Disclaimer: The author has worked as a consultant for Mandatum Life during 2018-2019. Mandatum Life has reviewed this article and accepted it to be published as such without requesting any significant revisions to it. Naturally, where the author’s views and opinions are shared, they are the author’s responsibility only, and any remaining mistakes and errors are entirely mine. No official endorsement by Mandatum Life or author’s employer is intended or should be inferred.
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Investment management industry has been traditionally dominated by different financial services firms, including banks, wealth managers, securities brokers, investment firms, insurers, and private banks. The industry is highly regulated and operates in a very challenging environment. Traditional investment management industry, including asset management and wealth management, is now under considerable pressure, and there is an obvious need to embrace new ways of operating in a more cost-efficient manner while growing profitably; and at the same time, the industry dynamics are shifting drastically.
With new flexible players penetrating the market as well as the increasing regulative burden and growing compliance costs, the necessity to find new ingenious ways to enhance performance, control risks and improve the overall customer experience is continuously increasing. As the financial services industry continues to transform from the manufacturing age to the age of the young customer, technology continues to affect investment management firms more and more throughout the investment management value chain.
Every one of us wants to be financially safe, and wealth management – whether it’s done via equities, bonds, real estate or what have you – is not only about accumulating, retaining and guaranteeing wealth but rather finding creative ways for people to enjoy and benefit from all the possibilities wealth ultimately creates. “No investment is safe forever. He who does not use his property in serving the consumers in the most efficient way is doomed to failure,” Austrian economist Ludwig von Mises once proclaimed in his magnum opus Human Action. Although some might be happy just owning some financial assets and holding cash balances, some people want to have it both and enjoy their wealth.
Emerging digital tools and solutions, such as digital platforms, advanced and predictive analytics, algorithmic trading, APIs, chatbots, real-time chat, and machine learning, have created new opportunities to serve for example self-directed and tech-savvy mass affluent customers with digital-only services (e.g., robo-advisors and hybrid models). Investment managers are facing significant challenges in adopting new business models and new means of distribution, but digital disruption is not only about technology per se. Changing consumer behavior, new business models, demographic change, and hypercompetition play a significant role too.
Also, customer expectations are not what they used to be as we are constantly bombarded with increasingly integrated value propositions, radically personalized content, and situation-aware recommendations. During the last couple of years, numerous new players often labeled as fintechs or more specifically wealthtechs and investechs, have been accelerating the ongoing change by focusing on serving an existing customer base of the incumbents as well as attracting previously unserved customers to test new services provided by these new investment management players. Although some players think that that digital is just one of those projects that can be completed in no time, and what digital means is that you just add something like a channel here or a new fancy application there. This not how industry transformation works as W. Chan Kim and Renée Mauborgne pointed in their book Blue Ocean Strategy: How to Create Uncontested Market Space and Make Competition Irrelevant.
Wealthtech is commonly used to designate both various technologies as well as business models that are currently being adopted by the wealth management, securities brokerage, and financial advisory industry. Wealth management, and financial services industry in general, has traditionally been perceived as a rather conservative, passive, and risk-averse industry. But this is not really true as Nigel Edward Morecroft in his excellent book, The Origins of Asset Management from 1700 to 1960 Towering Investors, and Norton Reamer and Jesse Downing in their book, Investment: A History, have demonstrated respectively. Finance has always been at the forefront of adopting new technologies to new use cases, but it’s, of course, hard to apprehend what this really means as it looks like anything hasn’t really changed in the past twenty years. Things are moving slowly at multiple fronts, but at the same time, many incumbents are adopting new ways of working when they approach new possibilities and opportunities available to them.
The world of wealth management, securities brokerage, and financial advisory is changing so fast that it’s becoming increasingly difficult to keep up with all the changes. 1)I have, for example, been updating a timeline of the digital wealth management landscape since mid-2017 but as there are so many things happening all the time, I decided to scrap the old static timeline last September, and since then I have been setting up a more flexible solution to keep in pace with at least some of the latest trends and news I come across. Numerous incumbents from all around the world, and an increasing number of startups, are offering a wide range of different solutions both to retail customers and institutional clients.
There are various sorts of fintechs operating in the investment management and wealth management space, and it’s essential to keep in mind that not every company is the same. Companies all around the world, such as Betterment, Wealthfront, ETFmatic, Personal Capital, Nutmeg, and Wealthsimple have been able to capitalize on the increasing enthusiasm towards various kinds of new digital value propositions. Besides, there are now many good cases from different types of tactical and strategic partnerships such as software firm Envestnet working together with Advicent, BlackRock, and LifeYield. On the other hand, some of the robo-advisory companies, such as FutureAdvisor, SigFig, WealthNavi, Folio, and Betterment, that are also working with robo-technology licensing and white-labeling, are making considerable progress.
Fast changes in the investment management industry and the level of digital disruption in how investment advice and solutions are produced and distributed has attracted many Nordic incumbents – including Nordea, Nordnet, Taaleri, Evli, Danske Bank, Sbanken, S-Pankki, Mandatum Life, and Jyske Bank – to simplify products and processes to improve wealth management and investment advice offering. This should mean better financial service to investors and savers. In the Nordics numerous new and traditional actors are competing in the investments and savings markets, and new players such as Inderes (equities research & analysis), Useless (sustainable financing), mintle (integrated PFM), Evervest (digital advice), WealthyTech (social investing), Invesdor (digital investment platform & crowdfunding), Opti (digital advice), Fellow Finance (P2P lending), Selma Finance (digital advice), Lysa (digital advice), Sigmastocks (investment tool), Waizer (robo-advisory), and NORD Investments (digital advice) are making progress in the investments space at their respective fronts.
“All the key players are, in one way or another, thinking about developing robo-advisory solutions,” Deloitte’s 2017 study reported. While some incumbents are autonomously developing digital investment management solutions and capabilities in-house on their own or with chosen ecosystem partners, others have been co-operating with various financial technology companies and fintechs for a long time already.
The partnership between Finnish life insurer Mandatum Life and fully licensed and regulated Danish Saxo Bank to launch a new Mandatum Trader trading and execution service is an excellent illustration of a new kind of business partnership in the Nordic investment management markets. To better understand why Mandatum Life and Saxo Bank partnered and the potential business reasons the collaboration offers, I will give my take on this interesting case as this kind of things – noteworthy partnerships in the trading and execution space – don’t take place every day.
Mandatum Life yearned a new digital business… with real upside potential
Mandatum Life is a well-known Finnish life insurance company that has a long history. The current Mandatum Life was born in 2008, and it currently has over 300 000 private customers as well as 20 000 corporate clients. Danish Saxo Bank, on the other hand, was founded almost 30 years ago in 1992 in Denmark, and it is a fully licensed and regulated European bank operating around the globe. Saxo has been licensing its platform and technologies to various financial services for years, and it’s an excellent example of Financial-Services-as-a-Service (FSaaS) player.
Although Mandatum Life has a large client base, its digital savings and investments offerings have been relatively limited. So, it makes sense that Mandatum Life wants to increase its offering by creating a new line of business by offering trading and execution services via Saxo Bank when an opportunity presented itself. In late 2017, Mandatum Life’s parent company, Sampo Group, acquired a stake of 19,9% of Saxo Bank, and in October 2018 it was announced that Mandatum Trader will be launched in early 2019.
So, why do I think that the partnership makes sense? First, Mandatum Life, as well as any other life insurance company with wealth management and asset management operations, needs to find profitable growth opportunities as well as attract non-customers to become customers. Secondly, Mandatum Life is already offering a wide range of investments to their customers, so if there is an opportunity to complement the core offering with a self-directed brokerage service, there might be good product-business-market fit. So, as Mandatum Trader was launched in early April 2019, the reasons for entering into the partnership with Saxo Bank seem to make sense to me. And, of course, if the parent company – namely Sampo Group – had already made an investment (€265 million to be precise), it would have been somewhat peculiar if Mandatum Life’s C-suite would not have at least explored this opportunity.
So ultimately, Mandatum Life wanted to add traditional brokerage – trading and execution – to their offering to provide their customers with more investment options. This point was also raised by Mandatum Life’s CEO Petri Niemisvirta in the press release announcing the partnership last October. Saxo Bank, on the other hand, wants to become a leading global financial technology partner and wants to generate new business as well.
Saxo Bank has been operating in Finland indirectly for a long time, and some years ago Saxo Privatbank (now part of Alm. Brand) offered its services to Finnish customers as well. Now, by partnering with Mandatum Life, Saxo Bank can likely benefit from multiple reasonable “upside factors” as I have previously described in my articles exploring the partnership (in Finnish). The partnership allows Saxo Bank to accelerate retail customer acquisition and enter the Finnish brokerage market in a way that seems to make business sense.
As Kim Fournais, the co-founder and CEO of Saxo Bank, pointed out in Saxo Bank’s press release in late October 2018:
“We are proud to partner with Mandatum Life and support the mission to provide Finnish investors with better global investment opportunities. Saxo Bank has always strived to democratize trading and investment to empower everyone with the best tools and opportunities to navigate their own financial destiny. With Mandatum Life’s new solution, Finnish investors and traders get a much better basis for managing their investments and build diversified portfolios across asset classes and geographies.”
Taking into consideration the way wealth management and asset management services have been changing since the financial crisis, it is possible that in the future Mandatum Life could make a considerable amount of its revenues – directly or indirectly – from Mandatum Trader, and if the global macroeconomic situation continues to be as it is, Mandatum Trader offers more self-directed clients the possibility to trade on a variety of financial instruments.
Mandatum Trader, as the new service has been named, makes it possible for Mandatum Life to expand its business and possibly target totally new customer segments. Yes, of course, the Finnish equities savings accounts (ESA) will change the market a bit next year. Let’s assume for the sake of the argument that 100 000 ESAs will be created in the first year that is €5 billion (max €50,000 per ESA) up for grabs. Now, let’s further assume that Mandatum Trader would be able to capture only 1% of that and every customer would invest €10,000 in 2020, that is €10 million AUM to Mandatum Trader in the first year alone. Not bad, I would say.
It remains to be seen how Mandatum Trader will succeed, but I think that the launch of Mandatum Trader makes business wise. It reduces Mandatum Life’s exposure to persistently low-interest rates – a headache for the life insurance industry. It also has drawbacks: in the long-run, the highly competitive brokerage business will most likely produce lower profit margins than traditional life insurance and wealth management. However, Finnish life insurers want to build new business and revenue streams, and as the new legislation, that will also introduce equities savings accounts in early 2020, will change some of the rules of the game, wealth and asset managers – not only insurers – need to address the new opportunities s as investors are given more flexibility in how they save and invest.
New digital investment management value propositions are affecting the industry all around the world, and it’s exciting to see that even incumbents are willing to make a wise pivot – “a strategy fit for the digital age that can help companies pursue new growth opportunities without abandoning their core business” – to find new business areas. To understand why Mandatum Life launched Mandatum Trader together with Saxo Bank and why there are many more things going on than meets the eye, I have tried to synthesize my findings of Mandatum Trader to you.
Partner because it makes life easier
The partnership makes it possible for Mandatum Trader customers to trade and invest via Saxo Bank’s three platforms and mobile app. Interested prospects can register and buy stocks in less than in 10 minutes, and the onboarding process is entirely paperless for private customers. Initial onboarding takes place through Mandatum Trader’s website, and after successful onboarding, the client will move to Saxo Bank. In this way, Mandatum Life takes care of certain regulatory and juridical elements – including the initial customer identity verification – while fully licensed and regulated Saxo Bank handles the rest. The client can fund the trading account either with regular bank transfer or fast e-payment method.
Mandatum Trader is a form co-branding that offers a pretty seamless and frictionless customer experience. This partnership strategy is in line with Mandatum Life’s history of partnering with professional firms to provide products: Mandatum Life acquired two Fourton funds in 2017, continued their successful collaboration with Danske Bank in 2018, and partial ownership of Swedish alternative investment fund company Crescit in 2019, for example. The partnership between Mandatum Life and Saxo Bank offers an opportunity for Saxo Bank to tap into Mandatum Life’s significant client base and local market knowledge, and Mandatum Life, on the other hand, can think about new business opportunities created by the partnership.
So, how is Mandatum Trader doing?
Although Mandatum Life has not yet publicly communicated results around Mandatum Trader, Saxo Bank’s overall market share in cash markets in the Nordics is still small in terms of turnover and trader. In a way, this is understandable as Saxo Bank is best known for its vast selection of trading instruments such as options, FX, and futures that are not usually available to private investors. At the same time, most of the Finnish private investors have not traditionally been very interested in advanced option trading strategies such as long put ladders or short guts, and as the Finnish tax legislation doesn’t recognize the CFD trading losses, it’s not easy to get going.
It’s evident that Saxo Bank and Mandatum Life cooperation is a relatively unique business and operating model in Finland. Personally, I have been working with brokerage and trading for over eight years, and I have not ever seen anything like what Mandatum Trader is trying to do, namely creating a blue ocean.
Mandatum Trader’s overall pricing model is pretty straightforward in cash only products: there are three separate pricing categories (Basic, Plus and Best) so that the client pays either the flat/fixed minimum fee or variable fee within a certain threshold. The commission model is updated every month based on the transaction volume and/or AUM. If the client trades, for example, with derivatives or FX, the fees are based on Saxo Bank’s international pricing. Mandatum Trader’s overall pricing is competitive in the Finnish brokerage space.
As a result, cooperation not only allows Mandatum Life to eliminate possible reasons for existing customers to find a broker for trading and execution, but it might also bolster its revenue from cross-selling their other services to its customers. And, given the fact that retail onboarding is easy and intuitive, Saxo Bank will benefit from Mandatum Trader’s local experiences when developing their solutions to future financial services clients as well as onboarding new Finnish customers.
What to think about the partnership?
I love anything related to wealth management, asset management, and investments in general. I am not impartial about Mandatum Life as I have worked with them previously and I hold Sampo Group shares, but I wish them best of luck. The market conditions are challenging as fears about China slowdown, trade war escalation, and Europe’s low growth increase. Some traders will undoubtedly love the increased volatility while others don’t. This will undoubtedly affect all the self-directed
Personally, I admire Mandatum Trader’s general approach, and I think that the masterminds behind the cooperation have been smart. The partnership between Saxo Bank and Mandatum Life is a bold move, and it’s a great example where two different financial service incumbent – one working with trading and another traditionally relying on insurance – can find each other, and I think that it also shows where the industry is currently going. It gives a lot of reasons to think about the future of investment management in general, and how different players might react.
While I and many others have noticed a growing trend in co-operation between incumbents and especially fintechs and incumbents, there still is not enough research about these various collaboration setups. It’s easy to understand how credit card issuers and acquirers operate in the market, and there is a lot of stories about open banking, but the theoretical point of view is still mostly missing. How to make sense of all the things going on? The tangible empirical evidence of totally new business being integrated into an existing financial services business has been mainly abstract, but it would be great to see academics and practitioners paying more attention to real-world case studies.
However, as Saxo Bank and Mandatum Life collaboration shows, incumbents are nevertheless equipped to identify critical strategic partnerships to boost their offerings, expand their revenue streams, avoid the costs of developing innovative services purely in-house, and even more importantly, able to offer their customers the actual services they might desire. For all the Nordic brokerage players, the case of Saxo Bank’s collaboration with Mandatum Life highlights the benefits of working with a potential competitor to access the extensive, attractive local customer base.
I believe that Nordic investment managers should learn more about Mandatum Trader in general and take it as an interesting case example when analyzing their digital investment management efforts. Incumbents looking to create their own challenger brands would learn a lot from Mandatum Trader – the new business operates as a startup within an established company. It is free from existing legacy thinking, while also being an integral part of Mandatum Life’s existing business. This, coupled with Saxo Bank’s cutting-edge capabilities, is an impressive combination that could help other incumbents pivot wisely for the new digital age if they can, in essence, match the example set by Mandatum Trader. Already, several of Nordic and non-Nordic financial institutions are trying something similar out: for instance, Nordnet integrated with Shareville in September 2014, Taaleri acquired Evervest in 2018, Lynx Brokers has been working with Interactive Brokers UK for a long time, and Italian Banca Generali partnered with Saxo Bank in 2018. There are numerous examples available.
Notwithstanding, successfully repeating Mandatum Trader’s approach might require more than just deploying out-of-the-box digital capabilities here and there; most importantly, this kind of partnership setups necessitate close collaboration and coordination between numerous activities and stakeholders so that the result – namely solving customers’ jobs to be done – is something more than just new things on top of old things. That’s what will set new ways of working apart from the rest.
Conclusions
Almost every private investor is now seeking almost immediate responsiveness, 24/7 information access, flexibility, and control over decisions and their data. As investment management firms try to make sense of the ongoing disruption, it seems too hard for many incumbents to make sense of the fragmented customer base and especially new generations of investors that are excited to adopt new technologically-oriented solutions while professional traders will need some very advanced services that are not readily available.
Mandatum Life’s partnership with Saxo Bank makes it easier for the two firms to expand operations locally and better manage business pressures. Online brokers are facing a range of urgent business challenges, including intensifying competition, increased regulatory burden, volatile macroeconomic environment, liquid customer expectations, and the need for considerable technology investments, so it makes sense for Mandatum Life to partner up with a high-end financial technology specialist such as Saxo Bank.
Partnership models, like Saxo Bank and Mandatum Life to launch Mandatum Trader, show that traditional incumbents are willing to partner for specific capabilities architecture to stay competitive without abandoning their roots. Saxo Bank’s open platform business model is fascinating as they can provide a range of capabilities and skills for their financial institution clients that are otherwise be very time-consuming and costly to implement on the existing legacy infrastructure. However, as it was pointed out in an insightful article published in Forbes late last year, Saxo is “aiming to act as a ‘facilitator,’ the bank allows its clients to access the varied global markets and investment tools they need, via Open API.”
I believe that we will see these kinds of business models – partnering and facilitating – becoming much more common in the future. “Partners no longer need to build their own platforms or rely on their old machines or processing systems to access the capital markets as they can use Saxo’s technology stack instead,” per Forbes. Partnership and facilitation will also affect the market dynamics as partnerships will allow even smaller players to tap into considerably more advanced technologies and solutions than previously. While smaller independent investment management firms struggle with customer acquisition efforts, partnerships like the one of Saxo Bank and Mandatum Life are likely to become more prevalent, and they can also act as a catalyst especially for smaller competitors to think about cooperation and partnership models.
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Photo credit: Bill Gracey via flick / Some rights reserved
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