Australia’s managed funds industry faces the challenging task of mapping out its digital future while grappling with myriad issues, including falling headcount, fee pressures, and the impact of a Royal Commission report on the industry. Despite these difficulties, fund managers who embrace change have a bright future.
Worldwide, the managed funds industry expects technology to sit firmly at the heart of future business models, according to a Calastone survey earlier this year. In Australia, however, the survey found key differences in how the industry sees that future being implemented.
The survey looked at current distribution strategies, technology investment, and perceptions of service quality, and endeavoured to form a picture of how the industry will develop over the coming years.
There has been a significant drop in adviser numbers in Australia, in part exacerbated by the Royal Commission report into the industry. Numbers have fallen from about 25,000 at the time of the report to about 16,000. According to projections, that will drop further to about 13,000 by the end of 2023.
Given that almost a quarter of survey respondents in the region identified advice as critical to all clients, this poses a major challenge to an industry that has historically been highly intermediated, and poses significant challenges for future distribution.
TAPPING NEW MARKETS
The plunge in headcount coincides with a period when the industry – confronted like its counterparts around the world with shrinking margins – is tackling the question of how to open untapped domestic markets.
While in Asia, and particularly China, fund managers successfully deployed app-based technologies to reach the mass of potential customers looking at smaller investment levels, in Australia managers are still heavily focused on wealthier, older clients and investors, which leaves a large part of the market under-explored.
The survey findings suggested that apps in Australia will remain the largest single target for future investment in technology for distribution, whereas the survey results suggested that in the rest of Asia-Pacific app investment has peaked.
Historically, the use of platforms by advisers to access funds has been very high, so the focus has been on those platforms delivering apps to investors. Australia lacks the sheer size of client base required to implement an Asia-style investment-app ecosystem seen in countries such as China, Indonesia or the Philippines, based on high volumes.
Fund managers are currently considering how to improve their direct client experiences, which currently can be clunky. Possible improvements will include mobile apps, but this will only be one strand of what is needed to attract and retain direct investors.
UNPRECEDENTED CHALLENGES
Globally, the fund industry is facing unprecedented challenges, not just from dwindling margins but also fee compression, new asset classes, emerging competitors, and expectations of better, more transparent service standards.
In the United Kingdom and Asia, about half of fund managers anticipate setting up their own wealth-management divisions to help bolster market share. In Australia, however, only a quarter saw this as likely – the second-lowest proportion after the US.
In part, this may be a product of Australia’s well-developed savings and investment culture, and the fact that funds have historically been distributed predominately by advisers. Regulatory hurdles to establishing a wealth-management division are also relatively high, and the shortage of advisers would make hiring for these divisions a challenge.
ESG SURGING AHEAD
Despite these difficulties, Australia is surging ahead in some areas, particularly ESG investment. According to the survey, ESG is expected to be the largest single factor driving future distribution strategy, outpacing every other region in the world.
Admittedly, the region is starting from a relatively low base. Australian investors have been slower to adopt ESG-focused funds; 2021 was the first year that the category saw a net inflow. Even then, the $2.1bn net purchases of ESG-labelled funds represented just one-sixth of net new cash into equity funds, compared with four-fifths in the UK, according to Calastone’s Global Fund Flow Index.
However, the survey’s expectations of a surge in ESG investment are being borne out. ESG funds attracted their largest ever share of equity inflows in Q3 2022. About $1 in every $4 of equity inflows was committed to funds with an ESG focus, while the $1.6bn total investment was almost double the combined inflow during every quarter since the beginning of 2019, according to Calastone Fund Flow Index.
ENHANCING THE CUSTOMER EXPERIENCE
Getting new investors onboard and delivering the experiences that will retain them, are among the industry’s most pressing challenges, the survey found. Simpler onboarding was identified as the main current priority in improving distribution.
This is unsurprising, because the onboarding experience is still often very slow and painful, especially for unlisted managed funds. There is still a way to go to make it easier for investors to sign up to managed funds but there are some good examples in the market of apps making the experience smoother.
Even after investors have signed up, shortfalls in innovation and data handling remain key obstacles to improving their experiences.
Greater automation and overall improvement of all operational processes will improve efficiency and build the foundation for a better investor journey. There are many opportunities for asset servicers to innovate to support asset managers’ distribution, including greater flexibility and the adaptability to handle new investment vehicles such as tokenisation, which offers the opportunity for more personalised and cost-effective investment offerings.
Timeliness and accessibility of data is also a challenge across the value chain. Creating a better way to share data will avoid the persistent errors that take a large amount of time and resources to resolve.
Over time, Calastone wants to help the industry create a better way to work. Through extended automation and digital data-sharing, the industry can service broader markets and deliver a vastly better customer experience, while simultaneously becoming more efficient and reducing costs.
