An extensive combination of market transformations are poised to upset the balance of power in traditional active asset management. This is leading to growing concerns about whether theirs is an industry on the verge of major disruption or disintermediation by companies with strong digital footprints and a proclivity to innovate.
False dawns from small fintechs
Despite the challenges in the funds industry, so-called disruptors have not had the impact many expected. In 2015, a number of asset and wealth managers believed their primary threat lay with small fintechs or robo-advisors, the latter of whom consultants predicted would be running in excess of $2 trillion by 2020. (1) This, however, has not happened. Markus Ruetimann, founder of Hardy London and former group COO at Schroders, said only a couple of robo-advisors had attracted meaningful flows, adding that a number of high-profile platforms were forced to shut because they could not scale properly.
While these nimble fintechs do have some interesting traits, Gavin Norwood, partner at Deloitte Digital, said it would be exceptionally difficult for one of them to disrupt the entire $79.2 trillion(2) asset management industry ecosystem. “I cannot see a small start-up acting in isolation disrupting the whole value chain in an industry as sizeable and global as asset management. Start-ups with a B2B model and those in a coalition with larger market participants might have a better chance of disrupting significant parts of the value chain,” explained Norwood. Even though the impact of small fin-techs and robo-advisors to date on asset management has been minimal, other challengers lie lurking.
The FAANGs are in place to disrupt
In its study – “The Impact of technology and Regulation on Funds” – Calastone found that 29% of the funds’ industry believed technology companies like Google or Microsoft were the most likely participants to disrupt their sector, while 22% said disintermediation would be driven primarily by online retailers such as Amazon and Alibaba. (3) FAANG (Facebook, Apple, Amazon, Netflix, Google) companies could easily transition into fund distribution as they are not drowning in legacy technology systems and have an unmatched consumer reach buttressed by extraordinary data insights on individual customer behaviour.
“The access to millennials, data ownership and lack of legacy infrastructure are all competitive advantages which big technology companies have over existing providers,” said Norwood. These companies also have unrivalled access to substantive talent pools and financial resources, with Apple and Amazon both briefly climbing over the $1 trillion market capitalisation threshold earlier in 2018, suggesting the costs of heightened or intrusive regulation would not be a factor precluding them from entering financial services.
Given their sheer size and deep pockets, there is nothing to prevent these titans from creating a tech-savvy, user-friendly distribution platform from scratch, building a solution centred squarely around the client experience, a strategic approach not always adopted by the funds’ industry.
A Capgemini study of affluent investors found more than half were open to entrusting a top technology company with looking after their wealth. (4) More importantly, digital natives want the actual fund buying process to be simple, cheap and accessible through smart devices, instead of having to visit an adviser and wait a long time for their portfolio to be constructed.
FAANGs take on asset management…or do they
Events in China would suggest the industry’s fears about disintermediation are being vindicated. Yu‘e Bao, the money market fund owned by Alibaba’s Alipay subsidiary is now the world’s biggest manager with $267.9 billion despite only launching five years ago.(5) Yu‘e Bao acquired such scale because its Alipay parent company gave users the option to channel their spare cash into its high interest funds, (6) in effect making the fund purchasing process very straightforward, cost-effective and effortless. The success and speed at which Yu‘e Bao accumulated assets will have been observed with interest at technology firms elsewhere.
Outside of China, some of the large technology companies have transitioned into payments, but their influence in asset management to date has been peripheral. Acadian Asset Management worked briefly with Microsoft’s Bing Predicts to mine social media data to help with its investment process, but that partnership expired in 2017. (7) Meanwhile, it has been more than four years since Google alarmed asset managers by commissioning a study looking into how it could break into fund management, but there has been silence ever since. Given how ripe asset management and distribution are for disruption, the lack of activity or even interest from the FAANG group of companies is intriguing.
“Large electronic commerce and technology companies have the resources, the data insights, the cognitive technologies and progressive leadership structures to develop enticing asset management and distribution channels. A joint-venture rather than a disruptive strategy seems more likely at present. A firm like Amazon could be using its retail market access and customer purchasing behaviour insights to develop a material distribution channel for some low-risk financial products. Data ownership and protection may have prevented them from doing so. While I believe some sort of disruption will happen, I do not think it will occur in the next two years,” said Ruetimann.
Changing the course of business
While the FAANGs have not yet thrust themselves into asset management and distribution circles, many experts believe they will do so at some point. As such, asset managers will need to innovate and adopt change to remain competitive. At the most basic level, the funds industry needs to mirror the tactics of the FAANGs and create solutions which are built around improving the customer user experience.
(1) KPMG – Robo-advising
(2) Boston Consulting Group (July 19, 2018) Global asset management 2018: The digital metamorphosis
(3) Calastone (2018) The Impact of Technology and Regulation on Funds
(4) Bloomberg (December 13, 2017) Why Google and Amazon keep Fidelity and BlackRock up at night
(5) Reuters (May 4, 2018) Jack Ma’s Ant Financial adds two new money market funds to its platform
(6) GB Times (April 28, 2017) Alibaba’s Yu e’ Bao overtakes JPMorgan as world’s largest money market fund
(7) Risk (September 27, 2017) Acadian ends social media partnership with Microsoft Bing