As the asset management industry struggles to bring its 20th Century glory along into the 21st Century, its reluctance to innovate through technology has left a wide-open field for small fintech startups as well as big tech players to fill the needs of an increasingly digital and tech-savvy market. In the previous article in this series on the state of the asset management industry, we described the internal conflict caused by the push-and-pull between those in the industry who are against change and those who are for it. Here is a continuation of the case that the industry needs to innovate or risk failure, as there is an equally powerful threat coming from the outside.
The fire ants of the financial services industry—the aforementioned fintech startups—are not only exposing industry pain points but are rapidly addressing them with new digital offerings, in the process nibbling away market share. Meanwhile, tech giants are battering at the ramparts. Can the industry respond to this invasion, and what should it expect?
Continued from part one... Q1 hedge fund letters, conference, scoops etc Abrams and his team want to understand the fundamental economics of every opportunity because, "It is easy to tell what has been, and it is easy to tell what is today, but the biggest deal for the investor is to . . . SORRY! Read More
Fintech: Friend or Foe?
To put the swarming fintech incursion into perspective, 2018 saw just over $3 billion in investment flow globally into start-ups focusing on asset management. Many of these fintechs are modelling entirely new conceptions of investing, trading, clearing, settlement and custody. They’re looking for a way to build a robust infrastructure by creating more effective solutions to address industrywide pain points. In doing so, they are starting to force a rethink of the asset manager value proposition.
To this end, some 44 percent of reported fintech investments in the asset management space are either in the seed funding or Series A stage, which reflects the nascent nature of the disruption. The main areas of focus for fintech are alternative data sources (for instance AlphaSense for AI-powered market intelligence), trade platforms (such as Pagaya for data-driven fixed income and alternative credit markets), trade management (for example, Redline for ultra-fast low latency market data and execution) and business information and analytics (such as Arcadia Data for AI-driven analytics platform for the cloud).
Despite the many challenges in the asset management industry, so-called disruptors have so far not had the impact many expected. Only a few robo-advisors have been able to attract meaningful flows; many have had to shut down, being unable to scale properly. Indeed, due to the complex and interwoven nature of the industry, it is exceptionally rare for a start-up to disrupt the entire $79.2 trillion value chain. When looked at from this perspective, the $3 billion in investments in these new companies doesn’t seem quite as daunting.
We have thus seen a shift toward a B2B model. The more successful newcomers are especially likely to seek new alliances with incumbents to ramp up their businesses or risk getting taken over by them—the main theme being, ‘If you can’t beat ‘em, join ‘em.’ Nevertheless, only 31 percent of asset managers have thus far engaged with fintech providers, and for those who did, the preferred route was through acquisition rather than partnering.
We have seen a number of these acquisitions: Parmenion by Aberdeen, Scalable Capital by BlackRock and Honest Dollar by Goldman Sachs. There has also been a spate of direct investments: Nutmeg by Schroders, MoneyFarm by Allianz, Trunomi by WorldQuant Ventures and Quantopian by Point72. A few incumbents have created accelerator programs for fintechs, like Schroders did with their Cobalt program. This movement is reminiscent of remoras—those little fish that attach themselves, partly symbiotically but mostly parasitically, to big sharks.
Under Tech Siege
In fact, the likely major disruptors are expected not to come from fintech, but from the established Big Tech players such as Google. Indeed, according to a Calastone study, The Impact of Technology and Regulation on Funds, 29 percent of the asset management industry felt that Big Tech were most likely to disrupt it, while 22 percent feel that retailers such as Amazon could transition into fund distribution. However, Silicon Valley is not used to the money business nor the heavy regulations that come along with it. Thus the expected threat is bigger on the distribution side than on the manufacturing side.
Given their deep pockets, there is nothing to prevent these digital titans from creating a tech-savvy, user-friendly distribution platform from scratch, building a solution centered squarely around the client experience—a strategic approach not always adopted by the asset management industry. In such a model, distribution would be largely disintermediated—that is to say, directly provided to end investors—and unbundled from financial advice.
This is the exact opposite of how most markets are structured today, where advice remains bundled and intermediated—for example, through bank distributors, independent financial advisors or investment consultants. Such an outcome would lead to significantly more price transparency and a magnetic pull toward Vanguard-like pricing for active management. Some estimates suggest that this could eliminate up to 50 percent of industry revenues.
Asset Management Industry And Fintech
And it’s clear that digital can scale up fast—suddenly, out of nowhere, a tech company can suddenly become a global top 3 player with its financial services offering. Case in point: Yu’e Bao, the money market fund owned by Alibaba’s Alipay subsidiary, which until the beginning of 2020–now it’s third after JP Morgan and Fidelity—was the world’s biggest money market fund, with $267.9 billion, despite only launching five years ago. 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, in effect making the purchasing process very straightforward, cost-effective and effortless.
This kind of speed and success can also be seen in Square’s peer-to-peer payment Cash App, which overtook Venmo and now has 24 million users. With a new U.S. banking license, they may soon add investment and savings products into their app. The lesson in this entire discourse on tech disruption is that ultimately, the success or failure of the industry—indeed of all industries today—comes down to hearing and responding correctly to the customer. Client experience stands or falls with a simple formula. It’s necessary to get inside the mind of the client to understand their key needs, expectations and worries; then to give them a range of choice in level of service. Can the asset management industry as it currently stands move toward this model? If they don’t, someone else will—in fact, already has.
Next time we’ll look at how the most successful asset managers are responding by formulating their own digital strategies.
About the Author
Martijn Moerbeek is group director of Digital Strategy & Innovation at Legal & General, a forward-looking, UK-based financial services and insurance firm managing over $1.4 trillion in assets.