Asset management failing to get to grips with tech revolution

The asset management industry realises it must transform to survive, but has yet to respond to the challenge of digitisation, according to speakers at the recent Alfi spring conference in Luxembourg.

“There is a sense that all is not well in our industry. We sense this social unrest and populism in society, that trust in our industry is fading,” said John Beckett, author of New Fund Order, “and underlying it all is this technological revolution that is going to change the very structure of the industry,” with the bogeyman of robo-advice looming in the hinterland.

Whether we “love it, fear it or hate it,” the concept of robo-advice is expected, according to Citi estimates, to gather €5tn of assets during the next decade, he added.

The old fund order has been remarkably successful in channelling investors into a handful of asset management products and styles, with a bias to star managers, achieving economies of scale and profitability for shareholders, while selling end investors short.

“The industry has been slow to embrace diversity, social obligations and responsibility,” he said, concentrating instead on generating fees from huge cash flows into “super tiger funds”.

Lack of innovation means a backward industry is looking to a group of “old men” to provide traditional solutions to the problem of excessive concentrations of global funds pooled into a tiny number of indices and the assets they represent, said Mr Beckett. This concentration has enabled the likes of passive players Vanguard and BlackRock, plus index provider McGraw Hill, to make hay while the sun shines.

But it is time for fund firms to look for Optional Economic Value – factors to improve the outcome for investors and the value chain – without playing to old values and concentration, he said. This includes a move away from volatility-based risk rating to style-factor analysis, preventing over-exposure to certain asset classes, such as emerging markets.

Among the technology-led solutions to these obstacles, Mr Beckett highlights the SharingAlpha system of 500 unpaid analysts who independently score funds in a sort of “Morningstar meets TripAdvisor” format. He is also looking at the “first truly global due diligence platform” from Door, which will “revolutionise the way fund buyers deal with asset managers” by creating efficiency for RFPs.

Many of the new innovations will make life easier for fund buyers, who must currently make time-consuming visits to fund providers to review their strategies, but have little follow-up after the initial contact.

“We need a mechanism to match fund buyers and asset managers. Such an electronic platform does not need to take its kids to school or have a break for lunch. It is always there for reference.”

Many old-school firms fear such technological advancement, because they believe it creates distance between real people, said Baldwin Berges, a former Invesco executive who has remoulded himself as a “business story strategist”, running his BD-Insider.com consultancy. “The ones who will own this industry are those who can create a human link to the virtual world,” said Mr Berges. “Humans still want to speak with humans. If you can make a human connection against the background of this technological world, there are huge opportunities for you. The race is not about technology, but making human contacts with technology. This is what is up for grabs.”

Rather than direct young people purely into software development to profit from fintech trends, he believes the most marketable attributes they can learn will be “humanistic skills” including psychology and philosophy.

“Body language will be particularly important. There will be a huge opportunity for those with a knowledge of virtual body language and how to animate on the screen.”

Technological solutions for Know Your Customer and security issues will increasingly be provided by bitcoin and blockchain technology, said Mr Berges. This will allow remote clients to provide immediate proof of their identity.

Major barriers to such technological progress in the investment industry include regulation and the spread of inaccurate information, he said.

“Regulations act as an excuse, to keep us from crossing the line and they can act as a refuge for us,” said Mr Berges.

“If we don’t destroy the cult of fake news, it will become a part of our world. We can use Alternative Intelligence to help us do that. Otherwise, it can become as acceptable as high alcohol consumption or a high-sugar diet.”