Steering disruption in funds

Ross Fox, Acting Head of Australia and New Zealand

Blog / 10 Dec 2018

We held our Connect Forum in Sydney on October 25, 2018, where participants discussed some of the innovations and changes currently underway in asset management.

The primary enablers driving successful enterprises have changed markedly over the last 20 years. As the 1990s drew to a close, information, online connectivity and data assumed a huge role in supply chain management, propelling ambitious technology start-ups like Google and Amazon into industry powerhouses.[1] Having gone through the ages of manufacturing, distribution and information, experts now talk glowingly about the Age of the Customer whereby digitally savvy consumers are changing the rules of business, generating enormous opportunities for companies that adapt, and existential challenges for those that do not.[2]

The funds’ industry has accomplished a lot over recent decades, as investors turned to managers to produce consistent, long-term returns. However, a combination of negative headwinds is threatening that model, and many asset managers are looking for ways to innovate and retain customer loyalty. Experts at Calastone’s Connect Forum in Sydney shared their views about how the funds’ world can onboard the experiences which other industries faced during periods of disruption, and augment their model off the back of it.

 

Failure through a failure to innovate

Throughout history, change has been positive for some and terrible for others. Speaking at the forum, Peter Williams, chief edge officer at Deloitte Australia, said great companies can and will fail if they remain wedded to past practices or pay limited attention to changing market dynamics. Kodak, he said, was a prime example of such an organisation. Despite Kodak mastering digital photography in the early 1970s, it was hostile to change, preferring to stay faithful to its existing, profitable business approach.

Kodak’s reluctance to rethink or transform its formula was exacerbated by the actions of senior executives, who simply could not accept that their customers’ photography habits would evolve or transition beyond any medium other than print. This short-sightedness and lack of vision ultimately contributed to Kodak’s decline and bankruptcy in 2012. However, there are numerous examples of where established businesses have changed or tweaked their strategies as they look to find mass appeal across a new generation of consumers.

 

Embracing change in financial services

Non-life insurance is one of the few areas of financial services – along with retail banking – that has weathered the threat of disruption fairly well. In a report, Calastone said non-life insurance was increasingly utilising InsurTech, as it looked to leverage data streams from users to tailor and customise products, [3] a feat which has been enabled by the sector’s willingness to hire technologists to C-level roles. These reforms have helped insurers tap into a digitally attuned younger marketplace, allowing them to compete more effectively against new entrants such as insurance price comparison websites and peer-to-peer insurers.

Within the funds’ industry, some providers including KNEIP have recognised that fighting against change is counterintuitive. “Innovation is part of the industry transformation. In the mid-1990s, half of KNEIP’s revenues were derived from helping managers prepare roadshows and communicate with distributors and investors through a proprietary transparency toolkit.  When Microsoft launched PowerPoint, that affected our revenues.  In response, KNEIP changed its model and developed products which helped clients deal with regulations like UCITS, MiFID and PRIIPs.  Now, KNEIP has developed an end to end user interface that will enable clients to have a seamless journey throughout their funds’ lifecycle,” said Bob Kneip, founder of KNEIP, speaking at the forum.

 

Asset managers reflect on disruption

If asset managers do not make radical alterations to their current designs and find a way to attract younger investors, the next few years could become very testing indeed. At present, active asset managers are dependent on legacy infrastructure while the actual process of buying funds is slow and encumbered with cost, which is off-putting to retail clients.  These operational costs were highlighted by Vince Lucey, managing director, innovation and change at Calastone, who acknowledged that inefficiencies in distribution inflated the frictional costs of trading, which are estimated to be in excess of 1.3 billion euros in Luxembourg alone annually. [4]

Aggravating matters further is that headline performance has been weak, leaving active managers vulnerable to cheap passive funds, a number of whom have benefited from the excellent equity run. All of these impediments put asset managers at risk of disintermediation from agile, cost-efficient and technologically proficient entrants. Disruption, however, is not a foregone conclusion for asset managers provided they start implementing cultural reforms and business changes. Forward-thinkers are already looking for ways to realise operational savings through the adoption of innovative technologies.

 

Controlling transactional costs

Calastone is taking a lead to remedy these problems by migrating the technology behind its Transaction Network (CTN) onto a private, permissioned distributed market infrastructure supported by Blockchain next year.  Lucey said the transition and modernisation of distribution architecture would expedite mutual fund trading and reduce transactional costs, potentially helping managers improve performance and enabling them to create a platform to attract new investors.

 

Winning over the youth

Another good starting point for asset managers would be to begin building bridges with young investors, a demographic routinely written off as being cash poor by many industry practitioners, and a social group that feels increasingly cut off from and disenchanted with financial services. Around USD$30 trillion in assets is about to be passed down to millennials from older generations over the next few years, making young people an ideal target market for asset managers looking to diversify their investor base.

“It is critical providers build products, which millennial consumers actually like,’ said Jon Holloway, founder and CPO at Zuper, a fin-tech currently shaking up Australia’s superannuation funds’ market.  Participants at the forum said asset managers should monitor some of the recent fin-tech breakthroughs in Australia’s super market, a sector that has historically struggled to win over apathetic young people.

Holloway added the current superannuation model was struggling to innovate, whereas the more digitally astute providers like Zuper were increasingly utilising big data analytics to deliver highly customised, impactful products to clients in both a cost and user-friendly way through mobile apps. Asset managers need to learn from these fin-techs in order to effectively tap tech-savvy younger investors, many of whom are unable to afford financial advice putting them at serious risk of having insufficient savings in later life.

 

Delivering on technology change

Asset managers must prioritise their digital strategy through the adoption of innovative new technologies, which can help streamline their operations. This will help firms meet the expectations of a youthful demographic which is used to receiving real-time, low-cost services. By doing this, asset managers can add to their market share of investors, and grow.

 

 

 

 

[1] Core Data

[2] Forrester – what we believe

[3] Calastone – The Position of technologists at the top of UK companies in 2018

[4] Calastone – Driving efficiencies in distribution through Blockchain


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