Recent weeks have seen some key, early fintech projects launch in the fund management industry. Lynn Strongin Dodds talks to some of the players.
Keeping pace with the innovation flooding the asset and wealth management arena is hard and it is touching every aspect of investment life. But there is no doubt as to the drivers behind the technological paradigm shift.
Not only have asset managers had to deal with a long list of legislation – including Dodd-Frank, the European Market Infrastructure Regulation and the impending MiFID II and Securities Financing Transaction Regulation – but the increased focus on fees has altered the industry’s dynamics drastically.
One of the most significant changes has been the boom in passive management. According to Tony Warren, buy-side head of strategy and solutions management at technology group FIS, these managers are “leveraging the new technology to operate more efficient models and cut down on operational costs”.
To combat these trends, he adds, active managers are expanding their strategies to multi-asset funds that could have a 20% allocation to illiquid investments such as private equity or real estate. But this requires a more sophisticated and robust front-to-back system that can handle these more complex products.
Both active and passive could use fintech in a much more meaningful way to gain cost reductions, differentiation and stronger performance, according to PwC’s recent global fintech survey. Out of the 163 respondents from the asset and wealth management sector, more than a third did not have any dealings with fintech companies at all and only rarely engaged in joint partnerships with new entrants.
When they did, it was mainly for data analytics, which 90% identified as the most important trend for the next five years (followed by automation of asset allocation, including robo-advisers).
Farther down the list were plans to expand their digital and mobile offerings.
As with all new technology, it will take time for the many different solutions to gain traction. “There are developments in a number of areas where fintech is being applied and there is potential for disruption, which I define as non-business as usual,” says Anthony Kirby, head of regulatory reform and risk management at EY. “These range from new bond, OTC-traded derivative and FX trading platforms; ‘all to all’ information network models; improvements to collateral management practice; transaction cost analysis for non-equities due to MiFID II; as well as informatics, surveillance and tools to detect false positives.”
He adds that there is growing interest in robotic process automation (RPA) - which streamlines and automates repetitive processes - as well as robo-selection/advice tools, where there are well over 120 different wealth and asset manager offerings worldwide.
“Fintech is a continuous journey from the high to the low-touch, and looking ahead over the next two to three years, all roads will lead to market, reference and meta-data lineage. As regulation becomes more personal in approach, the question of legal/natural person and robotic identity will come to the fore,” he says.
Thousands of data sources
There are already a number of projects and tools on the market in the data space. For example, Eagle Alpha, which relies on a combination of engineers, research analysts and data scientists, identifies the best alternative data sources for asset managers, from satellite imagery to credit card transactions. This is either gathered from Eagle Alpha propriety tools or from exclusive relationships with third-party sources. The data is harvested, cleansed and tested, then delivered to asset managers for input into their own investment models.
“We see ourselves more as an asset management or big data technology firm that enables asset managers to obtain alpha,” says the firm’s CEO, Emmett Kilduff. “There are thousands of alternative data sources out there but the challenge has been how do you get value from them. It is a problem of cost and having the right people. We help navigate the sea of data that is out there and offer bespoke projects so that asset managers can start off small with a specific project, to see if it makes a difference to their investment strategy.”
Work is also being done on the nuts and bolts of fund flows and transfer agency. For example, DST Systems offers an end-to-end integrated transfer agency service.
In May, pan-European exchange Euronext launched an automated fund investment service that offers institutional and retail investors a simplified subscription/redemption facility to invest in funds through their brokers. To date, Axa Investment Managers, Ecofi Investissements, Natixis Global Asset Management and OFI Asset Management funds have signed up. Others, including. Commerzbank and La Française Investment Solutions, will join over the next few weeks.
Anthony Attia, CEO of Euronext Paris and global head of listing, says: “We started the project in 2014 and there were a number of moving parts, but we worked together with asset managers, brokers, regulators and custodians.
“The benefits are multiple for French and non-French investors: they now have access to open funds products, a new STP [straight-through-processing] process, and low-cost access to funds due to the automation of the service.”
Although the press has dubbed the new service fintech, Attia believes the tag is more appropriate for the ten-year partnership it recently struck with bond trading technology vendor Algomi to develop a new multilateral trading facility (MTF) for the fixed-income market. Under the agreement, Algomi will supply an internally developed exchange-grade bond-matching solution to provide the functionality required for algorithmic smart matching to create an auction between dealers. The theory is that if a bank is unable to match an order coming in from a buy-side trader, it then gets sent to the interdealer exchange, where it can find the other side of the deal.
“Algomi has innovative and disruptive technology, whereas the automated fund investment service relies on existing technology,” says Attia. “However, Euronext Synapse, our MTF with Algomi, is not just about the technology but the interactions between the buy and sell-side, thereby generating liquidity.”
BNP Paribas Securities Services (BNPPSS) has also made fintech partnerships: with Fortia Financial Services and, like Euronext, with Axa IM. Jean Devambez, global head of product and client solutions, asset and fund services at BNPPSS, says “there are smart people in the industry and it makes sense for us to collaborate with them. This is what we have done with Fortia, as well as with Axa Investment Managers to develop a blockchain-based fund distribution platform.”
BNP Paribas took a minority stake in Fortia Financial Solutions, which provides compliance and data management tools, earlier this year. The objective, according to Devambez, is to explore new applications based on artificial intelligence (AI). “We have a proof of concept, for example, for our compliance platform and we are looking to see how we can leverage AI algos to improve the fund life-cycle management.”
Meanwhile, the blockchain venture with Axa IM, called BNP Paribas Fund Link, aims to accelerate the slow process of onboarding funds and improve their buying and selling through the use of embedded business rules and shared information across the distribution chain.
“At the moment, blockchain is not as mature for our industry, although there are a lot of initiatives, which is good news,” Devambez says. “With Axa, we are starting with fund distribution and investor onboarding and then we will see how it develops.”
According to JR Lowry, regional head of State Street Global Exchange, due to the distributed-ledger model and use of asymmetric cryptography, blockchain has the potential to create reporting and record-keeping systems that are not only more efficient than existing options, but are also more transparent and secure.
“At the moment, the industry is actively involved in conducting pilots and proofs of concept,” he adds. “Early efforts seem to be focusing on areas that are manual, don’t require a lot of stakeholders to align, have intermediaries that create a single point of failure and add cost to the system; or are new, therefore lending themselves to adoption of blockchain technology from the get-go.”
Steve Young, managing partner at investment management consulting firm Citisoft, believes banks and brokers will be the first beneficiaries. “At the moment, there is a lot of noise around robotics and blockchain, but we have not seen much of either. However, the sell-side is more dynamic and will push things forward whereas the buy-side, except for the larger global firms, is typically conservative and slow to change.”
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