Nowhere to Hide: Why the Future of Asset Management Depends on Innovation

Nov 15 2016 | 7:55pm ET

Editor’s note: Information technology has reshaped the asset management industry’s periphery, providing vast data, scale, speed, and cost advantages to those firms able and wiling to embrace them.

However, many innovations in the space have been evolutionary, not revolutionary, argues the team at SEI, and managers need to be better visionaries if they want to stay competitive. In this contributed article, SEI outlines five transformative trends that it sees as paramount for asset managers going forward.

Nowhere to Hide: Why the Future of Asset Management Depends on Innovation 

Virtually every week brings another startling new advance. Household robots. Three-dimensional printing of human tissues. Airports for drones. Brain-controlled prosthetics. Contact lenses that read blood sugar. Self-balancing scooters. Next month there will be more.

Over the past 100 years, our society has been dramatically reshaped by powerful inventions, such as the television, antibiotics, nuclear energy, and air travel. Now, information technology is the main driver of innovation, transforming cultures and economies worldwide at a pace that outstrips anything that came before Silicon Valley.

Computing power and electronic networks are not just transforming products and services, they’re also transforming the way businesses organize and operate. Now technology is the current that runs through nearly everything we do, and its applications are limited only by our imagination. Our increasingly powerful abilities to automate, research, analyze, connect, and communicate have transformed how we live and behave, the nature of the jobs we do, and the ways we do them. 

Tech remains one of the most important sectors in the global economy, but in today’s new economy, virtually every large company is also in the technology business, regardless of its SIC code.

How does this relate to asset managers?  Generally speaking, they have wasted little time in applying information technologies to advance portfolio management, achieve economies of scale, and make their complex operations more efficient. But technology also holds vast potential to enrich customer relationships, develop innovative new products, and reinvent their business models, and these are opportunities that many investment organizations have only begun to exploit. 

Over the past 50 years, the investment industry has produced many notable advances, including far-reaching innovations such as indexed investing, Morningstar’s five-star fund rating construct, Schwab’s mutual fund supermarket, and ETFs.  It has also spawned many creative new investment strategies. But many other inventions within asset management have been evolutionary rather than revolutionary, revolving around repackaging products or improving certain processes. Only in rare instances have investment firms applied technology to reinvent business models or value chains. 

One could make that case that the investment management has often been slow to embrace change, if not downright resistant.  Increased regulation is one explanation for that, although U.S. legislative landmarks have boosted the industry by driving the growth of retirement products. The investment industry may also be one more example of what Clayton Christensen dubbed “the innovator’s dilemma”—the problem faced by established companies for whom pursuing new technologies and markets offers too little near-term return on investment to be worthwhile. Disruptive startups, in contrast, have everything to gain and relatively little to lose. 

There may be a more fundamental reason why investment organizations haven’t felt driven to generate bold innovations. For some decades now, asset management has been an enviably good business regardless. While asset managers have no shortage of business challenges, and some firms are much more successful than others, the industry as a whole remains in a robust state of health. However, investment organizations can’t afford to be lulled by it.  

Asset managers face rapidly growing pressures to innovate, whether they recognize it or not. Moreover, those pressures are coming from two directions: 

  • The rapidly unfolding “fintech” boom. The amount of venture capital flowing to fintech has swelled dramatically, and while much of the action relates to banking and transactions, new contenders are also targeting wealth management, risk analysis, and other activities relating to asset management.  The pending application of blockchain technology to financial services and the emergence of robo-advisors are already challenging the industry’s existing business models and practices. 
  • An emerging shift in the industry’s business climate. To a large extent, the industry’s success has been propelled by demographic and regulatory trends. Open architecture has also been a major contributor to the growth of mutual funds. And the ongoing rise of the capital markets even through periods of market turmoil.  But those tailwinds are now weakening or reversing.  According to McKinsey, only 16 percent of the industry’s global asset growth from 2009 through 2014 was due to net new flows.


FIVE TRANSFORMATIVE TRENDS

Our world is awash in innovation, and while the connections to investment management are not always apparent, our increasingly powerful abilities to automate, research, analyze, connect, and communicate are reshaping how we live and work in ways that touch every industry.  Asset managers have done an impressive job of managing their investments and business performance, but if they want to stay competitive, they need to do a better job of being visionaries.  

We see five sweeping trends that asset managers must be thinking about and ready to act upon if they want to stay competitive in the years ahead.  


WATSONIZATION

The era of cognitive computing  

Artificial intelligence has been a boon to industry, enabling the creation of algorithms that can carry out complex operations. Now AI has advanced to a new phase: cognitive computing systems that not only simulate human thought processes, but can also learn as they crunch and interpret massive quantities of data. These capabilities are rapidly being commercialized for use in a range of industries. Predictive analytics and facial recognition technology are hot areas for applications developers. So are systems that can automate customer interactions, write news articles, conduct research, detect security risks, solve complex problems and more. 

Implications:

  • Robo-advisors may be the leading edge of a broader trend toward automated advice. 
  • Cognitive systems will hold an information advantage over today’s stockpickers and analysts. 
  • Investment firms will have access to powerful new tools for understanding and interacting with investors, countering cognitive biases, assessing risks, enhancing cybersecurity, and fail-safing processes.  


GOOGLIZATION
How companies are growing data-smart 

The power of search algorithms, coupled with the plunging costs of bandwidth, data storage, and cloud computing, has given each of us a limitless window on the world.  But this information abundance also presents us with an unprecedented challenge. How do we extract value from all this data? Unstructured data that doesn’t fit into columns and rows is growing at twice the rate of structured information.  Experts say human knowledge is now doubling roughly every 13 months, and will expand even more rapidly with the proliferation of networked data-generating devices (the Internet of Things). 

Implications:  

  • Top-performing managers are those who bring data sophistication to multiple aspects of competitiveness, and not just portfolio management. 
  • Operating data is at the core of big data capabilities, which means having the right kind of operating platform is key. 
  • Investment organizations will need high-level talent, robust training programs, and innovative capacity in order to move from legacy systems to big data capabilities.  
  • Data management is too important to be left to IT departments alone; executive teams must drive initiatives and link IT resources with business objectives.


AMAZONIZATION
The power of the platform 

Amazon, Netflix and other e-commerce firms have demonstrated the inherent advantage of online marketplaces: the more that people use them, the more valuable they become. Web-based platforms empower consumers by making it easy for them to research products, comparison-shop, and learn from other customers. But these marketplaces also empower businesses, enabling them to deliver a customized, high-touch customer experience, engage customers in ongoing relationships, and take a more disciplined approach to sales, marketing, and operational performance.  

Now online platforms are rapidly springing up around finance-related activities, and e-commerce giants are also moving into lending and investment, too. This expansion of the industry landscape presents asset managers with a mix of threats and opportunities they cannot afford to ignore.  

Implications:  

  • The platform phenomenon is leveling the industry’s playing field, allowing startups to create an online presence and compete without having to build their own infrastructure.
  • For established firms, the trend opens up opportunities to market new products/strategies and introduce disruptive solutions of their own. 
  • Like every other industry, asset management is being challenged to meet consumers’ elevated expectations for service, customization, and transparency.


UBERIZATION
Business models are being reinvented 

The model of the vertically integrated investment organization has continued to prevail in our industry, even as its landscape has been reshaped by open architecture, specialization and outsourcing. But escalating competition, costs, fee pressures, and regulation are now pushing asset managers to rethink their value chains. Companies such as Uber and Airbnb suggest a new kind of model — that of the technology-enabled network orchestrator. Such firms create a network of participants who interact and share in value creation.  Not only does this model allow companies to gain scale with low marginal costs, it also lets them boost the convenience, delivery speed, and personalization of their services. Even if asset managers aren’t ready to remake their business models, they should consider what they might gain by shifting more portions of their value chains to others.   

Implications:  

  • Technology enables firms to tap into the “gig economy,” recruit from a global talent pool, and outsource more functions, potentially enhancing their capabilities while lowering labor costs.  
  • Specialized turnkey solutions can make it more cost-effective for asset managers to pursue business initiatives such as mutual fund launches.  
  • The rise of robo-advisors and other cost-advantaged competitors give investment firms added impetus to re-evaluate their own business models.


TWITTERIZATION
Doing business in a connected, collaborative world
 

The world of social platforms and interactive digital media has grown explosively, transforming how businesses communicate with and also learn from their customers. While asset managers have been slow to venture into this new frontier, the industry is beginning to catch up with the trend. 

Before the rise of social platforms and interactive digital media, corporate communication was generally a one-way street. Now even big, anonymous firms can engage in meaningful conversations with their customers, employees, peers, and the world at large.  New media can be used to build brand, expand market reach, elevate the customer experience, gain insights into market trends, test-market new products, and accelerate employee collaboration and innovation. Being active on social media may entail risk, but the long-term risks of not engaging with investors, employees and other communities online may be even greater.

Implications:  

  • New media give asset managers the tools carry out investor education, content marketing, and advertising programs more cost-effectively. 
  • Some portfolio managers are using Twitter and other social media a way to glean market insights beyond the industry’s traditional information channels.  
  • Social investing platforms are giving investors new alternatives to traditional advice models. 


WHAT'S NEXT?

Technology’s unfolding impacts on the asset management business are large-scale and pervasive: 

  • Portfolio management could be redefined as cognitive computing and advanced analytics come into wider use. 
  • Distribution is being reshaped by data-driven strategies and the rise of online platforms. 
  • Investment firms have new opportunities to enhance the investor experience, engage more deeply with investors, and understand their evolving preferences. 
  • Firms with the scale to develop industry-leading infrastructure and invest in ongoing innovation may have competitive advantages difficult to counter. 
  • As the investment business becomes more data-driven, due in part to regulatory and investor demands, the quality of operations and operating platforms will become an increasingly important competitive factor. 
  • Investment organizations will need people with skill sets that fit the new business environment. 

Each investment firm must assess for itself how emerging disruptions might affect its business, and where its most compelling challenges and opportunities may lie.  

The investment industry has a long and impressive record of success. But this is no time to be complacent – not when the engines of the industry’s growth are slowing, the field of competitors is rapidly widening, and technology is transforming the landscape for every business. To stay competitive and take advantage of new opportunities, investment firms will need to think bigger and look beyond incremental improvements. That will take fresh thinking, a conscious shift in mindset, and effective leadership at both the corporate and industry level. 


SEI is a leading global provider of investment processing, investment management, and investment operations solutions. To download the entire paper, please visit www.seic.com/DisruptionUpside.


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