July-August 2017

INSIDE VIEW: How to avoid disruption

ObstructionJRLowry of State Street Global Exchange explains five emerging technologies that asset management firms need to consider.

The digital transformation in financial services is not going to bypass the investment management industry. The need for investment managers to participate in this digital sea change is not in question.

However, many have been relatively slow to embrace new technologies.

If firms are not receptive to disruption or fail to take technological innovation seriously, they could find themselves being on the receiving end of being disrupted.

According to our research paper – ‘Finance Reimagined: Finding Long-Term Value in a Digital Age’ – 28% of investment firms acknowledge they lag behind their peers when it comes to applying digital technologies in their businesses.

The same report also identified five emerging technologies that are set to transform the financial sector over the next few years. These are blockchain, predictive analysis, artificial intelligence, real-time tracking of asset performance, and identity software based on biometrics.

Blockchain has expanded far beyond its roots as the infrastructure underpinning crypto-currencies such as bitcoin. Blockchain technology can be used to create an immutable, near real-time, digital ledger of transactions, records, agreements and contracts, without the need for a central authority.

Its relevance to investment management is not to be underestimated. As one example, blockchain could enable investment firms to automate clearing and asset transfers in what could bring huge cost savings.

The 2015 ‘Rebooting financial services’ report by Santander Innoventures projected banks could save $15 billion to $20 billion a year by 2022 if blockchain technology was incorporated into their back-office systems. Guaranteeing true data integrity and finality could remove the need for intermediaries, such as central counterparty clearing houses that today manage between derivative trading counterparties, or transfer agents that sit between asset managers and their investors.

Streamlining portfolio management
Predictive analytics can help financial institutions manage risk more effectively, or track changing customer preferences. Our research – which was based on extensive quantitative analysis of 2,000 investors and 500 wealth firms – found 44% of firms believe utilising predictive models will play a major role in dealing with changing market trends and investor expectations in the next five years.

This could include mining of unstructured data – for example, opinions expressed on social media – to predict behavioural traits among customers. The Internet of Things – which harnesses data on its users’ habits and on the world around us – will likely lead to a surge in data that enables investment firms to provide customised and flexible products for clients and spot new indicators of investment performance and risk.

Identifying market trends based on patterns identified in the vast amounts of data collected from across the financial system will help investment firms automate their advisory services and streamline portfolio management decision-making.

Artificial intelligence (AI) tools can complement portfolio management through their thorough analyses of daily market prices and volumes, macroeconomic data, corporate accounting documents, investment research and other sources. One example is machine learning, a process that allows technology to apply learned patterns to new data and can help firms improve their decision-making effectiveness and efficiency.

Some investment firms already embrace machine learning and AI, enabling rapid data analysis in their trading processes. Others go further, utilising AI technology with zero human input to execute stock trades. The potential of AI has been recognised by investment management firms, with 49% according to the Santander report expecting to use the technology in the next five years.

The migration to cloud-based platforms and increased adoption of highly sophisticated data analytics tools has made it easier for firms to track asset performance and risk in real time. The chief benefit of such technology is that it can help investment firms immediately identify directional shifts in market conditions thereby giving them a competitive advantage.

Firms have taken note, with 57% of respondents in our survey saying that they will adopt real-time tracking systems in the next five years – an increase from 38% today. As just one example, such technology could give managers all of the research and analysis they require on potential trades prior to the market opening.

Electronification of risk
Innovations such as blockchain, AI and real-time tracking will have a phenomenal commercial opportunity upside for investment firms. But as the markets undergo rapid technological transformation, so do the threats facing those very same market participants. The electronification of securities from paper may have helped eliminate many manual processes but it has precipitated the electronification of risk.

Although this trend is not necessarily new, the technology to both attack and protect information security is increasingly becoming more sophisticated. Some firms are applying behavioural biometrics, such as analysis around how customers interact with their technology devices.

This may include the speed or force with which they tap keys to log in, or how they swipe their smartphone or tablet screen. Biometrics can help flag any behavioural inconsistencies. To reassure clients, investment firms are going to have to integrate advanced security protocols into their protection mechanisms.

There’s no denying that digital disruption is coming to the finance industry, and no firm can afford to be complacent; as highlighted by our research, some investment firms are already at risk of being left behind.

Established market participants naturally have a brand and reputation advantage over relative newcomers to the market. This is apparent in our study, which found 53% of investors acknowledged they trusted established wealth service brands more than new entrants. This is a huge advantage, and one that organisations should leverage to their advantage.

For those investment institutions that are bold enough to rethink their business models from the bottom up around digital, and are always looking to improve the client experience, the future looks bright. For those that aren’t, the risks loom large.

JR Lowry is head of Europe, Middle East and Africa at State Street Global Exchange

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