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Models of investment advice (Part 1): Mass customization, Robo-Advisory and the operating model of the Funds Industry

© Joachim Löning

tetralog uses calculation algorithms and processes with which the fit of all customer portfolios can be analysed. The goals for such suitability analyses are manifold. To offer one example, the influence of current scenarios can be checked for each individual portfolio by using the batch processing mode in order to draw conclusions for product development or customer contact. However, the suitability of a customer’s current investments with their risk profile data, as required by MIFID, represents only a fraction of the diversity of a customer’s financial goals. The question of what mass customization actually means for the financial market must be seen against this background.

In this first article, we approach the topic in terms of definitions, look at examples in other markets, and look at some specific financial market mechanisms that are important for future mass customization offerings. In the second part, we once again give examples from other industries, but also look at how an individual approach can lead to a more exciting handling of financial matters.

There are real innovations and persistent theories in the financial market. While a kind of ignition spark can suffice for some innovations to become cemented in the market, there are topics that recur time and again and yet fail to achieve market-wide acceptance and dissemination. “Mass customization”, which often receives the unsexy translation of “customized mass production”, probably falls into the latter of the two categories. Robo-Advisory, on the other hand, can be seen as a sparkling innovation, considering the rapid development of this market segment.

Mass Customization carries the promise of one-off production, a batch size of 1. But we should question to what extent this is actually being achieved within the financial services industry. Robo Advisors came to the market with the promise of individuality and the scaling of software-supported processes, but the majority of them in fact simply offer prefabricated model portfolios. In addition, they act to ensure that one is kept within certain ranges and restricted to certain allocations (individual stocks, asset classes, strategies). Although this may allow for more individuality than other offers, and also for lower costs to be passed on to the customer, most of these investment proposals nevertheless in fact represent a simplification on the basis of collected customer profiles and are far from a lot size of 1.

In the interests of the customer, it is also questionable whether the investment of a single amount for a single target is not actually some kind of a shortcut. A holistic solution for a customer should instead encompass all the financial goals of a customer. More on this in the 2nd part of this article.

With a look at different industries and examples, we will go on to show what is and is not possible today with Mass Customization, who should make use of it in the profession of investment consulting, and how it works.

Hamburger Example – Through customization having becomes being

Many consumers use offers that allow them to transfer their personal wishes into products. Burger King, for example, has for many years advertised the potential individuality of its hamburgers with the well-known slogan ‘Have it your way’. Even if it is ‘only’ a matter of selecting the ingredients of a hamburger, the claim well expresses the transition from a standard product (hamburger) to something customer-driven. Today, brand claims can go one step further: with ‘Be your way’, the custom hamburger meal becomes an expression of authenticity, conviction and style. The level of having is left behind, and the level of being begins.

Whilst a burger is a consumer good that is experienced and disappears when eaten, the situation is different with financial services. Investing is not only more expensive, but the satisfaction from the purchase the reward  –  is deferred.

Harley Davidson Example – sound as the characteristic brand experience

When buying Harley Davidson motorcycles the product can be highly customizable, but the specific quality of the brand is conveyed above all by the characteristic sound of a Harley, which shapes the riding experience. By comparison, it is only in very exceptional cases that the products of a financial services provider are equipped with sensorially perceptible features that could constitute such a brand experience.

Mechanisms of customer satisfaction at financial service providers

If customer satisfaction stems from reaching a psychological goal, then the customer of investment funds has a hard time. As fund issuers recommend a long holding period, it is only after long periods of time that any assessment regarding whether or not the investment fund has fulfilled its purpose for the customer is even possible, at this point the exact terms of the original goal are likely to have become vague. As a customer of investment funds, there are simply few experiences that one can use to compare them with expectations. With hamburgers, the reward is the consumption; with a Harley, it is the acoustics during use.

For the providers of managed funds, it seems that, due to the longevity of the product and the accompanying difficulty in realising customer satisfaction, all is left is the potential to differentiate in packaging and marketing.

Brand experience with financial service providers

Financial brands often use seafaring metaphors (compass, keeping course, moving forward!), references to traditions (long ago, the original, time-aged values) or the promise of being a far-sighted partner (for families, for old age, for potential challenges). These typical narratives manifest themselves in the form of coordinated brochures and glossy documents provided by the marketing departments for the various stages of consultation and channels.

In comparison to differences that can be heard, smelled and feltlike, for example, the sound of a Harley there is very little on offer here. Funds are virtual products that lack any kind of physical tangibility, and it is therefore extremely difficult to give them any kind of emotional charge. As B2B partners of the fund management industry, advisors are offered products that are compatible with the respective brand narrative and which they can use for their own and their customers’ identification with the fund issuer.

How such offers can be used by independent advisors is the subject of the following section.

The B2C sales process for investment advice

A special feature of the process of giving investment advice is that investment is sold, not bought. By far the majority of investments are sold by advisors, and only the smaller part by Do it Yourself offers such as Robo-Advisor.

While Robo-advisory leaves it up to its customers to decide which brand stories they identify with, consultants can identify with the narratives offered by individual companies and present them to the customer. From the client’s perspective, the advisors are representatives of the brand message of the fund they are selling. We can fairly suspect that it is unlikely for such “second-hand” messages to have much connection to the product and brand. The advisor instead relies on being seen by his client as an honest broker, and this comes in hand with a wariness of showing too much loyalty to an individual fund management brand.

The advisor does well to suggest a “reorientation” to the customer in the event of a sold fund underperforming, but this means that any laboriously built brand loyalty is gone. On the other hand, the advisor is in a good position, proving to be independent and focussed on the client’s best interests.

The downstream B2C sales process

There is another important process detail in the B2C investment advisory process: the purchase of a fund is, to reference Herzberg’s two-factor theory, a hygiene factor; profit expectation is the self-evident normal case. When the performance of a fund (a very comparable product) declines, the customer sees what price he is paying, and cognitive dissonance gnaws at the loyalty to the fund issuer.

This is different to the cases of buying a hamburger or a Harley: there, the sensory induced emotions of the product can be experienced and checked over and over again. In the case of funds, customers have to see for themselves what the price development is like, expecting profits as a normal case and becoming dissatisfied in the case of stagnation or losses.


It has been shown that Robo-Advisors do not offer true mass customization. Presumably only a small portion of the current Robo-Advisory platforms will retain a presence in the financial industry. Most investment products are still, and will remain to be, sold through consultants. Established asset management firms have to overcome some significant hurdles in this business represented by advisors as the product (i.e. the fund) cannot provide the sensory dimensions that inspire customers, the usual timelines for buying funds is not suitable for retaining customers, and, finally, the independence of the advisor who performs the actual selling stands in the way of the retention efforts made by the firm.

As it is unfeasible for a fund to have genuine sensory qualities, it would be desirable to provide more feedback on the products and solutions of any particular asset management firm. The goal should be to become the guarantor of the client’s objectives and, perhaps most crucially, to be able to report on them at any time. In this way, the advisor can also be effectively tied to an individual asset management firm, because the latter provides him with impulses for action through the solutions agreed with his customers.

Mass customization in sectors outside the financial market offers a number of suggestions for this. For a lot size of 1, many approaches are available at the individual level of the customer. “Have it your way” is easy for a customer to get at Burger King, but in the financial market such an offering is only available from financial planners. An asset management firm has all the prerequisites on board to support the creation of comprehensive solutions that reflect the customer’s objectives.

Read on: Models of investment advice (Part 2): Paths to Mass Customization

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