To say that technology has evolved at lightning speed would be an understatement. Innovations including computer-driven portfolio construction and advice (robo-advice), shared ledger technology (Blockchain) and machine learning are progressing at an unprecedented pace. This change is so rapid that businesses are regularly being forced to reassess and re-evaluate their strategies and models. A Calastone whitepaper – “The Accelerating power of technology: lessons for the future of fund distribution” – highlights the funds industry, whether it is the manager, distributor, platform or transfer agent (TA), must embrace technology at every level of their organisation if they are to make effective strategic choices going forward.
The industries that have successfully navigated disruption since the millennium have been the ones which were mindful change was coming and evolved with it at the right time, a point made in the Calastone paper. Retailers that foresaw consumers buying their goods online, developed their businesses to allow shoppers to purchase products through apps or websites. These retailers have generally retained market share. The funds industry will have to be equally accommodating as investors’ buying patterns evolve.
So how can this be done? For meaningful cultural and technological changes at any organisation to become embedded, the message needs to come from the top. Building a culture which recognises the importance of technology requires the support of senior management and the board. Calastone research of FTSE 100 companies found that technologists were in greater abundance at the most senior organisational levels, in the travel and leisure sector. It is no surprise, therefore, that this industry has been at the cutting edge of developing price comparison sites, booking websites and mobile apps. Financial services firms on the FTSE 100 also fared well for technology representation among senior personnel, although improvements could be made to bring more technologists into board and executive leadership levels.
There are geographical divergences in terms of senior management with technology backgrounds. An Accenture study – “Bridging the technology gap in Financial Services Boardrooms” – found that the US and UK led the way in regards to the percentage of technologists sitting on boards at banks. Despite this, the numbers are not phenomenal with just 16% of bank boards in the US and 14% in the UK having a technologist among their most senior ranks. The Accenture report added that banks in Russia, Greece, Italy and Brazil did not have a single technologist present on their boards, although it is apparent that markets where financial services are not central to the overall economy do lag behind in this respect.
Technologists’ importance is clearly growing. A new trend has been the emergence of the Chief Data Officer at a handful of FTSE 100 companies, according to Calastone’s research. This position was non-existent several years ago, but such is the significance assigned to data nowadays, the role is likely to ascend in importance going forward.
The funds industry is at varying levels of preparedness for the technological changes that will come its way. Some major fund managers, with large budgets, resources and infrastructure, have technology labs on a parity with those at a bank. The opposite is true at small to medium sized (SME) fund managers, where technical resources may be more limited or who typically view technology as something that is best left outsourced to a third party provider. Very few SME asset managers will employ technologists on their boards, according to market participants contacted by Calastone. One asset manager said SME investment firms typically hired directors with experience in custody, fund administration, law and occasionally risk management or portfolio management, but very rarely technologists.
At the most basic level, the funds industry needs to identify their primary areas of weakness in technology. The market is changing beyond recognition. One example being that younger or millennial investors will generally not want to visit their wealth advisor but would prefer to construct their portfolios using their mobile device. The is evidenced by the dominance of mobile apps such as WeChat in China, with a number of mutual funds looking to distribute via such channels.
The surging interest in robo-advice is not an existential threat to the asset management business but an opportunity to be exploited. Elevating technologists to top positions will bring diversity of thinking and innovative ideas on how to address the inevitable changes that will impact the industry. Some major asset managers are taking note, with a handful of hedge funds appointing former Silicon Valley computer scientists.
Admittedly, there are challenges. Remuneration at technology firms has skyrocketed, while compensation at asset managers and banks has taken a tumble. Regulations such as the Capital Requirements Directive IV (CRD IV), Alternative Investment Fund Managers Directive (AIFMD) and UCITS V have put pressure on remuneration practices at financial institutions. These restrictions apply to IT personnel, and a handful of organisations have written to regulators asking for these rules to exempt technologists.
Having qualified technologists partaking in firm-wide discussions on how to innovate is critical. But these individuals must also be included in engagement with regulatory bodies whose members are increasingly mindful that technology is becoming a core component in the evolution of financial services’. Regulators who represent, for example, the Financial Conduct Authority (FCA) are scrutinising robo-advice while the European Commission’s (EC) Capital Markets Union (CMU) regulators are also consulting with the industry about how best to regulate online platforms. If technologists provide useful input to regulators, it will give those agencies a more diverse range of views to consider. This will ultimately help them frame thoughtful regulation.
The funds industry will be impacted by technology changes. Emerging competition from technology led and data rich companies such as Google or Facebook cannot be disregarded, nor can the advent of specialist disruptive platforms such as Nutmeg. Dealing with these changes requires innovative thinking and cultural changes in how firms approach technology. The funds industry needs to remain relevant to the consumer, particularly younger investors, whose buying patterns are different. Those in the funds industry which put technology at the core of what they do will be the winners and will likely retain or grow their market share, just as those forward thinking retailers did at the beginning of the Internet age.
(First published in Investment Week 05/12/16 – http://www.investmentweek.co.uk/investment-week/opinion/3000738/accelerating-power-of-technology-what-are-the-lessons-for-the-future-of-fund-distribution)