A panel of experts from across the funds industry was asked to comment on the survey.
Paolo Sironi, IBM Fintech Thought Leader
The financial services industry is facing a period of unprecedented change which is not solely due to technology upgrades and competition. The real reasons for change are rooted in the excesses built prior to the eruption of the global financial crisis and the subsequent act of reckoning that dictated that existing business models would not be sustainable in the medium-to-long run.
Traditionally, the economics of banking have been shaped around asymmetry of information, which typically confined most clients to being price-takers of investment management relationships, while distribution channels could optimise their price-making primacy through open architectures fostering transactions based on product marketing.
However, the advent of passive investing – supported by greater investment convenience during a protracted phase of quantitative easing (bringing high correlation among asset classes) – has produced a progressive compression of intermediation margins owing to product competition, particularly in the US.
On the other side, especially in Europe, regulation has become more demanding, forcing higher transparency of costs and charges and presenting a more compelling requirement to deliver value generation for investors. This has triggered a progressive transformation of distribution channels towards fee-based propositions. Only by looking at the changes occurring at the level of personal finance (i.e., relationship management and digital offers) can we identify the main drivers of change in asset management. The new economics governing intermediation margins in more transparent markets are forcing a contraction of the value chain, inviting asset managers to compete with wealth managers on client relationships.
Clearly, this cannot happen without technology, namely digital and artificial intelligence. Fintech innovation is not the cause of industry disruption or transformation, but the opportunity for the industry to face transformation from transactions to services – thus from embedded commissions to products called ‘advice’ whose fees clients are transparently happy to pay for. The challenge is significant because stratified, legacy-based leadership models in investment management operations are hard to change, favouring an easier search for volumes (commoditisation of offers towards passive investing) compared with a more demanding search for value (personalisation of personal investment relationships).
A clear hurdle to face in delivering value-based transformation is also the biology of investors, who have a hard time engaging with financial complexity and understanding where real value comes from. Therefore, digital playgrounds powered by a new goal-based investment narrative will become essential to convey (whether through human-to-human or digital-to human channels) a stronger value proposition to defend existing revenues. Artificial intelligence will be the primary actor in this battle, as it can help to institutionalise the investment management relationships on a more compressed value chain.
Yet, artificial intelligence is not a product or a solution. Artificial intelligence is the core strategy and engine of a digital investment management platform that collates the work of asset managers with that of relationship managers. The periphery of prices and products, fostered by transparency and fintech offers, will imply the centricity of clients, empowered and assisted by artificial intelligence in all phases of on-boarding. Clearly, all back-office functions will face change to comply with the new narrative, while most investment management operations will simplify and automate, knowing that the personalisation of investment will shift from the asset side to clients’ liability side in a process of progressive institutionalisation of digital financial planning.
Markus H Ruetimann, CEO of Hardy London Ltd and Chair of Aprexo Group Ltd
The investment industry is at an inflection point. Super-convergence and cognitive technology solutions are likely to recalibrate the operational and commercial relationships between institutional asset owners, asset managers and asset services providers. Keen to reduce operating risks, costs and process complexity, all three constituencies appear to evolve their operating platforms at a different pace and with different solutions for what are often common problems. “To lead or to follow” is a key question executive teams are currently struggling with when searching for new technology and process solutions.
The asset management industry is not renowned for rapid and agile adoption of emerging technologies or new modus operandi. Cynics believe that it couldn’t manufacture an automobile as it would have to collaborate with competitors and various suppliers, operate with thin profit margins and continuously reinvent its products.
So far, and perhaps for not much longer, lower fees and other P&L pressures have not yet forced significant actions and change appears to remain largely incremental and opportunistic, rather than supportive of a step-change strategy. Hierarchical bottlenecks and career risk aversion can limit an enterprise’s ability to positively embrace change, let alone demanding continuous challenge of the status quo.
Regulatory transparency about fees and investment risks has fundamentally and irreversibly changed the engagement with clients for the better. Institutional asset owners want mobile, near-real-time access to their investment transactions and positions as well as to analytics on risks, performance attribution and fees. Asset managers incorporate these data requirements in their digital transformation programme. However, few firms consider digital transformation to be about a changing mindset rather than solely about technology. They should.
Technology is gradually liberating the industry from legacy. Distributed ledger technology (DLT) now enables simultaneous sharing of data in a private or public domain. Big data infrastructures are emerging, helping to capture and analyse vast amounts of structured and unstructured data. The use of cloud-born applications, delivered as software as a service (SaaS), as well as robotic process automation (RPA), are priorities pursued by most asset managers at present.
Evolving procurement strategies suggest that some global asset managers are considering the sourcing of technology, securities services and data solutions from fewer, or sometimes aiming for only one provider, while retaining an appropriate level of control and oversight.
Asset managers of the future are enterprises that successfully:
• involve clients in their product development process;
• foster a culture that allows its diverse workforce to experiment with new solutions;
• diversify their talent pool by hiring change and leadership experience from other industries (e.g. engineering, manufacturing, retail or high-performance sports);
• experiment with cognitive technologies that augment human intelligence to improve investment and distribution models;
• develop data analytics that overcome data overload and form the primary basis for making decisions and to predict trends;
• collaborate with innovative and uninhibited firms, including fintechs, for stress-testing or developing new business models.
“To lead or to follow” remains the question. Addressing legacy systems and processes is a mountain most financial services firms have to climb eventually. Early adopters of new technologies can benefit not only from new functionality, but also from mobilising their organisation for a step-change in their operating model. Our industry is familiar with the concept of ‘higher risk – higher rewards’. Fast followers are likely to end up we a ‘me-too’ solution. Not necessarily a great position to be in when differentiation of investment and operational performance is essential.
Undoubtedly, while past performance is not indicative of future results, future results are based on the performance of talent and technology. Industry consolidation is finally upon us.
Matthew Newnham, Managing Director, MFEX UK and Ireland
Earlier in my career, a senior leader would encourage his management team at the end of each year to break their products and build them back stronger. This simple message was to focus the team on continuous improvement and not be bound by the way this has always been done, legacy technology or the status quo.
As in all sectors, the fund industry is constantly impacted by change, be it from clients, regulators, improving operational efficiency, risk reduction, product development, keeping up with competitors or the integration of newly acquired companies. In the last few years, many industry participants have had to work together to implement practical changes imposed by regulation. Working together is the new norm. Finding like-minded partners willing to work for the common good increases the chances of success. This theme is continuing with many new technologies going through an early adoption phase, with distributed ledger technology (DLT) at the forefront of many initiatives in the fund and asset servicing industry. Successful adoption requires that companies work together – the very nature of a DLT is that one company is not the central point and dominant player. In this new world, the companies that stand the best chance of succeeding are those most culturally open to partnerships, that are willing to take a leap into the unknown, able to build trusting networks and that can work openly to solve real, and importantly new, problems.
Though there is a focus on new technology, we continue to face more pressing operational and technical issues on a day-to-day basis as an industry. Examples where the industry needs to work together to improve existing processes include manual transfers, manual switches and the exchange of physical legal or commercial documents with original signatures sent via registered mail. This is also necessary to address inefficient and duplicated due diligence processes or lack of transparency due to the inability to provide the right reporting. It’s certainly possible that many of these can be solved using new technology and thinking differently. From our experiences in the Nordic markets, we see that the use of digital IDs and authorisation, and the dematerialisation of legal contracts, can go a long way in removing friction from the financial services industry. These are lessons which can certainly be applied more broadly.
Creating an organisation able to deliver change and to ensure IT delivers value to the business is the panacea that eludes many. Smaller firms have a natural advantage through the creation of Agile and product-centric organisations. In real terms this means dedicated product, business analysis, IT development, quality assurance and operations teams working in harmony to deliver small incremental changes, all focused on delivering the maximum business value. At the heart of change is strong product management, driven by experienced experts in their fields who are able to navigate the client’s needs captured through working with the client relations and sales teams, internal business drivers and IT teams to deliver measurable financial benefits. The ethos of Agile is quick delivery and continuous reprioritisation, focusing on value and adapting to changing needs. A core part of an Agile organisation is the ability to bring change into production, something the largest tech firms these days can do daily. This can’t be possible without the right framework and infrastructure, which is where a ‘DevOps’ approach becomes an important part of the journey.
Being willing to challenge and break the ways things have always been done requires an important element in managing change – that is being creative and not being bound by the ways of the past. It involves a willingness to incorporate new technology and to work with partners to maximise impact.
Tony Freeman, Executive Director, Government Relations, DTCC
Managing change is no longer an optional task and all fund management companies have had to develop their skills in this area. Since the financial crisis of 2008, regulatory change has enveloped all segments of the market, including the fund industry. However, the fund industry has never been a homogeneous group and regulatory change has accentuated operational diversity. In particular, the move towards middle and back-office outsourcing has accelerated. Buy-side firms which have been wedded to performing almost all processes in-house have undergone a complete change, because the cost and complexity of singlehandedly implementing regulatory change is simply too great a burden. Investing in portfolio performance and client service remains a priority, but spending money on shareholder record-keeping or fund-accounting seems much less productive. This model even applies to the biggest fund managers, who can achieve economies of scale.
So how should companies be structured to optimise their ability to manage change? In practice, there is no optimum structure. The way firms are organised depends on several factors. Do you buy, build or rent your technology? How much of your middle and back office do you outsource? Do you regard operations as a value-add or a cost? And crucially, for a buy-side firm – how complex are your funds? The key success factors appear to be an ability to think long-term and to separate the responsibility for day-to-day management from planning ahead. The implementation of the Central Securities Depositories Regulation (CSDR) settlement discipline regime in 2020 is a live, current example – it isn’t unusual to meet senior operations people who are unaware of the new requirements. They appear to be so busy with day-to-day operations that they have little capacity remaining for long-term thinking.
There are also industry coordination concerns to consider. Many regulatory changes – T+2 settlement and the settlement discipline regime are both good examples – cannot be achieved in a vacuum and require industry collaboration. Therefore, it is vital that fund managers see themselves as part of a community. It appears that some firms believe their brokers and custodians will deliver ready-made solutions. When you have a complex supply chain and are heavily interconnected with counterparties and clients, you can’t avoid taking ownership of industry change projects. This is especially true in Europe, where there is no centralised entity to act as project manager.
The focus areas identified most frequently by clients as having potential benefit to the funds industry are data analytics, cost attribution and cyber-security defence. For active managers, the search for alpha is absolutely the highest priority and therefore, data management becomes paramount. Understanding costs is also a highly topical issue, because there is considerable pressure from policy-makers, especially the FCA in the UK, for all companies in the funds industry to be more transparent about how they allocate their costs to clients. And cyber security is what keeps us all awake at night. None of these challenges have historically been a core issue for the funds industry, so the key is probably for a firm to understand its own strengths and weaknesses. It may be necessary to procure skills and services in an entirely new way.
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