Like many of their global peers, active asset managers in Australia are facing a number of serious challenges, not least receding margins, difficult performance conditions, increasing competition from ETFs (exchange traded funds) and alternative investment vehicles and the risk of yet further regulation especially following the publication of the Royal Commission’s report on Misconduct in the Banking, Superannuation and Financial Services Industry. In response, the funds’ industry is beginning to invest more capital in new technologies as it looks to generate cost efficiencies and make the overall business model more user-friendly.
Technology and the future of funds
According to our latest survey of the Australian funds market, 36% of respondents believed distributed ledger technology (DLT) will have the biggest impact on the industry’s future. Moreover, a further 20% said regulatory technology (or reg-tech) would be the most influential disruptor. In contrast to Europe/UK and Asia, only 14% of Australian respondents felt that artificial intelligence (AI) would have a meaningful role in asset management. “During SIBOS, a lot of people said DLT had dropped down the agenda as more firms concentrated on developing application programming interface (API) capabilities, but this survey indicates otherwise,” commented Bob Currie, research editor at Funds Global Asia.
Significant investment has been made by financial institutions into DLT over the last five to six years and a number of POCs (proof of concepts) are now transitioning into live applications. Our survey said DLT had the potential to bring additional security and efficiency to transaction processing including in areas such as trade order routing, settlement and recordkeeping. “In the context of the Royal Commission’s recent report, reg-tech could support providers in Australia with some of their regulatory overheads. Equally, robotic process automation (RPA) could help the industry generate savings by removing a number of human touch points from the investment transaction process,” added Currie.
Data analytics – often enabled through AI tools such as deep learning or natural language processing – is also being leveraged by firms to improve their distribution capabilities. Our survey found 73% of Australian respondents were using data analytics to better understand the market although others are integrating it into their regulatory compliance programmes. While AI can bring about a number of potential benefits, Currie said it was critical that the underlying data was of good quality. “We all know that bad data makes for bad models.” In addition, Currie pointed out regulators are likely to insist on receiving assurances from firms using data analytics/AI that they have adequate protections in place.
But are people actually embracing disruptive technology?
While the funds’ industry accepts disruptive technologies will likely play an integral role in its future development, Australian respondents to the survey voiced scepticism about the sector’s actual ability to implement such changes. More than 60% of Australian market participants said the industry was not good at adopting new tech, with most blaming it either on an absence of understanding; budgetary constraints or an insufficient business case for implementation. Other respondents simply said they lacked the in-house skills and expertise to manage such technology change programmes. Despite this, 70% of Australian fund professionals said that the industry was getting better at adopting new technologies
Our survey also found 33% of Australians believed that innovation would be mostly driven out of Europe, followed by the US (23%) and Australasia (19%). “Very few Australian market participants believe China will be a source of innovation. This is in marked contrast to APAC, where 51% of Asian respondents believed that China would be the primary innovation source,” said Currie. These lingering doubts about China’s innovation potential is unexpected especially as some of the country’s technology giants have been widely credited with revolutionising payments, asset management and fund distribution.
Cooperation and competition
With nascent technologies and new market entrants (e.g. Alibaba) having a transformative impact on fund management, the industry is now increasingly open to the idea of collaborating with these disruptors. For instance, respondents in Australia conceded that fund platforms were likely to be their most important strategic partners moving forward, followed by large technology companies and new market entrants. Simultaneously, however, the industry accepts it may face potential disruption if a major technology company or online retailer with a sizeable network footprint moved into distribution. Australian respondents – in particular –predicted that industry-wide disruption would most likely be engineered by a new market entrant.
The funds industry is facing a number of challenges and even potential disruption. If it is to stay competitive, it will need to constantly challenge itself and innovate. This will require deep-rooted cultural changes in some instances. Moreover, asset managers and asset servicers should look to adopt new technologies to improve user experiences and drive operational efficiencies. While implementation of emergent technologies has never been one of this industry’s defining strengths, it appears to be making better progress when adapting to change.