Digitalisation in Asset Management putting power into the hands of investors
Asset managers around the world have raised the bar, introducing new business models with the potential to disrupt the post-trade ecosystem. In this paper, asset managers and platform providers, share their views on the latest trends, the potential impact across the ecosystem and why moving beyond the comfort zone may be necessary for survival in an increasingly competitive market.
Technology has profoundly changed the way the asset management industry does business.
During the past 30 years, processing has moved from hand written ledgers to real time activities and data. Rather than looking at new technologies in isolation, viewing all of the developments together shows the powerful effect of these technologies on business operating models of asset managers and the way clients buy their services. Technologies coming down the line, such as distributed ledger, will streamline processes for fund promoters and transfer agents, which will result in a cheaper and simpler experience for the end customer.
Regulatory pressure has played a significant role in the asset management business. In Europe, for example, the Solvency II Directive requires companies to disclose their assets rapidly to ensure they can meet their obligations. Providing this level of transparency will be a requirement for firms – we are moving away from the days of saying to clients “trust me”. While we are still in the regulatory tailwind of the financial crisis, going forward, I believe we will see more regulation designed to help the industry grow. For the past ten years, regulation has remodelled the industry in certain facets to create more transparency for regulators and investors. Best practice has now been enshrined in law. We can now look forward to regulation that will allow the industry to create new asset classes and new markets. Firms will be able to achieve their objectives within regulatory guard rails that have created transparency. A result of this could be a change in client investing behaviour, whereby there is a move away from benchmarking and look to outcome-based investing. In this model, the day to day market movements are not important – the focus is on the objective, for example, saving for a deposit on a home. Outcome-based investing gives clients a better framework to understand how their investments work best for them.
For post-trade organisations, data will become increasingly important in the future. Historically, post-trade services have been provided as part of a custody deal. This is changing and data has become a key factor for clients, who will want data that is accurate and delivered to the right place at the right time. This requires a great deal of work on the part of the post-trade organisation in terms of establishing the structure, management and delivery of data. To do this, organisations are creating data lakes, which enable data to be interrogated without the requirement to reformat it for each type of enquiry. Data lakes will usher in the same type of dramatic change that was witnessed as asset managers moved from handwritten ledgers to PCs.
In the future, asset managers will provide a more holistic solution to investors. Rather than specialising in a particular instrument and turning away clients who want to add something else in the mix, managers will cooperate with others in order to meet their customers' requirements.
Open architecture is another trend that asset servicers are following closely. Clients will be able to choose best of breed solutions from a variety of providers, rather than being locked into a single provider. This will be a more prudent approach, enabling clients to spread their risk rather than relying on a single service provider. In an increasingly competitive post-trade environment, the service providers that adopt an open architecture mindset, providing solutions that aggregate data and give a holistic view to their clients, should be among the winners. New asset management business models are also being developed to provide greater flexibility to clients, enabling more self-service functionality. Rather than waiting several days for a report, clients can instantly access information and create tailored reports, which can then be passed on to their customers.
The wider digitalisation trend in the financial services industry will affect asset management players such as fund manufacturers, who will be disintermediated from the end investor. Investors will deal directly with distributors, who will help them manage their investments. Investors will be able to access products via digital platforms such as smart phones; the millennial generation want apps and instant responses. Another characteristic of this group is that they want to invest and see the impact of that investment in terms of economic, social and corporate governance (ESG). This will become the norm and benchmarks will evolve to measure the performance of countries and corporates accordingly.