Trust, in one form or another, is central to all financial transactions, and technology can enable and enhance that trust.
How do we know? Because 50% of retail investors and 87% of institutional investors say greater use of technology in financial services has increased trust in their advisor/manager. This is one of the main conclusions of “Building Investor Confidence: 2022 CFA Institute Investor Trust Study», the fifth edition of the biennial series.
“Strengthen investor confidencefocuses on the relationship between technology and trust in finance. This demonstrates that trust in financial services is both visible and invisible: it is the ubiquitous backbone of financial transactions and the external interface through which these transactions are conducted.
Greater integration of technology into finance helps establish two types of trust that are essential to investing: “execution trust” and “relational trust”. The former refers to the knowledge that transactions are secure, accurate and handled appropriately, while the latter describes the added value that better investment tools and product customization create for investors.
Technology improves access to financial markets and strengthens representative equality between different market players. It drives the development of new products and services that open markets to more people and bridge the trust divide, or the trust differential between retail and institutional investors, across geographies and demographics, and between retail investors with and without an advisor.
Execution Confidence and Fundamentals
Confidence in execution drives market participation and all market participants, regardless of demographic, demand it. By fostering trust in execution, technology bridges the trust gap between all types of investors and helps ensure a level playing field.
As the world Bank observes:
“Fintech can democratize access to finance and the world can move closer to financial inclusion. . . . Fintech has the potential to reduce costs, while increasing speed and accessibility, enabling more financial services personalized and scalable.
Globally, the first point of access to financial services is often digital payment providers. In some markets, especially those without traditional banking infrastructure, they are the primary mode of transaction. As such, trust in digital payment providers – Apple Pay, Venmo, Alipay, Zelle, etc. – was the highest among all sub-sectors of the financial services industry in most markets.
Trust in digital payment providers*
Retail accounts and apps further address the disparity in access to financial services. The survey found that 71% of respondents believe these tools improve their understanding of investing. Institutional investors are equally optimistic: 89% say they are increasing confidence in financial information. These developments directly influence industry sentiment: respondents with retail trading accounts are more than twice as likely to say they trust financial services than those without.
Relational trust and personalization
Relationship trust is an added value that builds on execution trust and describes what advisors can deliver when they understand, connect with, and align with a client’s personal values and motivations. As with retail trading accounts, whether an investor has an advisor influences their confidence in financial services. Of those with an advisor, 69% have a high or very high level of confidence in financial services, compared to 45% of those without an advisor.
Technology can guide the form and frequency with which advisors communicate with clients and help them adapt accordingly to provide the right information at the right time for each client. It can also facilitate the development of more suitable products. Ultimately, tech-powered personalization – direct indexing, AI investment strategies, etc. – strengthens the link between investors and the investment industry.
The demand for these products is high. The survey found that 78% of all retail investors and around 90% of those under the age of 45 are interested in more personalized investment products and services.
Percentage of respondents who want more personalized products/services to better meet their investment needs, by age group
Implications for the future
That fintech adoption favors younger investors is no surprise, but as more assets are held by these “digital natives,” the integration of technology is becoming more embedded in the client-advisor relationship. This influences how investors participate in markets in general. For the first time in the Investor Trust series, access to the latest technology platforms and tools was cited as more important (56%) than having someone to navigate and execute the investment strategy (44%).
As confidence in fintech increases, so does the opportunity for new providers of financial products and services to enter the market. The survey found that 56% of retail investors would be more interested in investing in financial products created by Amazon, Google, Alibaba and other big tech companies than financial institutions.
Of course, the pervasiveness of technology in financial services creates some challenges. Data privacy is key. More than one in four respondents (27%) say they are less inclined to use online platforms requiring the entry of personal data than three years ago. The behavioral effect of technology is another concern: Among survey participants with a retail trading account, 57% say it has increased their trading frequency, while 74% say they think that acting on the digital “nudges” will improve their investment/decision-making performance.
Of course, these caveats are necessary reminders that unchecked technology can have unintended consequences. This is why the integration of technology into finance must be approached with intention and oversight to maximize its confidence-building effects on the industry.
If you liked this article, don’t forget to subscribe to the Enterprising investor.
All posts are the opinion of the author. As such, they should not be construed as investment advice, and the opinions expressed do not necessarily reflect the views of the CFA Institute or the author’s employer.
Image credit: ©Getty Images/Ilya Lukichev
Professional Learning for CFA Institute Members
CFA Institute members are empowered to self-determine and report Professional Learning (PL) credits earned, including content on Enterprising investor. Members can easily register credits using their online truck tracker.