. Expanding the digital footprint – harnessing a client’s unique investment “tune”

Insofar as the wealth management industry is concerned, one of the most

profound developments in recent times is the enabling of investment advice on

iTunes. Commenting on the launch of its Insights podcasts on iTunes in November

2010, J.P. Morgan Funds said its own clients “rely on digital resources to stay up

to date, research products, and connect with their clients.” Programs such as

these have further implications in a social media context in which investment

advice (and, importantly, service providers) can be discussed and reviewed almost

instantaneously by increasingly large groups.

To this end, iTunes has committed to increasing its digital footprint to ensure

integration of its content with many diverse places its customers are gathering

information. Aside from apparel and social networking, investment sites appear

to be a logical next market sector in this increasingly multi-dimensional retail

symbiosis.

This has particular relevance to the wealth management industry which remains

hostage to product-driven strategies as opposed to embracing personalized

information tools to facilitate the achievement of individual goals. If speed is

paramount in adapting a client’s investment portfolio, the technology to achieve this

is no longer a luxury but, indeed, a necessity.


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Fiction has been removed from the science and we have the technology capacity

right now to implement notable advances in consumer convenience. Examples of

current consumer-directed technologies with immediate relevance for investment

portfolio management include:

− investment options available through a Personal Digital Assistant (PDA) which

is in regular communication with the stock market prices and, when required

communicates with the insurer

− cars automatically communicate with insurers and loss adjusters after being

involved in an accident

− airlines page passengers with personalised flight information

iii. Leveraging the social footprint – the rise of social media with investment advice

The defining attributes of social media are speed and coverage. At the time of

writing, Facebook estimates it has more than 800 million active users. According

to Facebook, “more than 50% of our active users log on to Facebook in any given

day” [and] “every month, more than 500 million people use an app on Facebook or

experience Facebook Platform on other websites”. The increasing power of social

media, of which Facebook is but one of many available distribution channels, has

become increasingly clear in recent months. Situations as diverse as locating lost

relatives following the Tsunami in Japan to remaining abreast of the United Nations’

efforts in global crises have been facilitated, and fuelled, through social media. No

topic is beyond bounds.

In this context, wealth management firms are positioning themselves on social

media sites, offering information through blogs, webinars and instant messaging.

The significance of mass customisation technology, which enables investor

consumers to effect portfolio adjustment quickly as a result of on-line chat and

community impetus, is clear and compelling.


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Conclusion

Whilst more companies are exploring mass customisation as a means of capturing

price premiums and securing market leadership, few organisations in the wealth

management sector have genuinely availed themselves yet of mass customisation

principles.

Despite the significant economies of scale offered by mass customisation, many

firms remain reluctant to commit financial resources to ‘uncertain’ outcomes . The

perceived scale of financial outlay is a deterrent to action with so many competing

budget pressures. Despite the promise and attractiveness of customisation, there

are those who baulk at the perception of paying for other people’s uniqueness.

However, given the significant power of social media and the clear direction of

consumer retail trends, is it simply a matter of time before mass customisation will

be a mandatory feature of portfolio management? As a result, does a compelling

“first mover” opportunity exist also? Something to ponder indeed whilst reviewing

stock prices and transferring funds from one account to another on one’s smart

phone.


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About Financial Simplicity

Financial Simplicity is an international wealth management platform technology

provider domiciled in Australia with offices in London, UK. As a proven provider of

scalable mass tailored portfolio management technology for wealth management

platforms, Financial Simplicity excels in the disciplines of modeling, construction

and compliance.

Over the past decade, Financial Simplicity has developed dedicated technology

to facilitate the process of highly efficient and scalable portfolio construction,

management and implementation. Financial Simplicity’s unique approach to

portfolio decision-making has been acknowledged as the most effective way to

construct, and perfect, model portfolios for dynamic portfolio management.

Financial Simplicity’s technology has been conceived, designed and developed to

align the interests of investing clients and their wealth advisers in a sustainable,

cost effective manner. Our technology is the engine powering managed accounts

programs at some of the world’s leading wealth managers, administration platforms,

stockbrokers and pension providers.

For further information contact Financial Simplicity at:[email protected]

www.financialsimplicity.com.au

Tel: +61 1300 363 053

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