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07 June 2019

Disruption in asset management: Adopting a fintech mentality is key to firms’ survival

By Roger Woolman

Investment managers could be “the next group to feel disruption,” according to hedge fund investor Doug Kass.

Kass warned commoditization of the industry will result in reduced activity and investment management fees, leading to large share price falls. He is shorting several asset managers in response.

Disruption spreads
Swathes of the financial services industry are already wrestling with disruption, as the fintech incursion spreads across payments, retail banking, brokerage and wealth management. 

And competition is not just coming from the fintech insurgents—big tech companies pose an even greater existential threat. 

Capgemini research found 45% of financial services organizations believe the likes of Google, Facebook and Amazon will be their main competitors in the next five years. 

As this Milken Institute article pointed out, big tech firms have deeper pockets and better access to data than their financial services rivals. More importantly, the tech companies have “uniquely intimate relationships with their customers” that they can exploit to seize the customer relationship one product at a time.  

Asset management next in line
Banks have been in the front line to date, but asset managers will surely not escape the wave of disruption. 

Change is already upon them. 

Fee pressures continue to accelerate, with CaseyQuirk figures showing year-over-year compression reaching 5% in most asset classes and segments. More than a third of asset managers experienced falling margins, despite rising revenues fuelled by the bull market. And as markets turn, revenues and margins will come under even greater stress. 

Without dramatic changes to revenues, costs or both, CaseyQuirk predicts a quarter of asset managers risk becoming unprofitable by 2028. 

Such industry pressures are here to stay. The question is, what will incumbent firms do about them? 

Success through innovation
To succeed, the Boston Consulting Group notes asset management firms need to make profound changes in their technology. Easing margin pressures will require firms to optimize their target operating model, including how it is organized, and how it processes data and uses technology. Cost savings of 10%-20% could result. 

Meanwhile, CaseyQuirk says tomorrow’s asset management leaders must become more adept at:

  • Modernizing the operating model across governance, brand, data and technology.
  • Managing cultural evolution, especially regarding non-traditional talent recruitment.
  • Driving change through an emphasis on more agile decision-making and project execution.


I agree. But I’d go further.
 

Disrupted, or disruptor?
If disruption is coming to the industry—and I believe it is—today’s asset managers have a choice: do they hand their future to the innovators of tomorrow, or seize the initiative by bringing a fintech mentality to their in-house operations and the wider industry? 

The challenge fintech poses to financial services incumbents is not just in the technology they are introducing. The real disruption comes from how they are rethinking traditional business processes. 

Asset managers need to do the same. Tinkering around the edges won’t cut it. Time instead for some of that “blue sky” brainstorming that is upending the banking sector. And a good place to start is with the inefficiencies and pain points that currently hobble the asset management transaction chain. 

A few areas that come to mind include: 

  • Onboarding

When I opened an account with one of the challenger banks I took a photo of myself with a phone as part of the ID confirmation. This is a far cry from the laborious, paper-based account opening procedures traditional banks used. 

Asset management clients will similarly expect faster and easier onboarding processes, and firms must keep up. 

  • Distribution

In May, institutions across 41 countries migrated to Calastone’s blockchain-enabled fund distribution system. The ‘distributed market infrastructure’ (DMI) offers real-time trading, settlement and servicing of funds, and includes a ‘sub-register’ that provides real-time views of the registers between trading partners. 

This is just one example. How else can funds expand and streamline their distribution channels? 

  • Data flows

Asset managers need to collect and manage multiple datasets, which all too often become trapped in data siloes. Synchronizing these datasets internally brings multiple layers of effort, cost and risk. 

  • Counterparty interactions/reconciliations

Dependencies created by a multitude of counterparties and external service networks extend the data replication and redundancy problems out across the industry. Complexities in the asset management transaction chain result in multiple counterparty contact points, and time-consuming, costly confirmation and reconciliation processes. 

Think differently
Many more inefficiencies and bottlenecks exist, and I’m sure you have your own ideas about the problems they present and how they can be tackled. 

Solutions won’t be straightforward. But asset managers need to rethink how they operate in all these areas just the same. If they don’t, someone else will.