21st Century Distribution In Asset Management

For decades now, it has felt like the active management industry has been facing an existential crisis – natural selection at the whim of technology and exasperated mom and pop investors.

By Quan Tan

08 October, 2020

For decades now, it has felt like the active management industry has been facing an existential crisis – natural selection at the whim of technology and exasperated mom and pop investors. A recent article by Bloomberg sums up the overall sentiment all too well – “for years, investors frustrated by high fees and subpar returns from big-name money managers have been shifting their savings into ultra-cheap funds that simply mimic the returns generated by benchmark stock and bond indexes. Passive investing, as it is known, was in. Active was out”. The culmination of fee compression and improving technology now dictates the new norms of the industry. The straightforward answer for such cost pressures, fortunately, can be granted through cost-efficient tech integrations i.e. automation and artificial intelligence.

The rise of tech in the investment process has always been a well-expected tale. An aspect that is often overlooked, however, lies within the integration of big data and artificial intelligence in existing distribution models. With the rise of indexing and passive investing, highly scalable distributive models pose great opportunities. “Most markets today operate with a model that embeds distribution and management fees in some shape or form and misaligns distributor objectives with those of the investor. The demand for a seamless, integrated, and tailored solution for each customer will drive technology for asset managers in the future” – PwC. Innovative technologies derived from AI and Big-data i.e. Robo-advisors can automate the portfolio selection process for investors based just on data gathered through customer profiling. These highly scalable and cost-efficient trends will inevitably put into question existing distribution models of money management firms that are often too tedious and costly. A recent report by PwC, on the industry stresses that big data will become more important for asset managers to better understand their customers and align pricing, risk, and financial data to smooth the flow of information to the firm’s leadership and sales functions. With rising cost compression and performance uncertain, a highly efficient front and back infrastructure are crucial.

A strong data foundation drives the effectiveness of emerging technologies and is a critical factor in unlocking scalability. Without an effective data strategy and data foundation in place, innovation may be constrained, and automation initiatives may run into headwinds.” – Mike Kerrigan, Accenture AM Lead.

The collision of both industries has now created a new weave between Silicon Valley and Wall Street. Due to the demand for such technological implementations, the industry is now faced with increased competition from new FinTechs. A report by BCG states that “the mixture of both worlds are creating data-driven business intelligence to help the entire organization develop a deeper understanding of client needs. To enable that intelligence, they are building strong data science capabilities that operate in partnership with sales and marketing.” FinTechs however, are not short of their own challenges. A recent report by RFS warns that although Robo-advisory firms beat most incumbents in terms of customer experiences with seamless digital offerings, they still struggle to win clients and gain market share from incumbents. As the advantages of Robo-advisory firms are centered around lower costs and constant availability, they target the mass market and require scale. Thus, deploying scalable customized solutions into the distribution process will soon be the new determinant towards client acquisition. In coming years, it may not be a surprise to see established tech companies assimilating into the industry due to their ability to harness existing data structures from pre-existing customers. According to a report by PwC, social media firms, and even product providers such as Apple could provide front-office services or even buy a back-office servicing firm to create integrated asset management. For instance, existing tech companies involved in financial services i.e. Google Pay may assimilate into the money management industry just by diverting idle money into a money market fund.

In fact, this has already become more fact than fiction in some countries. In 2013, Alipay – the e-wallet branch of e-commerce giant Alibaba Group – acquired Tianhong Management Co. to launch an integrated money market fund that directly allows AliPay’s customers to invest their idle money in the markets. The result of which has now made Ali Pay’s investment arm – Tianhong Asset Management Co., the largest asset management company in China, and the first-ever fund to reach an AuM of over RMB 1 trillion domestically.

“Asset managers may never have imagined that they would need to provide the same “user experience” to their customers as retailers or consumer electronics companies” – Mike Kerrigan

Although the idea of tech giants offering financial services might seem like a foreign concept, this trend may already be taking shape. Just last year, Apple partnered with Goldman Sachs to introduce its very own credit system into the Apple ecosystem. Although this may pose as an early entry, tech giants like Apple have massive leverages from pivoting current financial services i.e. Apple Pay, into an integrated asset management service directed towards pre-existing customers within its ecosystem.

Although the solution towards the ‘tech-pandemic’ taking over the industry seems rather straightforward, there seems to be a sentiment of ‘anti-vaxxing’ in the industry. PwC reports that more than a quarter of asset managers were not sure whether the use of mobile technology for distribution or communication would play a critical role in their business. The marriage of tech and asset management in the distributive pipeline still pertains to a foreign concept for most managers as most technological integrations have been solely focused on the investment process. In fact, a recent report directed towards money managers by Accenture revealed that 42% of respondents believe that their operations and technology are not currently configured to execute their firm’s overall strategy.

Despite these challenges, the change in distributive models inherently pose great opportunities for firms that are adaptable. In fact, technological integration from industry giants are stronger than ever. Although Robo-advisory services were first offered by FinTechs, the two largest Robo-advisors measured by AuM today are helmed by industry incumbents – Vanguard and Charles Schwab. “In this new environment, the beneficiaries have been the world’s largest asset managers, who are wielding far more influence and increasingly attracting a larger share of investor money. They’ve been able to take advantage of their size to keep overall expenses down and help make up for lower fees.” – Suzy White, Bloomberg. This, unfortunately, is just not the case for most money management firms. Kathryn Hamilton, partner at Baillie Gifford paints a dire, but honest picture – “A lot of firms have been focusing on accumulating assets rather than delivering outcomes for their clients. If there is indeed a shakeout, let’s not assume that’s a bad thing.”