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Stalled innovation (part 2)

Rative: a Canadian fintech project that could not be built.

In part 1, I explained Rative’s mission which can be summarized as increasing the level of accountability of investments advisors towards their end customers. I explained the origins of the idea and I stated that I could not build the project because financial institutions blocked access to data even if I offered to work “within the walls” or with anonymized data. Part 2, informs about what I have tried and the answers I obtained. Let’s start with a collection of selected answers obtained by speaking with various stakeholders in the industry:

Investment advisors (10+)

  • I have been asking this to my firm for years now.  It would be great. 
  • My clients won’t understand anyway.

Investment dealers (5)

  • It is not a strategic priority.
  • I don’t think risk adjusted return is a pertinent measure (my personal favorite).
  • Great idea, took the deck. Never heard back.
  • We don’t know how to access the data.

Robo-advisor (2)

  • Yes, we could compute a risk metric, but we don’t want to show it.

Mutual fund provider (1):

  • “Don’t kill the golden goose.’’ (my second personal favorite)

Securities Regulator (1):

  • If financial institutions don’t have to do it, they won’t. We can’t force them. (WOW)

Saying I was discouraged would be a euphemism. I was disgusted. Even vacuum cleaners have performance statistics! Seriously, it is the equivalent of a golfer who doesn’t count its strokes but expects to be recognized (and paid) as a professional golfer.

I can understand the bankers, mutual fund providers and robo-advisors wanting to preserve opacity to protect their margins. But the regulators not caring? Those supposed to protect the end customer! This is just not right. But it was not the first time regulators let consumers down. Let’s illustrate this with the topic of fees transparency. One would think that “How much does it cost?” should have a pretty simple and straightforward answer. It costs X dollars. Apparently, not for retail investments in Canada. As a matter of fact, despite 15 years of industry consultations with round tables, white papers, stakeholders’ invitations to comment, to discuss, etc.[1], the answer is still not available. Retail investors in Canada do not have full fees transparency.

Fortunately, during this decade and a half long process, there was a major success achieved by the Canadian securities regulators. They forced investment dealers to provide their customers with a rate of return on the investment account they manage. Yes, left on their own, investment dealers did not think it was pertinent to present a rate of return on the investment accounts their advisors are managing. Regulators had to intervene and force them to do it. No, this is not a joke.

Is it that the lobby of financial institutions is so powerful, that clients would not understand or is it simply that the IT infrastructure of financial institution is such a mess that it cannot even be implemented? The story doesn’t tell, yet. But the result is the same. Bankers have opacity, regulators had work for 15+ years and retail investors don't know the full cost or the risk-adjusted performance of their investments.

I must, however, duly acknowledge that there are some investment advisors in Canada who do give a clean cut and fully encompassing answer about the total fees paid and some of them have a fiduciary duty towards their clients. But there is no fair level playing field where they can objectively shine. It is for them that I wanted to do Rative. For the good ones. For those who manage money well, a quantitative and objective merit-based system is possible. Investors (and advisors) deserve to know.

One financial institution that was more open than the others. I made some progress with its senior management and I eventually spoke with the IT team. This is where I realized that managing data was a nightmare even internally. The IT infrastructure is a challenge in itself. To make a long story short, they could not find a way to give me access to a sample of data so I could build my proof-of-concept. I also experienced push backs from the investment advisory business line. Transparency was not welcomed there. The classic answer, this is not a strategic priority, ended up being served to me.

How can having statistics about how well (or bad) investment advisors are managing money may not be a strategic priority to investment dealers? This is what investors pay them to do. It is their job!

Some institutions will say they have internal measurements. It is false. They compute standard deviation and sharpe ratio with monthly data. There is no statistical significance in having 12 data points per year. And if they do have stats, why don’t they share them? Institutional managers have a full suite of risk assessment tools, not retail.

I have learned that in startups you need to fail fast by starting with your riskiest assumption. This is what I did, and could not get investment dealers to compute standard deviation on the investment accounts (with daily data).

But these were not my final words. Once again, I said, let’s try this another way. If banks don’t want to give me access, I will go the retail investors and see if using a data aggregator (another fintech), I could do Rative. To obtain data, that fintech is doing what is called screen scraping. It is not ideal, but they do a great job with what they have. However, I got to realize that there is a data flaw, that has nothing to do with the fintech provider, it has to do with the data structure at the various financial institutions. There is no consistency in at least two key elements.

At this point, I had an epiphany. The financial industry IT infrastructure is such a fragmented and non-standardized patchwork, I will never be able to do Rative. Which means that even if financial institutions wanted to do it, they could not.

I had reached out to advisors, to investment dealers, to regulators. I have tried to spin this project all the ways I could. I had to conclude it could not be done. I was defeated.

On one hand, financial institutions should have already invested to have proper self-regulatory mechanism to assess the performance of their investment advisors. They can breathe easy as we are nowhere near empowering their end customers with these metrics. On the other hand, securities regulators are powerless. And innovators like me, can’t do anything because banks have an implicit kill switch on innovative projects that do not suit their needs. This is how innovation stalls. Can’t build within the walls, can’t build outside the walls.

So that was it for me. I knew that I could no longer work in that industry because this is a profound ethical matter. If there are no metrics, there is no objectivity. Might as well have studied psychology and the art of selling instead of mathematics, economics and portfolio management. Storytelling is something finance professional excel at; proof is they are extremely skilled at making things look complex. And conveniently, this complexity helps them look smart. This explains why they talk so much about wealth services they offer (ex: financial and estate planning) and how human their approach is. It's a smoke screen used to avoid opening the hood so we can see the engine.

Now you know why, after 23 years in the financial service industry, I got completely disinterested about what I now call the legacy system.

All while I tried to do Rative, I saw a ray of light, called Bitcoin.  

Part 3, will cover how and why it got my attention and full dedication for two years now.

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