Dr. Drago Indjic, Oxquant Consulting Limited’s Managing Director, was recently interviewed by the FinTech Istanbul writer S. Elif Kocaoglu Ulbrich about WealthTech. We have compiled the transcript of the interview below, which is available in its original language (English) as a Podcast.

Today we have an exceptional guest, Dr. Drago Indjic. Drago wears many hats: he is an engineer turned data scientist, a former hedge fund manager, an entrepreneur, and a part-time university lecturer. He was in the founding team of ETFmatic, the most downloaded Robo-advisory app in Europe, and provides consultancy services through his Oxford-based firm Oxquant.

After several years in the FinTech ecosystem, Drago was invited by FinTech Circle to co-edit the LegalTech Book that Wiley will publish in April 2020. So, who better to discuss WealthTech with, we have thought, and here we are to discuss ten topics in twenty minutes:

  • Drago, welcome! Can you tell us how you found yourself in finance?

Thank you, Sebnem, By pure coincidence! As a former – stateless – Yugoslav I have been visiting academic at Imperial College in London. Civil war started in Yugoslavia, I registered as a PhD student and completed my research but lacking a working visa I could not get a job in academia. Luckily, a small economic research consultancy ran by two South Africans who understood problems with sanctions and citizenships took a bet on me and managed to obtain a work permit in 1993 where I started developing neural network models for forecasting, later described in a book Neural Networks in Finance, published by Springer. And then my second work permit came via Kuwait sovereign wealth (investment) fund, then I passed a brokerage exam (IMC) and ever since 1999 I have been firmly in FCA regulatory database as an authorized financial professional to this very date.

  • Amazing! So, it’s around 20 years of experience we are talking about?

20 years of professional experience.

  • Really impressive. Then let’s start with the basics – ETFs gained a lot of attention in the market, especially after Warren Buffet recommended investing in them. What makes this instrument more attractive than others in your opinion?

You’ve just reminded me that Warren Buffet actually did something else. He did a bet against hedge fund people that S&P 500 over ten years will outperform hedge funds. He won this bet.

Anyway, funnily enough, I got into ETFs via hedge fund route, because I was researching hedge fund index replication at London Business School around 2005, thereby witnessing the birth of alternative Beta. Today, I can see that ETFs are as easily tradable as stocks – if not even better during dramatic periods (like September 2008) where their trading volumes surpass the equities – and can address a complete investment thesis at a single stroke, even a complex one, like an inverse, leveraged, smart Beta or alternative asset class. On distribution side, the fierce competition between ETF vendors reduced fees to very low level, down to 10bps level – even negative when they are trying to gain assets (during a launch phase). This is the new world basically. I love ETFs. I have them in my pension fund. Happy to promote them globally, if required.

  • I see where the idea of ETFmatic is coming from actually. But I think our followers would be very interested in learning what is it exactly, and what made you build this product.

Right. I did not get assets for my own hedge fund bravely launched in 2009 and I decided to close it 2014. In mid-2015 ETFMatic CEO, a Spanish and COO, a Swede were looking for an CIO with FCA credentials who is able to build a fully systematic investment process for a robo-advisor based on an academic blueprint. And I did it. British Nutmeg was already there, albeit with a human PM and limited number of model portfolios, and German team behind Scalable was still not on horizon. So, ETFmatic was a true entrepreneurial venture, bootstrapped by family and friends’ money and then supported in several financing rounds by predominantly local investors. Over the next 1,5 years I have enjoyed a real reverse mentoring, which means that younger people coached me, a senior guy. I have transitioned from a hedgie CIO thinking about qualified off-shore investors writing $10m size tickets to a retail customer CIO one worrying about the suitability, regular saving schemes of EUR 20-30 per month and regular EUR 50 per month contributions. Fortunately, at the end of 2016, Post-Brexit, I could not move family to Madrid, but I found myself very happy thinking about growing, global retail FinTech, ETFmatic is today competing against several large but still loss-making robo supported by institutional money. I am still an advisor of ETF-matic, and a happy shareholder.

  • I see. I would be very interested in hearing your family’s opinion on this Madrid journey. Anyway, speaking of investments, do you think that we need more investment solutions in the market? If so, in which direction?

Well, we have too many investment funds, but only B2B2C fashion, not D2C distributed and not massively personalized. I belive that we need if not revolution, at least liberation in fund industry.

Investment solutions are a spectrum: I find myself thinking equally hard about an inclusive, African payment FinTech in Kenya or Tanzania that will create wealth in D2C fashion for billions throughout this century and national pension or sovereign wealth funds that should carefully navigate NIRP regime and maintain financial system stability.

You are asking me about direction: from macro perspective, we need investment solutions that reduces global inequalities: diversity of vendors, currencies, exchanges; better corporate governance, sustainable finance, innovation, customer outcomes oriented, therefore more disintermediated and decentralized. Also, at micro level, something that is as inclusive and pervasive as a mobile phone app, one can supplement one’s life events and households. I strongly support this type of, D2C, investment solutions. 

  • It actually sounds like there is still a lot of room in the market. Is Robo-advisory merely the digitalization of financial advisory segment, or there is more to it?

Yes, it is. It is digitalization. But I would stress that it is a starting point: note my emphasis on a fully systematic investment process at massive retail end of the spectrum, the one where  economies of scale result in subhuman costs, if you like, because we have this requirement to compound to a wealth (say to a value of a few annual gross salaries, or savings/home value multiple) at a lowest possible cost, utilizing automatically all tax allowances, monitoring portfolios in risk-controlled fashion, something that can be delivered only through automated, digital, systematic solutions. Therefore, the advisory element, humans in this picture, should be used to complement this financial health assessment, meaning taking into account your family and tax returns, but as a truly independent, affordable and obviously accountable professional service. Therefore, I believe hybrids between robo-advisory and human advisories are going to succeed in this market.

  • Do you think Robo-advisory will become more widespread in the future? Can we expect all banks (offering investment services) to launch Robo-advisory products at one point?

Well, when you say bank, I start thinking about what a bank is today. We have EU EMI regulation can provide better customer experience through apps that do not have banking licenses. N26 in Germany, Monzo across Europe and Starling in the UK are leading in bank-customer switching tables now. 

It should – to answer your question. because, I can’t think about any other mechanism that can provide a personalized, direct sold, investment service to young people at cost expressed in basis points. If banks have started competing with PayTech companies, surely, we can expect them to compete with digital wealth technologies.

One can actually start questioning what is digital strategy beyond payments? Is there one? In India FinTechs are equitizing deposits in robo-advisors, meaning substituting normal bank deposit. That is a very naughty solution.

  • That sounds quite interesting actually. Speaking of robo-advisory; I believe you are also working on white-label Robo-advisory solutions for banks and financial institutions. How does that work?

Well, today having done a few of these, I enjoy analyzing robo propositions, benchmarking digital wealth solutions, and thinking about 2nd generation robo-advisory.

I am interested in targeting growing developing markets by promoting local market, local currency investment solutions using locally traded and sourced components: RMB or RUB solutions, or similar. In two cases I have encountered it requires a lot of patience for regulatory buy-in. But on the other hand, it is also going to develop a very healthy competition to BlackRocks and global champions, and that will take some time to materialize. And we may get back to this point, because I like this question. A lot.

  • But, then does it make more sense to outsource these services for banks and financial institutions? Will it be cheaper and faster?

Its partnership. It’s like with API, it’s like open banking. If banks through PSD2 are going to open up and enable payment companies and account aggregation companies, to just connect to core banking systems; and deliver other functionality; I would expect that in future slightly different API will be the one where instead of fund platform, wealth managers will be outsourcing customer flow to robo-advisors. To me its two sides of the very same coin.

  • I also know that you are a blockchain enthusiast and you know a lot about crypto. Let’s take a step back and go back to ETFs: there is a lot of speculation about the bitcoin ETFs at the moment. Do you think it will take off once the regulation paves its way?

Well, it is not my core focus but like many other quantitatively and softer-minded professionals, I enjoy watching crypto space. I can see all this fun that Libra, Facebook and Ripple have created from regulatory perspective and from research perspective, proceeding forks and evolution of the consensus protocols. But I would ask anyone, why exactly do you we need this type of ETFs? I for one, favor direct, decentralized investments. If we are talking about “money” and “liquidity”, I will start wondering about what exactly is producing yield on an investment, and how the governance of an investment is going to be organized. Today, I wouldn’t see why any retail clients would need to hold a crypto ETF. I am tempted to recommend to those would like to do so to try holding a few crypto assets directly – running your own node on their own mobile phones, safeguarding your own keys. They don’t need these disintermediated ETFs.

  • So, it’s just a hyped product, in the end?

Yes, absolutely.

  • What areas in the European FinTech and WealthTech ecosystem are underserved and need improvement, in your opinion?

Well, first of all, Europe for me is Great Europe; Empire. It is OSCE Europe, including Russia, Turkey and other large markets.

I can see that the core EU markets are saturated and highly competitive; we should continue developing local FinTechs targeting nearby markets, supporting Euro investment products and regional exchanges. Therefore, a lot of bilateral deals, GDR, stock exchange links and techs are required. I think PayTechs should leading first, followed by crowdlending and crowdfunding and Wealthtech and robos will follow naturally. There will be a lot of work around hybrid fund distribution and cross-country regulation. And wealth management is going to remain a moving target. But I would imagine that independent financial advisors across Europe will be in the future offering crowdlending products, even being paid through innovative performance- or risk-adjusted fees.

I remember that a few years ago, a banker told me that only Warsaw and Istanbul are good and strong, regional capital markets. I remember that statement and, I would love to help a local Turkish or regional financial service group to develop a homegrown digital investment solution, because underlyings are available, Istanbul even offers colocation and derivatives, they have ETF data going to 2005 and if we can’t do it in Istanbul, where else can we do it in MENA? There are even indexes that I can use. So, I am an optimist – I would love to do that!

  • I would actually second that opinion, not only for the capital markets, but also for vacation Istanbul is great! Just a side note.

Absolutely!

  • Last but not least – something to take away. What kind of skills do you think would be more or most useful for financial careers in the next ten years?

One should think about finance the way we think about the car industry. Because it’s becoming commoditized. Traditional retail banking is going to disappear; not just by the closure of branches and ATMs but it doesn’t make sense to hold expensive, premium real estate HQs. If you like startup culture, if you have some skills in data science; FinTech and start-ups will be always interested in you. It doesn’t have to be necessarily pure IT or tech skills, anything that is application-oriented or business oriented; for start-ups that’s going to be enough. I would never underestimate many other business skills coming handy in start-ups – which can be related to customer support, business development, digital marketing. Even skill sets you have behind this podcast, and similar social network presence or blog. It’s very exciting. I would recommend that young people should consider joining a start-up, rather than a traditional bank.

  • Absolutely! This has been really enlightening – thank you, Drago! Any last words?

Looking forward to meeting you in Istanbul, Antalya or any other place. See you soon!

 *The information contained in this interview is not intended as, and shall not be understood or construed as, financial advice or recommendation. Our content is intended to be used and must be used for information purposes only.