June 2017

TECHNOLOGY & DISTRIBUTION: Moving to a different algorithm

Calastone-WillisUnlike music, funds cannot be pirated – but that doesn’t mean the industry will not be disrupted by digital technology like the record industry was, found research by Funds Europe in association with Calastone.

The music industry was the first big casualty of internet-based disruption. When Napster launched in June 1999, and peer-to-peer filesharing went mainstream, the record labels reacted first with puzzlement then with outrage and then with lawsuits. Although Napster was closed down within two years, the technology it had popularised caused lasting damage to record labels’ profits. According to the International Federation of the Phonographic Industry, an industry association, global revenues from recorded music sales have fallen 40% since 1999.

The good news for asset managers is that funds are not the kind of resource that can be pirated. You cannot copy and share fund units with your friends. But that does not mean the funds industry is immune from disruption. In fact, the proliferation of robo-advisers, the rising popularity of low-cost passive funds and a trend towards disintermediation suggests the disruption is already underway.

Funds Europe, in association with Calastone, created a survey of its readers to determine how funds distribution is changing. The results were presented at Calastone’s
London conference.

The results
The survey suggested that the asset management industry is changing in a number of ways. The rise of passive funds, such as exchange-traded funds (ETFs), is forcing the industry to adapt to an environment that is more competitive on price. A majority, 57%, of the 263 funds industry professionals who participated in the survey said passive funds would take over from actively managed funds as the core investment product for mass retail customers, a finding that indicates a significant shift in fund allocations to come.

However, there was some comfort for the industry in the finding that only 30% of respondents believed these kinds of funds would take over as the core investment product for sophisticated investors, such as institutions, wealth managers and high-net-worth individuals. The thought here seems to be that sophisticated investors will still require sophisticated funds.

Robo-advisers, which we defined as algorithm-based services providing automatic investment advice, divided opinion. A minority, 42%, believed robo-advisers would become the main distribution channel for raising assets from the mass retail market. Of that proportion, “in between five and ten years” was the most popular estimate for when the shift would take place. It seems the case for robo-advisers must still be made, with one interviewee from the research project remarking that the typical users of robo-advisers “don’t have any money”. As clients get wealthier, he said, they tend to want personalised advice.

Tech
Can asset managers employ technology to help them stay relevant? Our respondents were unsure. Only 21% of respondents said asset managers were good at adopting new technology and only 15% said they were good at making use of data about their distribution network. The main reason given for managers struggling with data was revealing: according to our respondents, they lack access to it. That is a problem, especially in light of regulation in Europe such as the Markets in Financial Instruments Directive, which obliges managers to have a better oversight of their end investor to prevent mis-selling.

A number of other issues were explored in the research report, which is on the Funds Europe website.

©2017 funds europe