Financial Poise

One-on-One With Lex Sokolin of Autonomous Research

Alexey (Lex) Sokolin is a Partner and Global Director of Fintech Strategy at Autonomous, a research firm for the financial sector. His mission is to help the industry serve clients better by understanding innovations like wearable technology, machine learning, bitcoin, ethereum and the blockchain, and crowd-sourced asset management. Sokolin has been referred to by WealthManagement.com as the “financial futurist“, and was selected for the InvestmentNews  “40 under 40” and ThinkAdvisor’s “IA25” lists of influencers in the investment industry. Sokolin will be a guest on Financial Poise Radio soon. In the interview below, he discusses Autonomous, his role with the company and what he sees as the industry’s most exciting potential developments.

 

new lex

Lex Sokolin

Hello Lex. So what exactly is Autonomous Research?

Autonomous Research is the leading independent research firm covering the financial services industry globally. Founded in 2009, the firm has distinguished itself with in-depth, unbiased investment research on global banks, brokers, asset managers, insurance, information services, payment-technology,  mortgage finance and consumer finance companies. Its recently-launched Fintech practice explores the impact of technology on the future of finance.

What do you do at Autonomous and how did you get there?

I am the Global Director of Fintech Strategy at Autonomous, focused on discovering actionable insights about Fintech and the financial services industry for our clients. We help investors and executives make sense of innovation and disruption. I am leading the effort to build out a creative, original and rigorous Fintech research practice that combines both a fundamental and an innovation perspective. This should lead to better decisions in the industry and superior outcomes for all stakeholders. We call it Autonomous NEXT.

I made this transition after six years of building a roboadvisor platform—as founder of NestEgg Wealth, and thereafter as COO of wealth management tech company Vanare, which acquired NestEgg. While trying to apply the consumer web to finance and digitize the financial adviser process, we learned a transformational fact. Tech is no longer “information technology” to be relegated to some attic. Tech and media are colliding with finance, like tectonic plates moving continents. Software is smarter than us, faster than us, scales infinitely, and is marginally free. Software wants to help everyone have everything all the time. But what no robot will do is have human emotion, personal empathy, and the ambitions for art, expression and fulfillment. I want to help people see that and build organizations that support machine scale with a human heart.

What kind of transformations do you see specifically?

We are experiencing profound transformation at every level of value in finance, from the infrastructure (Bitcoin, Blockchain, Ethereum), to the middle office (Big Data & APIs, Artificial Intelligence), to the client experience (Roboadvice, Consumer & Mobile Web, Wearables, Virtual Reality). Incumbents are being challenged on multiple fronts by unfamiliar competition—startups, media, technology companies—and not all will keep up. The industry is having a Blockbuster/Netflix moment, and financiers need to rapidly develop expertise in what technology will do next.

I’ve developed a general framework at Autonomous that helps put this into context. If we believe that technology is on a path to greater automation, we can track that automation along the axes of Process and Intelligence. So for example, Roboadvice is an innovation that started in the front office and introduced automated process. Even today, much of the intelligence of investment and model selection is done by people, so we still use human intelligence. A newer technology, such as Chatbots, which many banks are now adopting also on websites and within apps, is the introduction of actual machine intelligence into the front office. This leads to even greater disintermediation and scale.

You mentioned Blockchain. What does the path look like there?

Blockchain is deeply important to the industry, even putting aside the positive hype cycle. It is a back office innovation that replaces the human process of reconciliation and settlement with a machine process, which is mathematically complete. It evaporates the human value chain in many cases.

In my view, we are now in the third wave of this innovation. The first was the initial enthusiasm for Bitcoin, leading to the proliferation of wallets and exchanges for cryptocurrencies. The second wave saw the separation of Bitcoin’s blockchain infrastructure from the digital currency, and multiple consortiums getting set up by the financial industry to prepare for a potential transformation. Early winners partnered with the largest global banks to test trading, money movement, and other investment management functions. The fruits of these partnerships are on display today with Ripple, R3 and Digital Asset Holdings and the utility settlement coin.

But we’ve entered the third wave, where trust and identity is no longer enough. Users want the blockchain infrastructure to do more, to have some sort of machine intelligence. Ethereum is the prime example of this, creating a platform for developers to build applications into the blockchain itself. This democratization is leading to amazing creativity – from upstart trading markets to autonomous venture capital funds, all built on code. Thus we’ve entered the age of smart contracts, which can know identity, understand big data, and take actions within a defined ecosystem. Giants like Microsoft and IBM are putting major resources behind this vision of the world, developing a much smarter cloud.

Are Smart Contracts really Contracts? Can they be hacked?

Nobody agrees on the definition of “smart contract”, and there are ethical and legal problems with thinking about them as contracts. Case in point — the $75 million Decentralized Autonomous Organization hack created a rift in the community on precisely this issue. The hack exploited the ability to take out money recursively, which was an oversight in the code. Part of the community thought that this had to be rolled back and erased, which required forking the code to pretend the hack never happened. Another part of the community saw the code as law, meaning that using the code implied a meeting of the minds with the code itself, rather than some interpretable intent of the DAO. So now we have two versions of Ethereum, one for each philosophical approach.

So here’s my best attempt — a smart contract is a business logic agreement formalized and made binding using the instrument of software code, with the purpose of facilitating legal agreements in whole or in part, through any of execution, enforcement or remedy. We still need the legal system and human interpretation to connect Ethereum to our legal and financial systems. Many in the cryptocurrency community think of that as blasphemy. But it is important to remember that we are social mammals and technology is a tool we define and wield within a cultural, social and historical context.

How can financial firms take advantage of these advances?

We work with our clients at Autonomous to answer exactly this question. The largest threat to the industry is not the proliferation of Fintech startups, many of which are being acquired and incorporated into the service model of incumbent institutions. Instead, it is the cultural shift towards technology and media companies. This starts at the level of understanding the core technologies like virtual reality, artificial intelligence and the Internet of Things. It then extends into applications of that technology into financial processes. For example, how can an investment firm compare its 10-question paper risk tolerance questionnaire with Facebook’s preference and social graphs derived from thousands of digital interactions? There is a real risk of that investment firm being multiple generations behind.

The way to address these issues operationally is through mission and culture. The industry needs to rediscover how to connect with Millennials, who are purpose and experience driven, and build products and services reflecting new approaches. This is a large challenge, but we see promising signs in the advent of Fintech, corporate venture capital and innovation labs.

We can also identify winners and losers through the waves of these technology challenges. In addition to the innovation lens, Autonomous has a deep fundamentals lens for analyzing companies. It’s the only firm I have come across that systematically quantifies the impact of changing business models on industries and specific incumbents. Most of that work is done privately for clients, for which we only service institutional/ professional investors, but we’ve shared some of our work on our page.

 

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