June 2017

TECHNOLOGY & DISTRIBUTION: Too hard for robots

George_Mitton_Robots_PresentationThere were low expectations that robots would flood the financial advice industry when we polled delegates at Calastone’s Connect Forum. The event, ‘Distribution state-of-the-nation’, was held in partnership with Funds Europe.

In the years ahead, it seems that robots will have plenty of chances to work as chauffeurs – but when it comes to financial advice, the jury is out.

One of the most insightful findings at the recent Calastone/Funds Europe distribution conference in London was that, whereas people accept a society with driverless cars is imminent, they find it harder to accept we will soon be living in a world where investments are decided by robo-advisers.

Just 4% of participants in a Calastone conference poll saw robo-advice as having the greatest impact on the fund distribution industry, compared to 43% who voted for machine learning.

It took a fintech venture capitalist to highlight the absurdity found in the result – one that speaks to the level of responsibility we might accord robots. With an impromptu audience poll, Reinier Musters, a founding partner of Orange Growth Capital, revealed a greater expectation that robots would be driving our family cars than running our personal finances.

The finding may indicate that the funds industry is in denial – as, presumably, taxi drivers at their own industry conference would be – or that professionals have a low degree of trust that robots are able to financially plan for people in the coming decades. Yet, as Musters pointed out, driverless cars are far more complex and the algorithms employed are about life-or-death decisions.

Allianz: Beyond thinking
Of the numerous participants, Andreas Utermann stood out for his firm’s place at the forefront of technology-driven distribution. Utermann is the chief executive and global CIO of Allianz Global Investors (AGI), a firm showing how asset managers may work with challenger, non-traditional distributors in future.

AGI has gone beyond the thinking stage and into full-blown development of tech-driven wealth management since its parent company, the insurer Allianz, holds a stake in Moneyfarm, a robo-adviser. Through this stake, and as a first stage of development, AGI is providing active wealth management services to UK employees of Allianz companies.

The deal with Allianz allows Moneyfarm to effectively create an active investment management offering. This is relevant because Moneyfarm, as part of a new breed of financial players often heralded as disruptors, currently offers passive funds to its regular customers.

However, Utermann was resolute that AGI would remain an active house; the market would not see AGI emerge one day as an ETF provider, he said.

Many in the audience would probably consider AGI’s approach to working with a passive-led robo-adviser as viable as, in another poll, 36% of attendees supported the idea that active management would remain a major force in distribution. They felt investment was best delivered as a blend between active and passive. Only 6% felt passive was suitable for all.

Confronting the passive question is in itself a major challenge for distributors and asset managers as they try to expand their profit margins.

For active asset managers, the challenge rests on proving active performance can be consistently superior. For distributors – particularly those in much of continental Europe, where rebates will persist even after the introduction of MiFID II – it is about the strong demand for ETFs, which do not pay the rebates that are traditionally so critical for revenue.

Technology is at the heart of controlling costs, and therefore margins. But it is an unavoidable fact that the greater coverage of machine learning and artificial intelligence in years to come and on top of current years-long trends in automation will entail a reduction in human jobs, and not just financial advisers.

Utermann was asked for his thoughts on where the most at-risk jobs were in the broad industry. He said it was people who exist to receive data from less senior people and repackage it for people higher up hierarchies – in other words, middle management. It is tasks around this data transfer that will increasingly be automated.

For now, anyone working in finance whose main machine competition is blockchain need not worry too much. It has great potential, but is not yet mature, said Calastone’s Ken Tregidgo. However, 21% of the audience considered blockchain as having the greatest impact.

Calastone’s Connect Forum series looked at changes in distribution derived from sources like regulation.

Jon Willis, Calastone chief commercial officer, said: “What this research showed and what was discussed by so many great participants in our Connect Forum series globally is that the potential disruption heading towards the industry is of a far greater scale than anything historically seen. As an industry together we can either evolve and reform ourselves or react when it is too late.”

©2017 funds europe