The Role of Technology and Innovation in Personal Finance

Posted by admin on January 11, 2010 in Uncategorized

Rob Carrick recently reported on the integration issues of Bank of Nova Scotia with E*Trade which has caused several issues with account errors and periodic access problems. Carrick’s article highlights are larger point. What should be the role of technology and financial innovation- mainly in the investment of newly created investment vehicles- in personal finance?

To use a crude analogy, technology and financial innovation should be seen as gasoline in a car. If you don’t know where you are going, it does not matter how high the premium of gas you buy, you are still driving in circles and wasting resources. If you have a very clear destination in mind, premium gas accelerates the voyage in a fuel efficient manner. The gas, in and of itself, does not make the decision for you. It only makes the journey easier.

Jim Collins, in his book Good to Great, studied what divided the merely good from great companies. In commenting about the role of technology (contextually significant since his research was conducted at the height of the tech boom in the late 1990’s), he writes “…When used right, technology becomes an accelerator of momentum, not a creator for it. The good-to-great companies never began their transitions with pioneering technology, for the simple reason that you cannot make good use of technology until you know which technologies are relevant…”

The same analysis applies in business management as it does in personal finance (as a side-note, Collin’s book has applications not only to business but to many other aspects of life). Technological change and innovation are occurring rapidly; 15 years ago, few retail investors would have heard of ETFs, hedge fund, asset-backed commercial paper, low-fee trading accounts, do-it-yourself futures trading platforms etc.

The temptation for some investors is to ignore the hard question- why am I investing and what do I want out it this- and follow the herd by using the latest technology or purchasing the latest financial product to solve their problem. More often than not, this is a strategy (if it can be called that) bound for mediocrity and characterized by mismatching products, lack of vision and below market returns over the long term.

Certainly, employing technology and financial innovation is necessary in utilizing your strategy. But it should not be a strategy in and of itself. As issuers are facing a harder marketplace to sell into, new financial products with innovative twists and new technologies will be used to entice investors to invest. The question to be asked should always be “how do these fit into my strategy?” before deciding to buy.

2 Comments on The Role of Technology and Innovation in Personal Finance

By 2 Cents on January 11, 2010 at 3:44 pm

This sounds like another way in which people confuse the medium with the message. They believe that, for example, ETFs are a new investment without doing the research it takes to realize that they are simply a new (and better) way of implementing time-honoured investment philosophies.

Before even asking “how do these fit into my strategy”, many of us would be better off spending some time asking ourselves “What is my strategy? Do I have one?”

I’m still working on mine. Thanks for your insights.

By admin on January 11, 2010 at 6:08 pm

Thanks for the comment 2Cents. Its important to tackle the “why” before the “what” in life and in money. Happy new year.