November 2015

INSIDE VIEW: Disruption through mass customisation

ShadowsThe asset management industry could harness mass customisation to bring premium products to a larger audience, says Hans van Houwelingen of NN Investment Partners. Mass customisation is designed to deliver highly customised products with mass manufacturing efficiency. Unlike mass production, where products are essentially the same for all customers, mass customisation attempts to fill unique customer needs by building customised products off a standardised product platform.  It is a differentiation strategy to make customised products attainable for large market segments, and not only for a few premium customers. In the sense that customers have a wide range of choices, many investment products are mass customised to some extent. People can shop for products and choose the terms and conditions that best fit their needs. Modular, build-it-yourself risk and return products are still not available to all; the digital world is giving this trend traction and slowly making mass customisation a reality. But it does require companies to educate their customers about the pros and cons of the options they offer. Mass customisation is also about using the existing manufacturing and distribution capabilities of the asset management firm to satisfy unmet customer needs. This concept is particularly attractive and disruptive in mature industries where real growth is stagnant and companies have a challenge to differentiate their products from competition.  The asset management industry is clearly in this range, providing individual customers with mutual funds as their core product to match a variety of customer needs. Active asset managers, who are mostly trying to add value versus a predefined benchmark, collectively offer over 34,000 funds in Europe and another 9,000 in the US with limited room for product differentiation in a rather stagnant consumer market, leading to a winner-takes-all market driven by brand and distribution arrangements.  While customers appreciate being in control and feeling smart about creating a tailor-made investment solution, asset managers are able to test various value propositions, gaining valuable insights into which customer segments choose which options. This, in turn, can lead to the introduction of better pre-configured products for segments of consumers who do not want this degree of choice. As potential loss experience begins to increase with rising interest rates and less central bank intervention, or potential increased risk experience is triggered by the next financial crisis, it becomes critically important for asset managers and customers to gather information that will help them understand and control the potential for loss or increases in unintended risk.  Using the principles of mass customisation, these inadequacies would be resolved by inviting customers into a more interactive relationship that extends from the product design phase through the life-cycle of the product. Feedback from customers is important in any business but in asset management it is equally important to feed information back to the customers. By creating better feedback mechanisms, customers would receive information about the product options that might suit them best.  LARGER MARGINS
A common argument against mass customisation is that the size of the market for these products is smaller than for traditional products. While this may be true, it is important to consider how much larger the margin can be on mass customised products, as well as the extent to which the new offerings might overlap with existing products. Ultimately it is the profit potential and with that the existence of the firm in the future that matters.  To understand asset managers’ ability to capture profit from a new product, one must also gauge the potential for competition. Many potential barriers to entry are obvious, such as capital requirements, regulation, economies of scale, etc. Others are more difficult to understand and include the adequacy of intellectual property rights, the brand advantage that can accrue to the first market entrant or the extent of the informational advantage that it may have over its rivals. The close relationship that develops between asset managers and customers of mass customised products can serve as an effective barrier to competition.  Another attractive feature of mass customised products is that the marginal development costs are relatively small since the infrastructure necessary to support these products already exists. The asset management industry has the licences, regulatory risk and compliance framework, distribution systems and administrative structures to support mass customised products. Success will be determined less by the asset manager’s product delivery infrastructure, though, and more by their flexibility, knowledge and content, and creativity.  Mass-customised asset management products offer intriguing possibilities for new growth and profitability to players who are willing and able to allocate resources to establishing real customer intimacy and move beyond supplying local distribution relationships with global products. While the digital arena has given the concept momentum in the area of personal finance, it will take much more focused efforts for this trend to gain traction with the mass market and investors’ differentiated risk profiles related to their needs.  In this area, the exposures are too heterogeneous, with individual customers already exhibiting various risk profiles relating to various problems, and the prospects for loss or unintended risk are too great for the standard solutions to be very useful in meeting customer needs. Mass customisation may also lead to new complexities from the customers’ perspective due to excessive choice and the diminishing return of additional choice on customer satisfaction. Setting the right degree of customisation and carefully selecting the options for customisation is crucial. To capture this opportunity, asset managers will need to develop modular manufacturing capabilities and strong communication capabilities to identify and solve their customers’ needs using the industry’s existing infrastructure. New opportunities do not just happen. Dedicated and resourceful people are needed. This involves taking calculated risks and requires corporate cultures and incentive systems that foster innovation, but the effort is well worth it. Mass customisation has great potential as a source of sustainable and strategic advantage with high customer satisfaction and participation of the asset manager in the inevitable disruption of the industry’s traditional approach.  Hans van Houwelingen is managing director, global product management and development, Emerging Europe region, NN Investment Partners ©2015 funds europe

Executive Interviews

INTERVIEW: Put your money where your mouth is

Jun 10, 2016

At Kempen Capital Management, they believe portfolio managers should invest in their own funds. David Stevenson talks to Lars Dijkstra, CIO of the €42 billion manager.

EXECUTIVE INTERVIEW: ‘Volatility is the name of the game’

May 13, 2016

Axa Investment Managers chief executive officer, Andrea Rossi, talks to David Stevenson about bringing all his firm’s subsidiaries under one name and the opportunities that a difficult market...


ROUNDTABLE: Beyond the hype

Oct 13, 2016

The use of smart beta investing continues to grow. Our panel, made up of both providers and users, discusses what the strategy actually means, how it should be used and the kind of pitfalls that may arise when using this innovative investment technique.

MIFID II ROUNDTABLE: Following the direction of travel

Sep 07, 2016

Fund management firms Aberdeen and HSBC Global meet with specialist providers to speak about how the industry is evolving towards MiFID II.