Understanding the evolution of FinTech both its present and its future, necessarily requires mentioning the idea of choice architecture and the challenge that consumers or purchases a FinTech products and services might have in selecting their purchases. For example, in a robo advisory contexts selecting elements within a portfolio. One of the solutions that have been offered again in the robo advisory space are pre-selected portfolios. Where do those come from? Why do they have three choices versus 30 choices? Well, choice architecture and the challenge of computation burdens when the number of choices is large becomes really important. Again, FinTech has its own challenges both with a number of possibilities out there, how many apps on the App Store related to FinTech at this point as an example, but also the underlying number of choices within the palette of potentials. Well, complexity matters when numerous choices are available. Research over many years has suggested that showing "Too much information Can affect the way the choices are made. It can skew risk perceptions. It can slow or make impossible decisions and decision-making. It can also impact the way people feel about their decisions and make them less happy about it." For example, Diacon and Hasseldine a couple years ago, found that investors are more likely to take risk when shown presentations over longer periods than when presented with succession of short period returns. In other words, one single longer-term representation of results, allowed clients or investors to make decisions more easily than a large number of shorter period returns. Other studies have suggested that when faced with many choices, investors choose not to participate. In a famous study of 401(k) defined contribution plans over a large number of participants, almost a million participants, across 660 companies, the number of choices as they increased caused decision or decision-making paralysis, we call it analysis paralysis. For every increase in options by 10, overall participation in retirement plans themselves declined by two percent. Framing decision-making thus turns out to be important. In addition, complexity interacts with trust. First, not having an answer leads to declining trust and second, when the client asks a question involving a complex scenario, a product service and so on, if an advisor did not know an answer, it was better than making up an answer. In well-known study, Bickart and co-authors conducted a series of studies in which participants rated advisors on two scores, trustworthiness and intention to make an investment decision with the advisor per se, after being presented with three answers from the advisor. One, absolutely correct and simple. Two, admitting ignorance and three, an answer that didn't sound right and appeared obfuscatory. What they found was that it's always better for an adviser to admit ignorance than obfuscate whether the client perceives the adviser earning a commission. Here are the results of the study relating complexity and clarity to trust and attention to invest. This is essentially a two-by-two matrix with commission motors on the left and no commission motive on the right. In other words, fee-only versus commission, and then participants who understood there's a commission versus participant who said the salesperson knew all the answers. Down at the bottom, we see intention to invest, subsequent to the interaction, and an overall rating of trust. Both of these scales range from one to seven with seven being greater in trust or intention than one. Let's focus on the bottom in the highlighted box. When there was no commission involved and of course, we know that in the FinTech space we have fee-only in commission oriented platforms companies. When a correct answer was provided, clear, and simple 4.91 average rating on the trust scale was observed, and a 4.5 rating on intention to invest. Note that when a commission was involved the 4.9 percent average dropped to 4.61 and the intention to invest drop from 4.5 to 4.3, both of which were statistically significant. Then, when we move from the correct answer simply expressed to a obfuscatory, in other words, an unclear possibly wrong response, the trust levels once again dropped dramatically especially, when a commission was involved. Four point nine one on the trust scale moved to 4.34 and then 4.34 move to 3.66 on the trust perception scale when a commission was perceived. To say it another way, an obfuscatory response brought trust perceptions down and interacted with the commission motive in a misalignment of incentives on behalf of the adviser as perceived by the client. In addition, the attention to invest went down from 4.5 to 4.36 and then from 4.36 to 3.56 was simply saying, "I don't know better." Absolutely. Again, think about trust perceptions. They went from, on the right in the no commission case from 4.9 to 4.8 and then in the commission case, the don't know response went from 4.8 to 4.42. In both cases better than making up a response. To summarize, intentions to invest, perceptions of trust interact with commissions and misalign of incentives as well as how responses happen. In the FinTech space, having unclear actions and unclear responses, as well as a heightened sensitivity to algorithms and potential mistrust and algorithms, come together both to represent a tailwind and a headwind for the industry. So at the end of the day, what can we say about what we know about the FinTech space generally and in particular about robo advising. Well, first it's here to stay and it's part of the way the world will work it seems ineluctable judging from both supply and demand. The increasing in size and number of deals. The upward general trend despite some market cycle variation. The global nature of the industry as well as how it's construed across sub-components. All tell us that FinTech as part and parcel of the world in the way forward. In addition, millennials matter in the heart and minds of millennials which seemed to be so much in the cross heirs of financial services firms already legacy firms as well as disruptors and entrepreneurial enterprises, underscore the avenue both the supply and the demand of FinTech providers. However, the traditional notions of trust not just in the financial industry but specifically in what is special about FinTech, algorithms and potential exposure to technology all come together. Traditional challenging areas like those of choice architecture arise. It's going to be nothing different for FinTech. Successful FinTech entrepreneurs, investors, and clients will resolve some of these challenges and harness the tailwinds while confronting both the classical and the new headwinds that are facing the industry. Almost surely, there will be winners and losers. Those that win will accommodate and treat these challenges and they'll harness some of them for the future
