As technology develops in leaps and bounds and millennials enter the market in force, asset management could be a very different industry five years from now. Our panel discussed how this disruption will pan out. Tech disruption roundtable Marcel Bar (head of digital, Investit)
Richard Clarke (managing director of shareholder services, RBC Investor & Treasury Services)
Jonathan Hammond (managing consultant, institutional technology practice lead, Knadel)
Keith Hale (executive vice president, Multifonds)
Rakesh Vengayil (chief operating officer, BNP Paribas Investment Partners) Funds Europe: To what extent is the industry experiencing disruption from new technologies? Keith Hale, Multifonds: Asset management hasn’t really been significantly disrupted yet. Although, we ran a survey in March this year, and 54% of our respondents agreed there’ll be a game-changing disruptor, an Amazon or a Google, entering the market in the next two years. I’m in the other 46% and think it’s going to be more evolution in the next couple of years, rather than revolution, with continued growth of ETFs and robo-advice, as well as the search for cost savings through improved efficiency. Marcel Bar, Investit: Can we distinguish between innovation and disruption? A lot of people would class innovation – doing existing things faster, better, cheaper, and more efficiently – as disruption. But it isn’t – disruption is someone coming into the market with a business model that is completely different to what exists already, which challenges understood orthodoxies, and throws everything on its head.   In that sense, I don’t think the industry is experiencing much disruption at all. I’m yet to see a business model that’s going to challenge the status quo.   Jonathan Hammond, Knadel: Most of the disruption to date has been on the edges of the fund management operating model.  Very little of it is in the manufacturing, fund accounting and operational side of it. Rakesh Vengayil, BNP Paribas Investment Partners: The notable disruption the industry has faced so far is from low-cost index funds and ETFs. Further disruption is expected from digital disruptors, who are set to challenge established business models and transform the industry. At the moment we see it happening in distribution channels, with the growth of digital disintermediation, often from unexpected quarters.   For example, there are certain emerging markets where telecoms players, which already provide wallet services to a large number of retail investors, are planning to enter the mutual fund distribution space by applying for distribution licences. Surprisingly, regulators are often more than supportive in helping them acquire licences, as it meets their objective of higher retail market penetration at a lower cost. Hale: The technical sophistication of end investors is ever-increasing, particularly the next generation of millennial investors, and this is creating an increased appetite for online or digital services, which will cause the distribution channels to adapt or they will be disintermediated in time. Bar: If you look at what people are prepared to pay for investment advice, it’s not very much – the median number is £253, and many won’t pay more than £100. At some point, that gap is going to have be filled, and it won’t be filled by current business models making their services cheaper. That’s not sustainable. Someone is going to have to come up with a business model that actually speaks to the consumer. This is what has driven disruption in other industries. However, the current attitude among asset managers seems to be ‘when consumers have money, they’ll come and find us’. I find that quite amazing. Richard Clarke, RBC Investor & Treasury Services: There isn’t going to be a single model for distribution. It’s millennials who are consuming digitally and embracing changing ways of interacting with providers, whereas older folk are perhaps less conversant with a robo-environment and more willing to pay for face-to-face, human advice. It’ll vary by age and it’ll vary by jurisdiction. Bar: The answer is a personalised service, based on specific needs. The firms that understand who you are, what you do and what you want are going to win. Although, I’d seriously challenge the orthodox view that only millennials consume digitally. How many people own iPhones? How many people shop on Ocado or Amazon? Many of these people are not digital natives, or particularly digitally savvy.  I’d argue it’s more a matter of how easy it is to use a service. If Nutmeg has taught us anything, it’s the value of showing that if you make a service simple, it becomes more compelling and cheaper.  Hammond: A major area of disruption, as services become more digitised, will be switching. People can switch most services, including their bank accounts, in a number of days. The next step could be switching between fund providers, in a brief timeframe.  Vengayil: That’s true. In a few local markets we operate, we see the associations and regulators taking the lead in encouraging industry participants to establish a common utility or fund platform, which connects all participants – asset managers, distributors, retail investors and payment banks – which simplifies the logistics, and establishes common KYC, transaction routing, and so on. Once that basic foundation is built, it will be easy for digital disruptors to come and provide innovative solutions. Hammond: Ultimately, we’re entering an age in which people want to be able to press a button and see how their future’s coming along – how their pension’s growing, how their investments are performing, and so on.  But, what if we go even further with that? What if Facebook, or Google, or something similar, was that provider? A platform that knows everything about their customers? Bar: Google currently has cash reserves of around €60 billion. They could buy any asset manager in the UK with that.  Clarke: But do they need to? They could construct something that would enable them, overnight, to sell other people’s financial products through their platforms. They have all the data on their users’ habits, likes and interests, this client information is really where their strength lies. They also have the connectivity and the experience in e-money transfer facilities. Bar: The fact that they can just buy someone in cash but haven’t done so suggests they haven’t found the right way of doing it, or that these services don’t benefit them in the ways they want to benefit.   Funds Europe: Why is it that asset management is behind other industries in being disrupted?  Hale: Again, in our most recent survey, 74% of the industry attributed this lag to regulatory constraint, and 37% said it’s the complexity of the back office.  Vengayil: The asset management format today is always behind somebody. One reason for this may be that we are never, ever in front of the customer, so we don’t feel pressure from below to transform.  As we are always intermediated by a distributor, a lot of pressure to transform is directed at them – and that aspect of the industry has changed as a result.  Hale: A major question is how would Amazon or another e-commerce company be regulated if they entered our industry? Would they be seen as a viable entrant from a regulation standpoint, or would new regulation come in as a result? Bar: Regulation can actually drive disruption. However, there’s a really interesting gap in the market presently, where models are being created that aren’t covered by regulation at all, so regulators aren’t actually in a position to regulate them effectively.   Clarke: Regulators are driving disruption in respect of price transparency. Asset managers, like banks, have been forced to become much more efficient.  Bar: In a lot of cases, compliance departments are taking risk-averse views to things that regulators would have no issue with.  Hale: Regulations can be a major inhibitor, though. A big question for me is what’s stopping some of the big e-commerce companies from entering the market? It can’t be margins – most asset management profit margins are in the 30% range, which is high in comparison to many disrupted industries. There’s got to be a reason why the e-commerce companies have said: “No, this is too hard, I’m not doing this.” So, a major reason must be the challenge of dealing with so many regulations, which differ so much across location and asset class, as well as the complexity of the back office. Clarke: If there’s money to be made, they’ll come in eventually. Disruptors are engaging with regulators in many other industries, why not investment eventually?  Hammond: We’re being too harsh on the industry. There’s a clear appetite for disruption in many quarters – some firms are looking to adopt blockchain, others are keen to launch denominated funds, there’s an increasing embrace of cloud technology. There are firms adopting disruptive technologies and seeing where they go, and one might take off.  Vengayil: Disruption started with less regulated industries, and it was more of a customer-led transformation than a business-led one. Moreover, asset management by design is front-ended by distribution channels – as a result, they are first to be subjected to customer-led transformation. As we are always intermediated by a distributor, a lot of pressure to transform is directed at them – and that aspect of the industry has changed as a result.  Hale: Nascent markets like China actually have an advantage, in that they have less regulatory issues, and less existing infrastructure in place, which allows innovation to move quicker. For example, the rapid growth of the Alibaba Money Market Fund. Vengayil: Regulation is dynamically evolving in these markets. Consumers in some emerging countries are effectively skipping the traditional branch-based banking paradigm and moving straight to mobile transacting. Africa would be a good example – many have mobile wallets before they have bank accounts. That enables things to progress faster.   Bar: It’s an economy of scale. There are a lot of people with smaller amounts of money, but only so many with large amounts to invest, and everyone’s competing for the same assets all the time. Someone’s got to create a new platform, rather than broaden accessibility to current ones. When someone creates a business model that doesn’t exist at the moment, which fulfils some kind of need, that’s when disruption will truly kick in.   Hale: A real game-changer will be when millennials realise they have to save for their long-term future because they aren’t going to get a meaningful pension from the government or their employer. They can’t afford to, so they’re just not saving anything as yet. Clarke: What products are there for them, though?  I’m not clear there are many that specifically target this group, in terms of their objectives and interests, which are not solely about generating financial performance. Bar: It comes down to what you’re selling. Millennials should be investing and saving now because they’ll be eating cat food when they’re old otherwise. That eventuality should be at the forefront of the sales pitch, but at the moment, it isn’t – the fund, app or platform is. Ultimately, engaging millennials with saving and investment is a question of finding what they’re interested in, and creating an investment vehicle that’s actually going to appeal to them in a way that they think and understand, rather than trying to shove an annuity in their direction.   One investment product that interests me greatly is Stash. It’s a cause-based investing app, allowing millennials to invest in solving world hunger and the like. In the first week, 50,000 people signed up.  Hammond: What helps any app take off, especially with millennials, is its ease of use. Compare that to many other financial products, which involve form-filling processes that aren’t easy or user-friendly.  Even if those processes were digitised, they’d still be cumbersome. Consider Revolut, the consumer FX app that’s being adopted at a phenomenal rate – part of its success is its ease of use and the user experience. Vengayil: There are schemes for younger generations, like systematic investment plans, which encourage long-term saving. You subscribe to the scheme, and a regular standing order debits the scheme periodically with a nominal amount to be invested.   Hammond: An issue could be digital services evolving so much faster than the longevity of investments. Apps didn’t exist 15 years ago – who knows what someone saving into a pension today will use to look at how their fund is performing in another 15 years? A digital strategy needs to consider this. Bar: Universal enablers for disruption need to be in place, and they aren’t currently. Perhaps that’s why Amazon and Google aren’t coming in – they’d need to spend too much building those foundations, which other people may be able to leverage.  Clarke: Not wanting to share things with other providers or for the industry to work collaboratively is certainly an issue in other areas, such as developing common processes for data management. Hammond: There are initiatives out there to crowdsource data management solutions. That could suffer from exactly the same problem.   Funds Europe: Are there any areas of the asset management industry that are particularly susceptible to disruption?  And if so, which ones are they?   Hale: The two hot-button areas identified by our survey with the biggest likely impact were big data (43%) and blockchain (42%). However, I think it’s very early stages for blockchain – there are still major obstacles to overcome over scalability and security before it gets applied in practice. On the other hand, big data, artificial intelligence and robo-advice are all here and now. They’re happening now and starting to impact the industry already. Clarke: ‘Susceptible’ is a key word for me. There are many businesses – again, the Amazons and the Googles – making much better use of big data than asset managers do currently. They have the skills and technology, and actively leverage big data for distribution purposes. Bar: A major, positive source of disruption will be the rise of augmented intelligence. Our industry is currently bloated in terms of the amount of people doing manual tasks. Machines and algorithms will optimise a lot of these, enabling employees to focus on value-add activities.   Hale: If you go back 200 years to the creation of the power loom, people at the time were so worried it would put scores of weavers out of work they started rioting, but ultimately we readjusted to a more automated way of working. Bitcoin is interesting but has serious security issues associated with its permissionless usage. However, the underlying distributed ledger blockchain technology associated with it, applied in a ‘permissioned’ manner, could be highly disruptive, making fundamental changes to AML/KYC, market or reference data, transaction processing, settlement, and so on. Nonetheless, we’re still at a very early stage in terms of its usage – and there are still challenges around applying it in a highly scalable way. Clarke: It may potentially be disruptive in derivative processing and collateral administration, but it will probably just be evolutionary to our business, driving greater efficiency and reducing operational risk, which is where the real benefit would be. Bar: I’ve spoken to people heavily involved with blockchain, and their view is it could be as much as ten years before you see an industrialised version in use. Clarke: That’s too long, isn’t it? Something else will have been thought of by then, I would hope.   Hale: Again, this is potentially an issue where regulators could inhibit the growth of disruptive technology. There are security issues around blockchain which regulators are worried about, and the perception that it’s a favoured payment method of criminals selling drugs and the like via the deep web. Bar: I’d argue regulation isn’t the main thing holding us back – the interpretation of it is. If you have a standardised process, how hard is it to build a tool that just helps you enforce it? Regulators are happy because it’s traceable every time.  Vengayil: We see regulators willing to support such initiatives if it’s in their comfort zone, and they think they can control it. Moreover, in big emerging markets it enables higher penetration to smaller towns and rural areas, which enables financial inclusion, a key cause of concern today. As a result, those seeking to disrupt should consider working with regulators and bringing their technological literacy up to speed. Funds Europe: Five years from now, how do you think the landscape will look?  Vengayil: The world in which we live is changing rapidly, driven by a number of forces such as demographics, technology and social behaviours. Therefore there will be a significant shift. Technology is going to be cheaper, and easier to use. Hammond: I agree. Moreover, we don’t know who we’ll be talking about in five years’ time yet. I don’t think it will be the established ones, though.  Clarke: Parts of the industry will look exactly the same. Banks aren’t going to disappear, unless some other equally regulated vehicle which delivers parts of their service springs up.  Five years is actually a very short period in which to achieve major change. Before change can happen, technology not only has to evolve, but so does the legal and regulatory environment.  Hale: We live in a remarkably fragmented market in asset management and to a certain extent asset servicing, and the technology that supports it. Over the next five years, there will likely be major consolidation, with the big brand asset managers getting bigger, particularly in the passive space – but at the same time, we’ll also see growth of specialist active managers searching for real alpha. Administrators will continue to consolidate technology, gaining efficiencies by reducing the number of systems they have to work with. It’s all about getting away from the spaghetti nest, having less systems that cover as much across asset classes and countries as possible – whether it’s in the back office space, from an accounting perspective, or a distribution perspective. In the end, how many people will be left in the administration world and the asset management world, I don’t know, but it’s going to consolidate.  Bar: I agree that there will be major consolidation in the next few years. Wealth and asset management are going to converge. A large number of firms are devising and implementing strategies to get their clients back, leading to a convergence of wealth and asset management. At the same time, there will be a move towards hyper-personalised, client-specific solutions, enabled by technology. The capability exists – it just needs someone to offer it. Whether that’ll be an outsider like Google, or someone in the industry, who knows – but it will happen. Firms that don’t keep pace will die or get bought, adding to the thinning of the herd.  We may see some firms on the way out being bought up and totally rebuilt into effectively new entities, as their existing licensing and the regulatory approval is a good foundation for launching an effectively new entity.  Lastly, the concept of a fund is going to fundamentally change over the next five years.  Hale: We could see a reduced need for traditional collective investment vehicles, because of disruptive elements such as robo-advice and blockchain enabling automatic execution and settlement. However, I don’t see that happening within five years.  Clarke: The real challenges are converting legacy technology to the new model, and achieving scale. Five years isn’t a long time to overcome those challenges – so, the industry landscape will likely look fairly similar to today, although the growth parts will look very different.  Vengayil: It’s possible that the largest industry player in five years’ time could be a non-asset manager, who was ahead of the curve in adopting new technology. The clients of tomorrow are likely to be very different from the clients of today. To date, we’ve not seen much disruption in the industry, as it’s mostly touched only the distribution side, if at all. In future, there could be a collaborative model, with someone new as intermediary – they’ll use their data to connect consumers with our services. The success belongs to those who anticipate the opportunities long before it becomes relevant.   Hale: Yes, it’s likely new technology-driven services will at most challenge, not replace, the traditional model. To use an Uber analogy, while the firm’s growth has been huge, there’s still plenty of black cabs. However much they hate each other, they’re both still around and being used. Competition is a catalyst for improvement and innovation. Bar: Just to be slightly controversial, I’m fairly sure we’ll see significant change in the next five years. If I’d said three years ago that there would be an app-only bank by the year 2016, few would’ve believed it possible. Yet, today Atom Bank is up and running with a full licence now, with a 30% stake being bought by Spanish lender BBVA for €57 million – and that’s before the bank has even officially launched. Hammond: Things like Apple Pay and Android Pay are becoming pervasive too. Hale: That’s because they’re leveraging their existing brand and distribution capabilities. People trust e-commerce; if you look at the surveys of trust from the consumer industry, e-commerce companies are much higher rated than banks.  Clarke: In terms of share of the wallet, you know, they’re scratching the surface, and again the timeframe is key. To be truly disruptive, it would have to be a Google, an Amazon, the telecoms, a utility company, somebody from outside our industry. It would be very exciting if the industry did evolve that much in five years, but that’s very short-term for me. Bar: It’s certainly possible. It’s very possible. I think we’ll be surprised. ©2016 funds europe

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