The lines between asset and wealth management are continually blurring. A Funds Europe panel debated the operational impact of this convergence and what firms can do to enable personalised services at scale.
- Mark Gillan (Head of product, AJ Bell)
- Rajeev Tummala (Director, digital and data, securities services, HSBC)
- Josh Wade (Product manager, Calastone)
Funds Europe – Why are the lines between asset and wealth management blurring?
Mark Gillan, AJ Bell – They seem to be blurring faster than ever and that hints at an underlying process of democratisation. There is a move from the traditional sense of this being an industry for the wealthy with enormous amounts of investable assets to something that the person on the street with £25 or less can invest and become part of that community.
Rajeev Tummala, HSBC – It is also about proximity. Today we expect most of the services to be delivered when we want, where we want, and some of the services are also free, and that goes hand-in-hand with personalisation. So I need something that fits my purpose. I need it to be a lower ticket size and I don’t want the average product that is being sold to everyone. I need that product to cater to my own requirements. For that kind of aspiration, you can’t have the current value chain. The feedback system is too long.
You also want some amount of customisation and personalisation, even at the distributor end. Just as the distributors are feeling pressure, so you’ve got to be able to manufacture and be at the further end of the value chain and that means either the distributor has to manufacture, or the asset manufacturer has to distribute. Both these trends are actually pushing the value chain to contract.
Thanks to technology, it’s no longer as hard to do these things. In the past, if the asset manager had to distribute, you had to have physical locations, but the internet provides that access. At the same time, the electronification of financial markets and the rise of passive products means you can create more dealer advisers at the distributor’s end as well, so that’s also aiding them. There’s a large element of digitisation as well that is contributing to this trend.
Josh Wade, Calastone – The thing that’s driving this blurring is definitely the asset manager moving leftwards in the industry towards distribution, and that’s driven by two things: one is the market environment and fee pressure. Whenever you have an industry where margins are compressed, you see that horizontal move in terms of business models.
The other thing is that we live in a world where technology enables that move to be successful. It’s not a gamble to set up a compelling website or a D2C proposition or to have a more real-time or embedded link with your distribution party who is responsible for distributing your product, because things like the APIs, the infrastructure, the embedded technology, make that really simple and actually more engaging for the end customer to engage with.
Asset managers now want to have more of a say in setting the terms of their pricing, they want to have closer proximity to the end investor physically by compressing the overall lifecycle or the overall value chain.
There is also this expectation around personalisation that has been baked in from other industries, so the same investor who’s engaging with you as a fund manager or a wealth platform to get a service is also a client of Amazon or is also a client of Netflix where as soon as they log on, they are met with products that are tailored for their interests. It’s an expectation that the asset manager is having to respond to.
Funds Europe – What are some of the major issues from this blurring from a product perspective? Does it mean greater use of passive products? Do tokenised funds have a role here?
Gillan – The cost compression and that value chain compression lends itself towards passive products. That’s not to say that there is no market anymore for good active products, absolutely not, I just think it’s now becoming harder and harder for active managers to demonstrate that value over and above what are now ultra-cheap passive products.
Data is definitely a big concern and how we use data in a sensible way that really feeds into personalisation. There is the ‘Amazon algorithm’ that will analyse billions upon billions of terabytes’ worth of data, chew that up and present you with a nice, personalised set of recommendations. The asset management industry is nowhere near that yet, but I do think from a product perspective, that’s where we need to get to.
Tummala – Do we use newer capabilities to manufacture existing products in a different way that is cheaper and faster? Or do we completely manufacture a different kind of product? The difference is stark, but I don’t think we have the answers yet.
When it comes to tokenised funds, the big difference is if the underlying assets are tokenised. But then, do you really need a fund structure? If the underlying assets are completely programmable, what value does a fund structure bring? Do you really need to take on the overheads of a fund? Can you not produce a lot more personalised product using that?
We are nowhere near having a widespread availability of tokenised funds, but all an asset manager needs to do when there are a lot of programmable assets is create a protocol of the allocation and then just leave it to the platform to collect those assets. Advice then becomes mostly software. You would be going from seven or eight intermediaries to infrastructure, advice and an infrastructure operator, and subscribe. That would be revolutionary, but the immediate focus would be on using new technology to manufacture and distribute existing products more efficiently.
Funds Europe – In terms of distribution, are we moving towards a more transparent market?
Wade– Yes, I think so, for sure. There is a regulatory mandate that’s been placed across industries to drive greater transparency of both cost, but also the suitability and appropriateness of different products. That’s an obvious win if you’re looking to create a personalised experience to encode the suitability or the transparency of that product into the contract.
From a distribution perspective, there’s also this groundswell around transparency and greater investor engagement with the products in their portfolio. This can be seen in the proxy voting space and the greater momentum that’s building around shareholder activism and greater engagement.
Tummala We talk a lot about disruption, and whether our roles will be relevant. The roles will always be there but we have to adapt.
How we do the role is going to be very different – the shape, function and form will be delivered using significantly different tooling and processes. That’s why the value system is going to have a lot of overlaps between the service providers, manufacturers and distributors.
As we move towards a lot more personalisation, customisation and democratisation, there will be a lot of niche and bigger opportunities. They need not be massive scale opportunities, but I do think the right use of technology will allow you to serve a community of 500,000 investors as easily as 50 million investors.
You might today call us a fund administrator or a transfer agent or a custodian. We need to transform ourselves to be able to support both ends of the value chain to serve these niche communities or scale communities. So our role might transform from being a processing provider to an infrastructure provider.
Gillan– From a distribution point of view, there are massive challenges and massive opportunities, actually.
My nightmare is reading in the newspaper tomorrow that Amazon has decided to go into the passive fund industry – they’ve got a massive distribution network, huge data capabilities and all that infrastructure already there.
The flipside of that is the opportunities this gives us in terms of serving the wider market and niche bespoke markets, and partnering with those big online retailers and partnering with finance apps.
Funds Europe – What are the technology issues from an asset servicing perspective? Can you serve both an asset and a wealth management market with the same platform or are you trying to consolidate this infrastructure that you provide for both?
Tummala – From a service provider point of view, it is about embedding ourselves as much as possible into this value chain. You can’t do that with the conventional, boxed software. We have to develop a very flexible architecture and a collection of micro services that can be enabled on a flow-by-flow basis. The technology capability is already available, I don’t think we are inventing anything new here, it’s about using the current capabilities to embed ourselves at both ends of the value chain to be delivering value.
Service providers are largely processing shops and our strength is performing those operational processes at scale so that we neutralise the cost for both ends of the value chain. Our challenge is to get to a place where technology is core to what we are doing and operations are an oversight function. That will allow us to create a huge amount of variants on the distribution side – for example, supporting a discretionary portfolio management platform, a custom index advice, or robo-advisory.
It’s the same thing in the asset manufacturing space as well. Why do we need to replicate data across asset managers and ourselves? How can we use either the benefits of blockchain to maintain a golden source of data between a service provider and an asset manager and a distributor?
Are we there today? Absolutely not, but as more technology becomes available at lower cost, we will get to that point. For example, today you have three or four public cloud providers and you’ve got to make a choice, but as the ecosystem matures you would not have to worry about who the underlying cloud provider is. Similar capabilities will come into the asset management world as technology becomes less complicated.
Wade – The main operational challenge in the industry is one of path dependence. The way that the industry works, the way the actors are set up and the way that the regulation works, was baked in decades ago. In any industry, when you try and change something from the inside out, just sticking to the path that you’re already on, it’s very difficult to get to these monumentally different outcomes. There’s an increasing recognition from asset managers that you can’t just layer on the infrastructure to run on top of the current infrastructure because you’re just going to double up on cost. You have to create something new in order to go to market with a new proposition.
Secondly, that infrastructure needs to be open, where it can be equally accessed and engaged with by multiple parties, a bit like the consortiums that led to the development of Visa or Swift network.
These open infrastructures that lead to a step change in service and outcomes for the end investor have to be industry-led and therefore come with a time constraint that that kind of model goes with.
Gillan – As much as we would all like to see ourselves as disruptors and innovators, I do think the asset management industry has a tinge of conservatism about it and can move a lot more slowly than it perhaps should. Things like that mutualisation will help because it lends an air of robustness to the process that will push more asset managers to adopt some of the technology.
The technology is not new and there is nothing here that we’ve discussed needs to be invented, the tech is available and there are providers out there.
At the moment it’s a journey for asset managers. We are on the first few steps on that journey and no doubt there will be an inflection point in the very near future where there’s a real take-off.
Funds Europe – As the wealth and asset management markets come together, will more consolidation be inevitable and what are the implications of more consolidation?
Tummala – As you bring in more tech you should easily be able to scale, and if you use the technology well, it should create cost advantages. There is a cost to adopting technology – if you are not operating at scale, then you cannot afford that capital expenditure, and if you cannot afford that capital expenditure, then how are you able to compete?
If you take the example of Amazon, it’s not just the customer funnel they have, you’ve got to look at the cash they have on their balance sheet and the amount they can burn to take some market share away, so with the right regulations and everything else being in place, how do you compete with these large players who are tech-native? There is a significant journey that our industry has to make in terms of technology adoption.
The industry also has to look more at the periphery. We look at each other, what the other custodians are doing, what the other asset managers are doing or what the other infrastructure providers are doing, but we have blind spots to the things that are happening on the periphery of our ecosystem.
A great e-commerce company has mastered the art of distributing something on a digital channel, so how hard will it be for them to adapt to the funds market? This blind spot has developed because we’ve never really seen the emergence of new entrants. There has been industry consolidation definitely owing to scale benefits that come from either geographical reach-out or sometimes flight to safety, but I think we will have to keep an eye out for these things because technology is going to enable a lot of innovative new competition to come in from other sectors.
Wade – Whenever you get consolidation, you’re also going to get new market entrants as well and people who are looking to differentiate and so they move out of roles and set up their own thing as well, so that’s the other side of it.
The consolidation one is also interesting when you think about the way in which asset managers have speculated on those new entrants and robo-advisers. A lot of them have taken initial stakes in the first couple of years of operation of these new players only to then go on and acquire the capability and the technology later on when it’s proven. In terms of the investor experience, you’re going to see increasing divergence between massive scale-driven providers at one end who are already overwhelmingly driving fund flows in the industry and then, at the other end, a smaller boutique level of service that potentially could be one of the early adopters of some of these things that we’ve been talking about around personalisation and an increasingly tailored view of what that customer is in order to compete.
Gillan – We’ve talked about consolidation among asset managers and platforms, but there’s also lots of vertical integration, for example, bringing custody and administration in-house. For customers, this should be beneficial, because is compresses costs and should mean cheaper products for consumers. But it also leaves space for disruption and for niche players.
I also think there are lessons to be learned from other parts of the financial industry. You can compare the traditional asset management model versus some of the apps that have a micro-finance type approach where they round up your weekly shop and then invest that in a passive fund. This stuff is already out there and there is a customer demand for more personalised services and more app-based delivery. A lot of firms do digitalisation well, there just needs to be more of it.
Funds Europe – Is there a danger that we’re over-exaggerating the demand for personalisation, particularly in the institutional space?
Gillan – No, I don’t think so. The demand for personalisation is coming primarily from our direct consumer arm but ultimately our institutional clients are serving investors and they will react to that demand. In the UK, there is a definite trend towards a much more heavily digital experience. The advice market in the UK has this very traditional image, but you’re going to see a world where robo-advice will increase in importance. That is not going to remove the need for face-to-face financial advice. Nevertheless, that face-to-face financial advice is going to change.
Rather than going in with lots of forms and pieces of paper, it’s an adviser walking into a client with an iPad to complete their risk profile questionnaires. Everything will be done digitally, from the initial piece of advice all the way to the execution of the client’s portfolio, so every institutional firm involved in that process eventually will have to move on this journey as well.
Wade – There is already a personalised element in the institutional market in the form of separately managed accounts and bespoke time horizon-led products, but the ticket size to get access to that service is in the tens of hundreds of millions of pounds. So, how do you take that ticket size and bring that down to single-digit millions or even hundreds of thousands for an investor through the use of new infrastructures and technology?
Tummala – A lot of assets are managed at the institutional level today and the share of direct personalisation is probably going to increase. And the share of modern digital distribution platforms that service end users or end consumers is going to be vast. As a consumer, we ask ourselves, ‘Do we place all our wealth needs with an institution and allow them to manage them?’ or will we have a couple of accounts that use robo-advisory to do the same thing as/when they become available?
Today I have less than 5% that I directly manage, but as the robo-advisers and segregated managed accounts and everything else, as the ticket sizes change, I will be shifting a bit more of my wealth management requirements into these platforms. That’s the natural flow and that’s where both the challenge and the opportunity are there for an asset servicer.
Funds Europe – What is the most important priority for achieving this personalisation at scale?
Gillan – When it comes to tokenisation and removing intermediaries, there are two challenges. One is just sheer inertia. The other would be a lack of a harmonised approach. There are a lot of people who are not going to change until there is an industry standard or something approaching an industry standard.
When it comes to tokenisation, developing an industry-wide, standardised approach enables asset managers, manufacturers and distributors to get comfortable with that change. If you look at the typical value chain for a fund with a number of players that are involved in there, every intermediary in that chain will justify their existence. They are all there for a specific reason and for any link in that chain to be removed, people will need a lot of confidence in that technology. So, that standardised approach will be very, very important.
Wade – With the industry that we’re in, engagement with the regulator at the right time in the right way is the way that these things move forward. To do that, you need a minimum viable network of actors, so you’re closely defining the functions needed to make this work and therefore which of those can be assigned to technology and which of them need a regulated actor performing that function. Then it is about how you choose the infrastructure that operates this technology, making sure that you choose the one where the network is already established and embedded, and the technology is able to scale to the level of a market infrastructure.
Tummala – There are a few different versions of the future. You could have these massive industry-scale utilities that are driven by huge tech capabilities that enable you to service a lot more, or you could potentially have more minimum viable ecosystems succeeding by using this infrastructure as intermediary construct so that you can meet different kinds of customer requirements and outcomes. The truth is going to be somewhere in between, but I am more in favour of having a lot more minimum viable ecosystems actually working towards helping the end clients achieve their multitude of goals rather than having five large industry-scale players.
First published in Funds Europe April 2022 (https://www.funds-europe.com/april-2022/roundtable-achieving-personalisation-at-scale)
