To appeal to a new, digitally savvy generation of investors, fund houses must harness an array of technological innovations, says Calastone’s Varun Atre.
The fund management industry is emerging from a succession of boom years, but challenges are lurking beneath the surface in an environment that is both fast-moving and disruptive.
The changing profile of the industry’s client base is defined by a new generation of investors that is fully digital and which expects transactions to be almost as easy as ‘swiping right’.
Not only that, but these new investors have views about how their money should be invested and they will also expect their client journey to be clearly and regularly signposted with data.
In short, the average customer of fund management firms – whether they are retail or professional – is getting younger and more digitally savvy.
Fintechs around the world are meeting the demand of this younger demographic of investors that are seeking enhanced digital services. These companies often pride themselves on offering a seamless, responsive digital experience. To compete for business, fund managers must harness new innovation too.
Further, new asset classes and investment vehicles will be coming to market over the next decade, forcing fund managers to change the range of the products they offer and find new ways of providing these new products, including alternative funds and ESG.
Varun Atre, global head of product at Calastone, says there has been a sizeable move towards ESG funds, as evidenced by Calastone’s Fund Flow Index.
“Clearly, ESG is one of the products asset managers will need to start offering to capture this trend,” he says.
Digitalisation has a large role to play in retaining investor loyalty – not just in communications, but right back in the fund manufacturing stage.
Atre says the bar has been raised in digital distribution by the plethora of digital experiences consumers now enjoy. “Quite often, companies such as Uber and Amazon get quoted in terms of how high they have increased client satisfaction and experience,” he notes.
Over the past 15 years in the retail space, large industry players have transformed the way the average investor thinks about financial services. For example, the digital bank Monzo enables its users to manage personal and business finances via an app. Atre says digital expectations are now migrating to all parts of the financial services industry. Investors expect the same level of convenience and ease-of-use that they potentially experience as day-to-day banking customers.
Meanwhile, fund choice is an equally important ingredient. Atre says: “The alternatives space has been growing and players like Moonfare are distributing and easing up access to private equity investments that have grown in the last three years.”
According to Atre, as these companies grow, so too does the awareness of the different types of alternative funds that are available.
“If you are an asset manager or even a distribution platform, providing easy access to these types of new instruments is increasingly important for investors and success,” he says.
The new generation of investors also values enhanced transparency. So, before allocating their capital to a fund, they’re likely to want sight of, for example, exposure to oil and gas companies so as to allow them to determine whether the fund’s ESG-related goals and ethics are aligned to their own.
However, this can cause investors to spend hours sifting through a fund prospectus to understand what its holdings are. Digitalisation is set to address this challenge.
Atre says: “Being able to increase transparency and make this accessible is another key ingredient to the recipe, and we are seeing this trend come through. For example, technologies such as DLT can help increase transparency for financial institutions as well as end investors.”
Personalisation – meaning the ability of fund providers to offer more bespoke and client-centric services – is also a critical component in the future of fund management. Firms will be measured by the extent to which they can meet investor expectations and, importantly, tailor investment products to suit the needs of this new investor demographic. Technology developments are driving the personalisation trend and financial providers are increasingly using technologies such as AI to provide personal prompts to their customers.
“If you are in investor at the moment, you have a vanilla choice of investment options. The selection consists of the funds available from the asset managers. There is a limited opportunity of what you can pick from there,” Atre says.
But technology like AI and tokenisation can provide an alternative way of offering funds. For example, tokens can represent exposure to certain areas that are aligned to a specific investment methodology and philosophy.
According to Atre, as more asset managers use this technology, they will be able to capture a healthy proportion of the market share. “This will become a self-feeding cycle. This structure will be initially offered at a low pricing point and, as a result, more industry participants will become interested.”
Personalisation and direct-to-customer distribution are increasingly being offered to the new demographic of investors that wished for more control over how their money is invested. Atre muses: “A few years from now, every individual may have their own customised fund that meets their investment needs, but also their philosophical profile towards investments.”
Ride the wave
Fund managers must keep on top of the trends currently shaking up the industry. Investor demand is set to take fund managers into previously untapped markets and opportunities.
“The future of fund management will be more digitally served and more personalised – and it will become more profitable as a result.”
But to unlock the opportunities, managers must actively embrace the digital transformation and be more responsive to their investors’ evolving expectations, needs and demands.
(First published in Funds Europe July 2022: https://www.funds-europe.com/july-august-2022/funds-for-the-next-gen)