Industry leaders shared their insights at the Calastone Connect Forum in London earlier this month about how the funds industry can successfully reposition itself and compete in this increasingly digital ecosystem.
Reconnecting with clients
Right now, a lot of people are hesitant about investing in active funds, instead preferring to ride out the market uncertainty by sitting on cash. Our most recent Fund Flow Index found that cash is flowing out of active funds faster than ever. This is an issue that the funds industry must resolve urgently. During our Connect Forum in London we found that efforts are however being made to encourage more people to invest. One of our panellists, Melanie Seymour, Head of Global Client Service at BlackRock, said the industry was becoming more client-centric and accessible, communicating in language that is easier for customers to understand. “The big differentiator for asset managers is not the product but the client experience and service. We need to put ourselves in the shoes of the clients and listen to them when we are rebuilding our operating models,” she said.
As a result, asset managers are devoting less time to promoting their products, focusing instead on articulating clearly what solutions they can deliver to customers. Christian Pellis, Global Head of Distribution at Amundi, told us that his organisation was regularly hosting seminars aimed at salespeople and distributors instructing them to redouble their efforts on pitching solutions as opposed to products to clients. He said retail customers are uninterested about the merits or granular details as it relates to a particular fund, but just want affirmation the investment vehicles they purchase are aligned with their needs. “We need to change the way in which we speak to our clients,” he acknowledged.
Attracting the new generation of investor
During the event I took the audience through our new research, looking into the approaches and attitudes of millennials when it comes to investing. If the funds industry is to grow, this group will be key. This, however, will not be entirely straightforward. I conceded the picture was fairly bleak for them, pointing out it was the first demographic in modern history to be materially poorer than the generation that preceded it. Furthermore, our study found respondents overwhelmingly prioritised other things before considering investing. In addition, the study said millennials are constrained by high living costs, which could further preclude them from investing in funds.
Exacerbating matters further is that millennials score badly on financial literacy too. For instance, we saw that over half of millennials had a poor understanding of investments, with less than 10% actually had an investment in a fund. Nonetheless, there is ground for optimism as the study found well over half of millennials would likely invest in the future. On investing, millennials said a firm’s reputation; fees; long-term returns and transparency were among their key criteria. Interestingly, despite all of the impressive progress our industry has made with ESG (environment, social, governance) investing, it is not the most important driver behind millennials’ investment decision-making.
Consumer behaviour is undergoing a digital transformation and the funds industry needs to move with the times. But it isn’t just millennials who are becoming more digitally astute. Calastone’s Josh Wade said that “A lot of the focus around digitalisation has concentrated on millennials but all generations are becoming more tech-savvy.”
If the funds industry does not evolve and digitalise, it puts itself at risk of disintermediation, potentially from established technology firms or even retailers. This is corroborated in another of our studies we reviewed during the event– “The Impact of Technology on Investment Funds” – which revealed over a quarter of market participants believed online retailers (e.g. Amazon, Alibaba) were best positioned to disrupt the funds industry followed by technology companies (i.e. Google). In fact, this is already happening, as pointed out in our recent article on big tech which referenced Yu’e Bao, a Chinese money market fund owned by e-commerce giant Alibaba, which is the now the world’s biggest.
Admittedly, most of this technology giant-led disruption of the asset management industry is taking place in China, but it would be wrong to presume that it will not eventually happen one day in North America or Europe. “More technology companies such as Google and Amazon are establishing strategic partnerships with financial services as they look to refine their product suite,” explained Bob Currie, Research Editor at Funds Europe. Several leading technology firms (such as Amazon, Google, WeChat, and Facebook) have already launched their own digital wallets and online payment facilities, while a handful are even beginning to provide financing to small enterprises, although the latter service has not really taken off.
While over half of market participants told our study that the funds industry struggled to implement new technologies, most said there had been a marked improvement in technology adoption nonetheless. Disruptive technologies need to be leveraged if the investment experience is to become more enjoyable. “Most significantly, investors want full transparency on everything from performance, fees, and ESG,” said David Marriage, Partner and Global Head of Disruption and Innovation for the Asset and Wealth Management Sector at PwC.
Unfortunately, he added this data is segmented throughout the industry and held – usually in function specific siloes – across various intermediaries including transfer agents, global custodians and fund administrators. It is critical the industry enhances its data management processes if it is to meet the growing transparency expectations of its underlying customers.
Elsewhere, artificial intelligence (AI) applications such as machine learning, deep learning and natural language processing are being trialled in asset management as organisations look to optimise their operational processes and deliver a more rounded client experience.
Melanie Seymour said that “The industry is investing heavily in AI to generate efficiencies, especially in the middle and back office, where the technology could free up staff resources allowing people to partake in higher value add activities and have more client interactions”. While AI could expedite a number of operational activities, she stressed that human intervention would not be usurped altogether. “AI may be able to replace the human brain but it cannot replace human judgement,” she added.
Distributed ledger technology (DLT) could also play a meaningful role in rationalising asset management, especially in fund distribution. Fund distribution is an activity laden with inefficiencies, a legacy of ageing technologies, intermediation and duplicative processes, and it all adds non-trivial frictional costs to asset managers’ bottom lines. Josh added that “It cannot only be the front end where innovation takes place. The back end processes must undergo a transformation as well.” He said that DLT was a compelling client proposition giving organisations a consistent view of their data throughout the value chain and it is something financial institutions are increasingly leveraging to obtain efficiencies.
A new reality dawns
Whereas banks are providing a wider range of digitalised services to clients through open banking programmes, the asset management industry is yet to make similar advancements. However, there has been visible progress as asset management firms increasingly adopt DLT and AI and repurpose their data management processes.
That said, the funds industry also needs to innovate sustainably if it is to flourish, a point made by our keynote speaker Paolo Sironi, elected member of the IBM Industry Academy and fin-tech expert. “It is critical that firms deliver value. Disruption often means simplifying a product to the point where the margins are low, which means it can only survive if it is a high-volume product. The alternative, however, is sustainable innovation whereby the margins are sustainable. It is crucial that firms identify sustainable innovation at the point of disruption.”