The Securities and Futures Commission (SFC) released consultation conclusions on the proposed Guidelines on Online Distribution and Advisory Platforms in March 2018, providing direction on the design and operation of online platforms. The new guidelines aim to encourage the development of online distribution in Hong Kong, whilst protecting the interests of investors. Many in the financial services industry also believe that the guidelines are set to welcome new distributors, such as technology firms, to sell funds online.
The current fund distribution ecosystem in Hong Kong is very fragmented: each stage processes, balances, and reconciles every transaction separately, which adds to the distribution cost. In order to remain competitive in an evolving market, coupled with the emergence of online platforms including automated or robo-advice, asset managers must focus on areas of inefficiency and cost reduction, so as to create the best possible offering for investors.
Cost reduction is the purest form of alpha, and many fund firms are already analyzing where savings can be made. The present distribution system also limits the transparency of the transaction process, which is becoming increasingly outdated; digitization is necessary to provide clarity and cut cost for both firms and investors.
Exchange-traded Funds (ETFs) are proving to be an investment tool of choice, as the transaction methods used by mutual funds and other traditional forms of investing are starting to be surpassed by more efficient, technological systems. The asset management industry must focus on investing in technology, so as to progress with these developments, rather than risk being transcended by newer, technically advanced firms.
The changing investor demand reflects these technological changes. There is a shift in focus now from servicing wealthy ‘baby boomers’, to a new, younger generation of digitally savvy millennials, who do not shop for investments in the same way as the generations that preceded them. They may be more likely, for example, to use robo-advisers, rather than traditional financial advisers, which will impact the number of jobs needed in the asset management industry in the future.
How can technology help?
Technology is therefore transforming the funds industry. A digital ecosystem, with trading fully automated and integrated, provides a platform for innovation and an environment prepared for management and regulatory reporting needs. With the growth in digital platforms and the advent of robo-services, investors can benefit from a seamless end-to-end customer experience. As the friction across the transaction chain is reduced, funds can be more easily processed, increasing efficiency and trading activities.
Blockchain’s impact of funds distribution
Automation, machine-based learning, and artificial intelligence are all significantly advanced and are impacting the financial ecosystem. We believe that blockchain, when it is fully integrated into the financial industry, has the potential to transform funds distribution.
Blockchain provides a means of revising traditional operating models, to drive new business models. It creates a digital distribution chain, where all participants can agree on the data and the same outcome for a given process. With such technology, applied across the whole funds market, participants can avoid the duplication of balancing and settlement of each transaction that still happens today.
A Forrester research commissioned by Calastone in January 2018, titled “The Total Economic Impact of Calastone on the Global Mutual Funds Market”, found that migrating to blockchain could generate more than US$2.6bn cost savings for the global mutual funds market.
By standardizing all orders across the mutual fund purchasing chain, market participants can share a single consistent and accurate view of each transaction and all balances. This approach simplifies what is otherwise a complex market, providing clarity for clients, investors, and the public and, crucially, driving down the cost of trading and settlement across the whole market.
The application of blockchain also enables market participants to roll out new services, catering to the needs of the next generation of investors. For example, asset managers have the option to launch eShare classes in a fund, which could be offered to investors at a lower price.
Hong Kong’s asset management industry is facing challenges in a constantly changing investor market, with the potential emergence of new industry participants. With vision, innovation and investment in transformative technology, the asset management industry has the potential to continue to support the changing needs of future investors.
Through blockchain, the entire funds value chain, cost, risk and operational and regulatory pressures, can be alleviated. This is already starting to happen; and there is certainly the potential to realize this further. When we consider the innovative technologies that can be leveraged, the savings and value that can be unlocked are vast.
(The article first published on July 2, FinTech Innovation: https://www.enterpriseinnovation.net/article/digitizing-funds-distribution-hong-kong-1782916001?r=177)