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Asset managers look to innovation to improve outcomes

An "innovation mindset" may be the answer

Changing dynamics fuel need for innovation

Thanks to the existing regulatory regime, high barriers to entry as well as the industry’s intermediated structure where fund managers do not necessarily engage with end investors, asset managers have been somewhat protected from the types of disruptors who have entered other industries. However, this dynamic is rapidly changing.

The pressure on fund managers to innovate is being spurred by an evolving legislative environment, investor expectations for higher yields, and shifting demographics, particularly the large cohort of baby boomers entering retirement, and millennials with sophisticated digital needs. Harnessing technological solutions to deliver enhanced customer experiences provides an opportunity for continued growth.

Staying close to customers helps manage cost pressures

Key insights

  • New technologies are driving partnerships between asset managers and fintechs to develop solutions that benefit all parties
  • An “innovation mindset” is needed to understand where the challenges lie, especially around customer experience
  • With millennials becoming a greater proportion of the workforce, more thought needs to be given to their investment needs and requirements

At a recent Financial Services Council Leaders’ Summit discussion in Sydney, panelists discussed the influence of disruption and innovation on the fund management sector.1 Costs were identified as one of the main areas of impact, particularly the extreme margin pressure on managers—partly a result of the growth in passive investments—which has accelerated over the past few years.

One challenge articulated, is that the further an asset manager gets from the end investor, cost pressures become more intense. Advisers who are close to their end investors and are delivering differentiated customer experiences alongside sound advice will be best placed to retain margins.

Related to this is the dislocation taking place within the advice industry, which has now moved from being dominated by a number of large institutions in a vertically integrated structure to one that is more fragmented.

The panelists agreed that the future is moving towards a client-centric world where asset managers need to be closer to end investors, including retail, institutional, and their intermediaries, with close to real-time insights. Asset managers need to adjust to this new paradigm.

Fintech partnerships help bring innovation benefits

The cost pressures faced by asset managers are driving them to innovate using technologies such as artificial intelligence (AI), and robotics. RBC Investor & Treasury Services’ Marian Azer, Managing Director, Global Head of Middle Office and APAC Product, believes the industry is now at the next stage, where technology can be used to add greater insights and value to fund managers’ businesses.

New technology
is also driving
partnerships with
fintechs to develop
solutions that
benefit everyone

“A lot of this focuses on how we can help make fund managers more efficient and even how to retire their legacy products,” she said. “But new technology is also driving partnerships with fintechs to develop solutions that benefit everyone. For example, the intellectual property that we bring as a global asset servicer allows us to be an enabler for fund managers who want to offer more products and innovate in different spaces.”

Products should match client expectations for each life stage

From an asset manager’ perspective, putting clients’ needs at the heart of any solution is critical. For example, there is significant effort now being dedicated to understanding millennials’ emerging investment needs as incomes rise. This group is expected to comprise three-quarters of the global workforce by 2025.2

Harnessing technological solutions to deliver enhanced customer experiences provides
an opportunity for
continued growth

“There are currently 2.3 billion millennials in the workforce globally compared with 1.2 billion baby boomers, so we need to know whether we have the right products for that group,” Azer said. “This involves asking whether we understand how they want to interact with us. They are digital natives; they want to invest and divest in a couple of clicks. It is so critical and important to partner with providers and advisers to better understand who they are designing products for, what they’re needs are and how they’ll use that product.”

For example, millennials tend to have an active interest in ESG (environmental, social, and governance), so fund managers could consider how to better integrate and provide transparency of this preference into their products.

Disruption likely to come from outside industry

An innovation dilemma that may face asset managers, is that disruption will likely come from outside the industry.

China’s Ant Financial, a subsidiary of Alibaba, is a case in point. Ant Financial developed the largest money market fund in the world in just two years by integrating the fund into the Alipay app. This allowed Chinese consumers to easily shift their spare money into the fund.

There are currently 2.3 billion millennials in the workforce globally and we need to know whether we have the right products for that group

Ant Financial by-passed the traditional distributors in China, the banks, and in effect leapfrogged the desktop. It was also unusual in that its solution was not about finding a way to invest—which is a typical issue the industry seeks to answer—but how to save simply and more efficiently.

Mindset remains a barrier to innovation

While the panelists felt that Australia’s complex legislation and regulatory environment can be a barrier to innovation, an organization’s mindset presents a further challenge. For example, the belief that a strong client relationship today will always remain so, is naive.

Don’t forget to think about the changing risk profile that comes with innovation

Loyalty cannot be taken for granted. The panelists agreed that newer technologies can challenge loyalty as clients are now more likely to adopt new solutions from other providers that may have greater perceived value and utility.

As a result, a key opportunity for asset managers is to learn from the disruptors and adapt their practices accordingly. Having an “innovation mindset” will help reframe the questions the industry is asking such as, “Can we save if we spend?” and “Can we build trust and make a profit?” with a focus on customer experience. The answers often lie in innovation and solutions may come from new industry entrants.

Changing risk profiles require greater vigilance

Azer had a final word of caution as asset managers make further moves to embrace innovation. “Don’t forget to think about the changing risk profile that comes with innovation,” she said. “Investors trust us with their personal data so you need to be careful if you decide to put in an AI system or outsource a task. Ask yourself if you are making sure you’re protecting your investors, and who is going to keep track of who has what data and who will keep on top of the rule changes.”

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Sources

  1. Financial Services Council: The Summit 2019 Conference (August 28, 2019) Innovations: Funds Management
  2. Catalyst (August 20, 2018) Generations – Demographic Trends in Population and Workforce: Quick Take