Will digital technology offer asset managers a lifeline, helping them to build lasting relationships with a new and demanding generation of investors? Or will it give rise to an existential threat, handing big tech the tools to execute another industry landgrab?
Against a backdrop of uncertainty and upheaval, the question of how to build sustainable and resilient business models was explored throughout ‘Transforming distribution through technology’, the first in a series of Calastone Connect Forum Leadership webinars we are hosting.
To provide context, moderator Romil Patel, Global Editor of Funds Europe, asked our CTO, Adam Belding, and Colin Bennett, Head of Global Digital Distribution at GAM, to assess managers’ challenges and priorities in light of our latest survey with conducted with Funds Europe, ‘The Changing Face of Funds Distribution’
Braced for change
The fund distribution landscape is braced for change. UK and European survey respondents currently rank banks as their most important distribution channel (30%), followed by fund platforms (26%) and direct-to-consumer sales (19%). But 32% expect direct-to-consumer to be their key channel by 2025, with banks (9%) slipping well behind fund platforms (27%), both challenged by ‘new entrants’, cited by 19% as their primary channel in five years’ time.
To underline this changing of the guard, 57% of respondents cited technology firms (e.g. Google, Microsoft, Apple) among their most valuable partners, with online retailers such as Alibaba and Amazon mentioned by 49%. Both rank well behind fund platforms (73%), thanks to long-established collaborative partnerships, but the findings reflect the growing potential of distribution alliances such as Invesco’s tie-up with Ant Financial’s wealth management platform.
“Fund platforms are clearly important partners to asset managers today,” Adam observed. “But we could soon see more online retailers developing investment management services. In China, ‘super-apps’ are beginning to offer savings options, for example letting users redirect money saved from a taxi booking into short-term investment vehicles such as money-market funds. Online retailers and big techs have huge reach, power and ability to disrupt. Asset managers have opportunities to partner with such firms as they develop their investment management offerings.”
Asset managers see new entrants as a double-edged sword, with online retailers (71%) and bigtechs (69%) viewed as potentially disruptive to their business models. Adam acknowledged the scope for an external player to “massively simplify” investment management, as big tech firms have already done elsewhere. ”Potentially, they could combine an AI-driven investment solution or robo-advisor with their distribution channels and knowledge of billions of customers worldwide to take away much of the retail market,” he said.
Colin suggested the emerging role of non-traditional platform providers offers great opportunity for asset managers, depending on the right strategy and technology. “There is room for many to play in that space, as platform or a partner. But you have to understand your position in the network, the value you’re adding, and the technology and tools required. Asset managers must have their data and APIs in order, and the ability to integrate with platforms via open standards,” he said.
Appetite for new models and partnerships reflects a recognition of the need to re-engage with the retail investor. But the Funds Europe survey suggests asset managers will also need to overcome perception challenges to rebuild relationships.
A total of 61% of respondents highlighted a lack of investor education as the greatest barrier to attracting new investors. Whilst 59% cited poor returns and a lack of certainty, a similar proportion (58%) pointed to excessive regulations/KYC controls. Almost half (47%) noted the high cost of investing, with 40% blaming perceptions of investment as boring, unengaging or old-fashioned.
Adam asserted that persistent problems with the investment experience were no longer acceptable to a new generation of customers raised on simplicity and transparency. Citing KYC automation as one example among many, Colin argued managers must embrace technology to address perception challenges.
“Costs are being forced down through the process of digitalisation, which also has the potential to improve the customer experience and make things more self-explanatory, as big tech applications are today. These issues may be less of a problem in the future if we design solutions and processes properly,” he said.
Knowing your customer
Thirty percent of Funds Europe survey participants expect artificial intelligence (AI) to have the biggest impact on the funds business – rising from 22% in 2018, to 26% last year – closely followed by distributed ledger technology (DLT, 28%) and big data (21%).
Conviction in the transformative potential of DLT has dipped from 43% in 2018. But 65% of survey respondents believe DLT can deliver greater efficiency in fund trading and settlement, while 61% say DLT has the potential to replace inefficient links between intermediaries.
For Adam, the appeal of AI lies in its ability to help managers understand and respond to client need. “End-investors are used to a more advanced, comprehensive customer experience compared with 10-15 years ago, largely thanks to much better use of data to understand customer behaviour,” he said. “The collection and management of data is an essential component of any firm’s value proposition. And if you want to create tailored solutions at scale, you will need to deploy AI, notably machine-learning (ML) technologies that can identify patterns in large datasets leading to new customer insights.”
Colin agreed that ML-based insights will give asset managers a competitive edge, in future. “As these solutions are being applied, it’s becoming apparent that firms need a range of expertise to implement them. Although momentum is building, there is a lack of data scientists and digitally-savvy staff in our industry,” he noted.
Room for everyone
As margin pressures intensify, 73% of Funds Europe respondents expect asset managers will continue to be squeezed, whilst 65% forecast that fund distributors’ margins will fall. A further 56% predict that some players in the current supply chain could disappear.
Old models are being challenged, but new partnerships and technologies offer a route to cutting costs and delivering greater value to customers. Digitalised distribution should not be seen as a threat, but as an opportunity to understand and service the customer base more effectively.
The strategies of individual firms will vary. According to the survey, 72% of respondents expect asset managers to introduce more low-cost products, including ETFs. But others see a future focus on wealth management (59%) or alternatives (53%).
As Colin suggests, the opportunities are there to be grasped. “Our sector is being digitalised. But both humans and machines are needed. We will utilise new technologies and methods to give the best value for clients. There is room for everyone along to play along the value spectrum from active to passive.”