Paolo is a global thought leader at IBM Watson Financial Services. He is a recognized author on topics such as quantitative finance and innovation, demonstrating international expertise in investment management, risk management, and corporate banking. As a pioneer in FinTech digitization, Paolo founded a FinTech joint venture to augment personal finance. He joined IBM in 2012 following the acquisition of funding partner Algorithmics — itself a world leader of risk management solutions. Paolo was previously head of market and counterparty risk modeling at Banca Intesa Sanpaolo.
Advicent recently discussed Paolo’s take on the industry and what he believes firms and advisors must do to be successful in our changing industry.
What do you believe is the biggest challenge for financial services firms when trying to remain competitive in our ever-changing industry?
Paolo: We are observing a strong polarization of the industry — on one side we have commoditized investment opportunities (such as passive investing), and on the other side we have expensive financial advice. This trend is the consequence of a set of mega trends — reduced investors’ trust in the aftermath of the global financial crisis; higher transparency requirements fostered by international regulators, which are affecting intermediation margins and revenue sharing mechanisms between distributors and manufacturers; digital disintermediation. While this shift was noted by Nobel Prize winner Robert Merton in 2010, FinTech innovation is currently available to fill the gap and help financial institutions transform their business models from transactional businesses (less and less remunerative) toward service-oriented propositions (recurrent revenues for added value advice). This transformation is not easy and requires a Copernican change of existing practices to place investors at center stage.
What do you believe is the key step firms should take to ensure the consumer is at the center of the business model?
Paolo: Personalization of personal finance is not a cacophony but a business imperative, and it requires a transformation of what investors buy. Investors do not buy “products” any longer but “advice,” which is a mechanism to package products and reveal added value within investment relationships. This requires transferring to individuals the real asset class that generates effective investment value, which is knowledge to invest with comfort — that is why knowledge digitization is at the cornerstone of the industry transformation.
What is cognitive banking?
Paolo: Cognitive refers to the usage of artificial intelligence to augment—not replace—individual decision making. As customers’ needs and goals take center stage, financial institutions must transform the investment experience by shifting focus from benchmarking financial markets to truly understanding clients and reveal to them added value of the investment relationships.
Do you believe human advisors could ever be fully replaced by technology and artificial intelligence?
Paolo: I think there will space for fully digital and hybrid solutions; however, the progressive squeeze of advisory margins will force firms and advisors to grow volumes in order to remain relevant. Therefore, these “squeezed margins” will drag more and more businesses towards robo-technology and digital solutions. Added value to customers is not a shoulder in times of distress but "knowledge and comfort to make or delegate investments decisions." Cognitive technology is the only way to make sure that digitizing advisory firms avoid commoditizing, which would not generate enough value for clients.
What FinTech innovation from the last decade do you believe is most beneficial to the industry?
Paolo: I am a strong advocate of a transformation of both quantitative methods (The FIN side of the equation) as well as technology enablement (the TECH side) because transformation is a Copernican revolution of the business model today. My latest bestseller “FinTech Innovation” (Wiley, 2016) clearly indicates that only goal-based investing coupled with cognitive gamification principles can help the industry face current disruption and emerge stronger in order to grow again — thanks to sustaining innovation.
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