You would probably think it unfair to compare the much vaunted asset management industry with the inside of a grubby New York taxicab.
But Angello A Calvello’s contrasting experience of a ride in an Uber ride-sharing car service versus that in a New York taxi got him thinking about industry disruption and its power to unseat providers that do not give customers the respect they deserve.
“It’s a business (Uber) that successfully took on an entrenched, monopolistic area populated with dissatisfied customers and offered a viable, prudent alternative, effectively disrupting the conventional taxi business,” says Calvello in his article “Asset Management Without Asset Managers” published in the CIO Chief Investment Officer magazine. “It gave riders a better choice.”
Asset management ripe for innovative disruption
With examples of far-reaching disruption legion in almost every sector and industry across the globe, it’s a puzzle how asset management – or “beneficial investing” in Calvello’s words, has remained relatively immune to disruptive influences.
Here’s a pretty damning statistic from Simon Lack’s book The Hedge Fund Mirage: Between 1998 and 2010, hedge fund managers earned $379 billion in fees, while their trusting investor-customers made only $70 billion in profits!
If that’s not overcharging, I don’t know what is. In fact the industry has been often criticised for generating returns that are not all that great compared to ‘no-brainer’ index funds. Besides, the industry cruises to these humongous earnings riding an antiquated business model dating from the 1970s and basically unchanged since then.
Disruptive innovations bypass the asset management industry
“This business model, like the taxicab, is anachronistic, monopolistic (it requires its own type of “medallion”), and generally disappointing for asset owners,” says Calvello. “It’s time-consuming, expensive, laden with misaligned interests, and managers often fail to consistently deliver the promised target returns.”
That’s pretty hard-hitting criticism, but wait, there’s more. According to Calvello, the industry emphasizes asset-raising over investment performance and discourages risk-taking and failure. “This model is so stultifying that I would argue that there has not been an idea that is fundamentally reshaped how we invest in the past 20 years,” he says. “What passes for innovation is merely incremental change.”
It’s interesting though that there have been several disruptive innovations in the financial services industry, though admittedly, they seem to have tip-toed around and past asset management.
Innovations in financial services
One great example is crowdfunding, e.g. Kickstarter, where entrepreneurs sidestepped intermediaries like banks and venture capitalists and approached retail investors directly. Bitcoin is a digital currency that is in its infancy yet but could change the rules for money transfers by making them as small as you want and cheaper than you could imagine. Square allows individuals and merchants in the United States, Canada, and Japan to accept offline debit and credit cards on their iOS or Android smartphone or tablet computer and supports manually entering the card details or swiping the card through the Square Reader, a small plastic device which plugs into the audio jack of a supported smartphone or tablet and reads the magnetic stripe.
Changing the game
So what’s ailing asset management and how could it be brought out of the dark ages?
The main stumbling block, according to Calvello, is the industry’s perceived monopoly on the expertise and processes that generate superior returns for investors – an “intellectual capital” that is its supposed preserve.
Crowdsourcing is one way to break that, he suggests. Throwing open an investment challenge on a suitable online platform, with prizes for performance, could generate outsized returns at much lower costs compared to an asset manager.
Cooperatives are another solution according to Calvello. He suggests that investors (“asset owners”) take a pooled approach and cooperate among themselves with the objective of sharing risk, funding and resources. The arrangement could create shared value because of economies of scale, cost savings and knowledge sharing, and other such advantages.
And this one is really out of the box: Google X, the ultra hush-hush Google lab that is developing ‘sci-fi’ innovations such as self-driving cars, Internet service via stratospheric balloons, Google Glass and wind energy through airborne wind turbines. Calvello suggests Google X could develop cutting-edge investment solutions with the aid of its “superior financial strength, massive technological capabilities, and polymaths.”