Robo-advisors and technology
Tom Brown, Global Head of Investment Management at KPMG, segmented the issue of technology and digital disruption in the asset management industry into three main areas: customer experience, operational efficiency and the use of technology to manage money.
Robo-advisors – online wealth management platforms that provide automated portfolio management advice without the use of human financial planners – are perhaps the industry’s best example of all three points rolled into one. While the technology is still relatively new, use of robo-advisors has been growing exponentially, especially amongst the younger generation, which today prefers to view and manage its pension savings using a mobile app rather than going into a bank branch.
A number of traditional asset managers have equity stakes in robo-advisory platforms, aiming to strike a balance between traditional and technology-based approaches under the umbrella of an established, credible brand name. Others argue that artificial intelligence and machine learning will eventually lead to the demise of the fund manager entirely, the argument being that machines can do what humans can do but better. Consumer behaviour will adapt to the new environment as it always has done when presented with innovative leaps forward such as self-service checkouts, online interactions and soon, driverless cars.
In October last year The Economist devoted their cover story to Blockchain: “The trust machine: how the technology behind bitcoin could change the world”. In simple terms Blockchain is a digital, trusted, public ledger that everyone can inspect, but which no single user controls. It keeps track of transactions continuously, for example ownership of a diamond, rare painting, or piece of land.
The asset management industry continues to debate the potential applications of this technology, which started out by powering Bitcoin. In a panel moderated by Lawrence Wintermeyer, CEO of Innovate Finance, ideas ranged from Blockchain’s applicability in areas such as post-trade environment, collateral and liquidity management, regulatory reporting, and the handling of know-your-client (KYC) and anti-money laundering (AML) data. In each instance success will require close collaboration amongst the various parties involved.
Brexit and Trump
Mohamed El-Erian, Chief Economic Advisor at Allianz, addressed some of the shifts that are giving rise to the anti-establishment movements seen in many developed countries today.
“The common element throughout all these things,” he explained, “is that the advanced world has lost the ability to grow in a fair and inclusive manner, and when that ability is lost and people lose confidence, things start going wrong.”
El-Erian stressed that global growth to unlikely to be consistent and stable any time soon, thus the risk of non-normal distribution of events affecting the markets is always an issue. Secondly, he highlighted central banks’ inability to rein in financial volatility, which remains as frequent and unpredictable as ever.
The discussion centred on the fact that investment managers should try to adopt new framework about how they think about risk, and acknowledge that market events in both developed and emerging markets no longer follow a normal distribution curve.
Is ‘data’ the new gold?
A number of panels focused on the industry’s ability to understand and utilise the unprecedented amounts of data that are generated by each one of us in the digital world.
“By 9 o’clock each morning we have already created more data than mankind created from the beginning of time to the year 2000” said Andreas Weigend, former Chief Science Officer at Amazon.
“Because of the signals you send through sensors, microphones, GPS, gyroscopes and cameras, your phone knows almost everything about you: where you are walking and even how you are walking – it probably knows more about you than know yourself”.
Crunching and refining data such as these enables the industry to improve and tailor its products a lot more to client needs.
Costs and Transparency
The new European MiFID rules are due to take effect in early 2018 and will require funds to give more information on costs in their fund factsheets.
EU and UK regulators are demanding fairer and more transparent fees from fund managers in a bid to ensure greater transparency and accountability to investor clients. As discussed in previous blogs, as part of this process they are also assessing which costs should be borne by the asset manager and which can be passed on to the end client through management fees and commissions.
The new regulatory environment is forcing asset managers to rethink a number of elements of the traditional business model, such as how they consume and pay for investment research.
With technological innovation comes regulatory oversight. Those able to react quickest to the dual challenges of new regulations and market unpredictability are most likely to succeed.