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.
RalphWaldo Emerson (1803 - 1882)

01Mass 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 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 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 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 management
In 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 Investor
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 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.

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-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.

11
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.

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 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 theTsunami 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.

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 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.

14
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:
sales@financialsimplicity.com.au
www.financialsimplicity.com.au
Tel: +61 1300 363 053

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