The global asset management industry has been reporting a steady increase in assets under management since the financial crisis. However this trend, driven by rising financial markets, does not offset the underlying challenges – lackluster active performance driving the migration to passives, higher regulatory pressure, and a challenging operating environment. Acutely aware of evolving technology trends and gathering forces of disruption, asset managers are seeking to innovate their business models one step at a time across the industry value chain.
Last week, I attended Euromoney’s Asset Management 2.0 conference in London. Several speakers from the industry, regulatory agencies, FinTech start-ups and other stakeholders discussed the key trends reshaping the asset management industry. Summarized below are the key takeaways from the event.
- Retooling the business model: The conference started with a recap of the rapid pace of innovation everywhere – autonomous vehicles, internet of everything, robotics, smart cities, etc. – and the impact on all aspects of our lives. An interesting statistic presented was the ever-shrinking industry disruption cycle – from about 15 years in 2000 to just 7 years by 2025. In this context, it is only inevitable that disruption catches up with the asset management industry. Perhaps it already has, considering the structural shift being witnessed in the asset mix towards passives. A senior industry representative cited the example of Chinese money market funds, where billions of new assets have been raised purely through social media platforms such as WeChat. Development of such completely new distribution channels requires new tools and capabilities for the asset manager – a digital strategy to target next-generation audience, multi-channel distribution models, advanced analytics with descriptive, predictive and prescriptive capabilities, and robust content management – while also ensuring full compliance with regulatory regimes in all the operating jurisdictions. While the retail segment is the logical starting point for asset managers to innovate their marketing and distribution platforms, disruption will also take place over time in B2B segments such as wholesale and institutional.
- “FinTechs are rather a distraction”: Coming from one of the most senior industry representatives, this was perhaps the most provocative statement at the conference. Several senior industry participants candidly admitted lack of innovation in existing asset management houses. At the same time, there was a realization that a disproportionate amount of their time and effort was being diverted toward monitoring and evaluating FinTech developments. No doubt that FinTech firms bring new capabilities, but the view was that they tend to focus on one particular technology or part of the industry value chain without necessarily appreciating managers’ business strategy holistically. Another challenge is the need to implement any FinTech approach within the regulatory context that asset managers operate in. An example was a block chain product wherein two-thirds of the budget for implantation was regulatory driven. In this instance, the FinTech firm did not have the resources required and had to fall back on the asset management sponsor to fully execute the implementation. The feedback to FinTech entrepreneurs was to think about one business problem to solve and focus on improving the value chain one step at a time. On the flip side, the feedback to asset managers was to focus on one problem to solve and to seek the necessary tool box either from within or outside the firm.
- Mind and machine: A number of discussion panels were devoted to “next generation” technology – robo advisory, RegTech, Big Data and Artificial Intelligence (AI). Portfolio construction and optimisation were billed as being sufficiently advanced to “take the human touch out of the equation” while robo advisors were seen to be managing an ever increasing share of assets. However, as the discussions progressed, all the participants readily acknowledged that technology (machine) is still very much in development and is a far cry from becoming a substitute to human skills (mind). Strong asset management domain skills and experience combined with a judicious amount of technology can reduce costs and improve efficiencies across the investment management business model. Unsurprisingly, this reflects Evalueserve’s own mind+machine™ approach of combining human expertise and best-in-class technologies that use smart algorithms to automate key tasks, thereby enhancing process efficiency, improving throughput times, and delivering new capabilities.
- Proof of the pudding: Given all the changes impacting the industry – continuing migration to passives, high competition for assets, increasing regulatory requirements (MiFID II in particular for European firms), evolving technology landscape and changing customer expectations – asset managers are extremely focused on cost management. Even as FinTech players and other vendors entice them with new offerings, asset managers are hesitant to invest in new initiatives, unless the case for ROI is clear. A senior participant noted that they are inviting vendors to experiment with “equitable share” models – the vendor derives revenue from the share of new business generated or cost savings delivered. Another preferred approach is custom prototypes and proof-of-concepts (PoCs) demonstrating clear benefits to the asset manager within their specific business value chain. Firms desirous of collaborating with asset managers need to be prepared to invest upfront to demonstrate their value proposition and ability to generate ROI in clear terms, and further link it to the return on equity for the manager’s own shareholders.
The overall message is that the asset management industry is well aware of the need to innovate, driven by the challenging operating environment, evolving technology trends, and the gathering forces of disruption. While open to innovation from outside, asset managers like to focus on offerings that are contextualized to the business value chain and regulatory constraints of the industry. FinTech or otherwise, vendors that demonstrate strong domain skills, high industry relevance and that can invest in custom prototypes will emerge as successful collaborators to asset managers in the 2.0 world.
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