Today’s confluence of technology, regulation and market volatility is supercharging the transformation of Australia’s funds management industry that in five years will look entirely different. That was the consensus of experts gathered at the inaugural Calastone Connect Forum this month, representing a diverse representation of investment management operations, platform administration, banking, venture capital, legal, regulatory and even elite sports to dissect the day’s theme ‘Technology as an Enabler’. Whether it be enabling smoother systems or creating new ones, technology is challenging status quos within financial services and driving cultural acceptance of failure as part of success.
Seven key highlights gleaned from the Forum reinforce the magnitude of change that is coming and how our industry is responding.
- Extraordinary uncertainty is favouring technology disruption
Roger Bridges, Nikko Asset Management, set the macro backdrop for the day, reinforcing how technology led disruption and automation is testing the strongest of industries at a time when the world is literally dislocating. Where the United States once led the western world of commerce, intervening as necessary and flexing its currency powers, populism and extremism have cast doubt over whether the US even needs to be part of the world, particularly as fracking has allowed energy independence. China’s problem is a lack of resources and ability to source water and protein to support its growing population. This vulnerability makes India, controller of much of the Indian Ocean, a far larger threat to China than its often hyped conflicts with the US or Russia. Sources of uncertainty are changing also. Where just a few years ago terrorism events in themselves were destructive for markets, today their impact is more related to how system infrastructure is affected.
These factors all amount to unprecedented uncertainty for market participants, regulators and indeed, technologists challenged to build algorithmic responses to market events. Every part of the financial system will be tested in its ability to pre-empt and deal with the ramifications of globalised risks mixed with domestic protectionism, with technology key to maintaining visibility, operating efficiently and remaining agile.
- Operational alpha can make the difference
It is currently easier and cheaper for companies to buy growth than to accept the uncertainty associated with capital reinvestment. This paralysis is stalling market growth, contributing to flatter equity markets and resulting in mediocre returns for investors. Investment managers are under pressure to find pockets of growth as well as consider all possible sources of ‘operational alpha’. This alpha in the form of saved costs amounts to extra basis points for investors, and in a flat growth environment, these can make the difference between who is considered to be a good operator or an exceptional one.
- Robo-Advice will take off in 2017
A major challenge for robo-advice is the cost of client acquisition. It is a scale-game, and while Australia was quick to move into this space, leveraging calculator models, some banks are in fact rolling back digital systems because they have not worked to expectations. Other banks meanwhile are upscaling efforts as giant bets in their technology. Those that are having most success within banks today are bionic systems, where technology is supplementing human effort.
According to Andrew Inwood, CoreData, once robo-advice can systemise and robotise the sales front end, historically a cumbersome process for investors and costly in risk for providers, the future looks big for robo-advice, with the first models just 6-8 months away from being rolled out in Australia. Others note that the regulatory regime in Australia is more complex than in other jurisdictions, which complicates the development of robo-advice models.
- Machine Learning and Artificial Intelligence is the game changer
In 2002 the founder of Google, Larry Page, famously quipped that “We’re not building a search engine, we’re building AI”. He clearly saw the end-game of how technology can enable any business, process or system. Artificial intelligence (AI) is smarter software that learns over time with more data and without human input. AI is enabling the industrialisation of financial services, with data and processing power being the new change agents. Forum experts, including John Henderson from Airtree Ventures and Steve Wilson from Macquarie, agreed that we’re more or less five years away from AI having its transformative effect on the investment management industry, which will affect the customer interface, generation of contracts and back office processing.
- Common platforms and mutual recognition programs the growth of today
AI powered bionics may be key to enabling new systems, but where technology is having greatest effect today as an enabler is in the form of shared or common networks, says Richard Harris-Smith, OneVue. We agree. As digital gateways standardise and single sources of truth utilise cloud technology, the processing power of shared networks grows, producing greater cost and efficiency benefits. Interoperability of shared networks, such as those operated by Calastone for transaction, messaging and data services, has opened up enormous opportunity for firms to migrate from legacy to frontier IT solutions without having to build or adapt solutions in-house. Mutual recognition programs such as fund passports and shared regulation are also major tailwinds for the growth in shared networks that well geared for cross-border transaction processing.
In Australia/NZ, we are expanding on our suite of order and reporting (reconciliations, distribution and tax statements) solutions to automate the dilemma of management fee rebates and in-specie transfers, reducing the time it takes to transfer from one provider to another (a major pain point for New Zealand’s NZ$35B Kiwisaver market).
- A Blockchain killer app is coming
Whether it takes the shape of a universal global identity, smart contract enabler, or some new capability we’re yet to learn about, a distributed ledger technology (blockchain) application is expected within five years. With more challenger banks applying for licenses, the continued migration to shared networks for middle office processing and cultural shifts that embrace, and even celebrate failure as part of success, the real disruption appears yet to come. Blockchain’s distributed ledger has the potential to streamline reconciliation, facilitate a seamless transfer of assets, reduce cost of trading, and potentially remove centralised system risks. Fortunately, we are seeing strong and cross industry collaboration to establish a consensus fabric for distributed ledger technology that will aid successful adoption without the risks of excessive fragmentation and future legacy issues.
- Emergence of Chief Data Officers
The continued focus on client-centric solutions and understanding client journeys are key drivers in the emergence of Chief Data Officers within asset management. This trend is seeing more academics move into commence, bringing new dimensions to working groups and cultures that many organisations have not encountered. This in turn is requiring boards to govern more diverse workforces and balance idea exploration with economic productivity. These cultural and economic challenges will no doubt be lessened by learnings from more advanced regions and industries.
Industry participants are moving faster after precious years lost to reengineering of legacy systems and building operational systems able to evolve in step with regulatory change. At Calastone we keep pace by closely aligning our business focus with client pain points that are growing more obvious and intolerable in today’s growth challenged landscape. This awareness is only going to intensify as participants rethink their value proposition and business models and adopt the best mix of technology that enables better practices and opens new horizons.
On behalf of the Calastone team, I sincerely thank all who participated at our Connect Forum, especially our panellists who are leaders in their field and whose work at the coalface of innovation is rethinking and reshaping financial services.
These author views also reflect expert insights shared by leading industry thinkers who presented at the Calastone Connect Forum.
(First published in Investor Daily 31/10/16 – http://www.investordaily.com.au/analysis/40317-industrialisation-of-financial-services-is-coming)