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Enlightened companies are engaged in adding a new unit to the corporate knowledge pool: mass customisation. Mass customisation provides consumers with the means to achieve variety and individual tailoring through flexibility and heightened responsiveness. The commercial possibilities implicit in this expanded - and scalable - approach are limitless.
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Mass Portfolio Customisationa and the Unique Investor
Enlightened companies are engaged in adding a new unit to the corporate knowledge pool: mass customisation. Mass customisation provides consumers with the means to achieve variety and individual tailoring through flexibility and heightened responsiveness. The commercial possibilities implicit in this expanded - and scalable - approach are limitless.
Enlightened companies are engaged in adding a new unit to the corporate knowledge pool: mass customisation. Mass customisation provides consumers with the means to achieve variety and individual tailoring through flexibility and heightened responsiveness. The commercial possibilities implicit in this expanded - and scalable - approach are limitless.
Insist on yourself; never imitate... Every great man is unique. Ralph Waldo Emerson (1803 - 1882) 01 Mass Portfolio Customisation & The Unique Investor Copyright 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 shifs 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. Afer all, why should consumers not be able to manage their investment portfolios via their iTunes account? Introduction 02 Mass Portfolio Customisation & The Unique Investor Copyright Financial Simplicity Australia Pty Ltd 2012 1. Mass customisation considered i. Mass customisation addresses parallel consumer needs Consumer control is core to mass customisation. This motivation reveals the scope of mass customisation as a powerful nancial services tool. Still a relatively new paradigm, mass customisation provides consumers with the means of achieving variety and individual tailoring through exibility and heightened responsiveness. It exchanges the traditional focus on price for a priority placed on the consumers individual needs and wants at an aordable 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 nancial market uncertainty. Mass customisation provides companies with novel opportunities to dierentiate 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, shif in their expectations, seting 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 benets 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 atributes of a mass customised operating environment include: Personalised preferences embedded in clients own unique product or service prole Blended modular components to satisfy unique and dynamic consumer needs Dened system of macro processes with micro exibility 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 reect changing consumer requirements 03 Mass Portfolio Customisation & The Unique Investor Copyright Financial Simplicity Australia Pty Ltd 2012 ii. Mass customisation cuts both ways Proactivity is key to the mass customisation paradigm. However, in order for the benets of mass customisation to be sustained, this creative energy must ow 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. Specically, 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 diculty 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. 04 Mass Portfolio Customisation & The Unique Investor Copyright Financial Simplicity Australia Pty Ltd 2012 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 dening and modifying individual needs in the design phase, the product, or service, becomes the result of a collaborative eort 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 nished product requiring no expensive, afer-service modication. The consumers needs, and specic 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 rening a specic product reects an unprecedented level of collaboration between two previously disparate stakeholders. In the nancial 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 specic, 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 signicant barrier to achieving scalability in customisation. Mass production lowered costs but at the expense of uniformity. Customisation was the product of designers and crafsman. Its expense generally made it the preserve of the auent. 05 Mass Portfolio Customisation & The Unique Investor Copyright Financial Simplicity Australia Pty Ltd 2012 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 xed solution space: one characterized by stable but still exible 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 dicult 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 nancial services retailing. 2. Opportunities presented by mass customisation to wealth management In 2009, Forrester Research issued a report highlighting that consumers who actively seek customised products tend to be signicantly younger, beter educated, and wealthier than the average shopper. Other, more recent studies suggest that younger consumers raised on FaceBook, Twiter, MySpace, iTunes and personal blogs favour shopping in the world of innite 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 sacrice speed, nor design, eciency. 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 eciency 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 writen to support increasing personal alternatives. Mass customisation is not constrained by personal preference. Rather, it feeds on it. 06 Mass Portfolio Customisation & The Unique Investor Copyright Financial Simplicity Australia Pty Ltd 2012 Employing a wealth management perspective specically, an associated benet of mass customisations 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 eective 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 uid, and growing, number of participants: In an era of specialization and rapid change, this is imperative for eective business growth.
Figure 2.
07 Mass Portfolio Customisation & The Unique Investor
Copyright Financial Simplicity Australia Pty Ltd 2012 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 nancial 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 ltering the noise with a clear approach to managing their long-term investment strategies. Many investors have lost loyalty, trust and condence in the wealth management industry. The average wealth investor seeks greater simplicity and transparency. In other words, Its my money. I want to understand what Im investing in and how much Im paying! Emerging retail investors, particularly the younger generation whose social networks are vast, immediate and inuential; 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 suer 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 atention for their investment portfolios. Alternatively, investors can, and do, buy commodity products elsewhere and on-line. However, many wealth advisors today lack eective tools to implement portfolio- specic decisions quickly and cost-eectively. A return to the basics of managing an individuals well-being is critical: wealth advisors seeking to remain relevant must align their interests to those of their clients and ensure that each clients individual requirements are addressed. The result is a tailored, transparent portfolio co-managed by the client and wealth advisor in genuine partnership. ii. Benets 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 signicant commitments of investor energy. Although trust is still a signicant 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 ts like a glove, their glove. Greater access to tailored portfolio management expertise and operational eciencies can combine to improve client service. 08 Mass Portfolio Customisation & The Unique Investor Copyright Financial Simplicity Australia Pty Ltd 2012 Customised valued-added services assist in client atraction and retention. Investors gain from customization the increment of utility of a good that beter ts to their needs than the best standard product atainable. 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 t, style, and functionality. iii. Wealth advisors and wealth management businesses of choice From a strategic perspective in wealth management, mass customisation is a dierentiation tool that can help atract 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 oer a one size ts 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 atractive and relevant, their function must include design and management of dynamic investment portfolios that consider each clients specic 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 benets of mass customisation to wealth management businesses include: Enhanced client satisfaction and repeat business due to a beter response to consumer needs Greater conversion of inquiries to sales due to fewer competitive oerings 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 Investor Copyright Financial Simplicity Australia Pty Ltd 2012 9 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 specic needs, especially in the emotionally charged area of personal investment. However, high-prole implementation failures through awed 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-eective price for all stakeholders. As outlined earlier, a mass customisation environment can handle eectively 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 exible 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 eective system also provides a central point of reference for identifying, interrogating and validating the rules as well as for their continued re-use. Mass Portfolio Customisation & The Unique Investor Copyright Financial Simplicity Australia Pty Ltd 2012 10 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-seting 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 eected within a highly disciplined process framework.
Figure 3. Mass Portfolio Customisation & The Unique Investor Copyright Financial Simplicity Australia Pty Ltd 2012 11 Operational excellence, achieved by focus and execution, can beget excellence in client service. If client focus is enhanced and execution capacity improved, beter outcomes are achieved on a scalable and sustainable basis. In portfolio mass customisation, consumers become actors within the portfolio design process. They are rst 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 specic requirements. What the wealth management rm 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 clients 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 commited 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 clients investment portfolio, the technology to achieve this is no longer a luxury but, indeed, a necessity. Mass Portfolio Customisation & The Unique Investor Copyright Financial Simplicity Australia Pty Ltd 2012 12 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 afer being involved in an accident airlines page passengers with personalised ight information iii. Leveraging the social footprint the rise of social media with investment advice The dening atributes 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 eorts in global crises have been facilitated, and fuelled, through social media. No topic is beyond bounds. In this context, wealth management rms are positioning themselves on social media sites, oering information through blogs, webinars and instant messaging. The signicance of mass customisation technology, which enables investor consumers to eect portfolio adjustment quickly as a result of on-line chat and community impetus, is clear and compelling.
Mass Portfolio Customisation & The Unique Investor Copyright Financial Simplicity Australia Pty Ltd 2012 13 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 signicant economies of scale oered by mass customisation, many rms remain reluctant to commit nancial resources to uncertain outcomes . The perceived scale of nancial outlay is a deterrent to action with so many competing budget pressures. Despite the promise and atractiveness of customisation, there are those who baulk at the perception of paying for other peoples uniqueness. However, given the signicant power of social media and the clear direction of consumer retail trends, is it simply a mater of time before mass customisation will be a mandatory feature of portfolio management? As a result, does a compelling rst mover opportunity exist also? Something to ponder indeed whilst reviewing stock prices and transferring funds from one account to another on ones smart phone. Mass Portfolio Customisation & The Unique Investor Copyright Financial Simplicity Australia Pty Ltd 2012 14 About Financial Simplicity Financial Simplicity is an international wealth management platform technology provider domiciled in Australia with oces 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 ecient and scalable portfolio construction, management and implementation. Financial Simplicitys unique approach to portfolio decision-making has been acknowledged as the most eective way to construct, and perfect, model portfolios for dynamic portfolio management. Financial Simplicitys technology has been conceived, designed and developed to align the interests of investing clients and their wealth advisers in a sustainable, cost eective manner. Our technology is the engine powering managed accounts programs at some of the worlds leading wealth managers, administration platforms, stockbrokers and pension providers. For further information contact Financial Simplicity at: sales@nancialsimplicity.com.au www.nancialsimplicity.com.au Tel: +61 1300 363 053 015 Mass Portfolio Customisation & The Unique Investor Copyright Financial Simplicity Australia Pty Ltd 2012