There is colossal change happening in the asset management industry. Regulatory and investor scrutiny is relentlessly driving down fees.
The US has, as an example, seen a steady decline in both passive and active fees over the past years (see the figure below). As further transparency is introduced to the industry, it is unlikely that fee levels will increase and therefore pressure on margins will likely increase or remain the same. One of the few ways then that firms will be able to fight margin pressure will be by reducing costs.
Expense Ratios of Actively managed and Index Mutual Funds in the US (percent)
As firms feel the pressure to reduce costs, the walls between technology and business need to be torn down. While some firms are already leveraging new technologies in certain areas, what the future holds is a time when a firm without tech-enabled solutions will be labelled as sluggish compared to competitors. Automating or outsourcing middle- or back-office will provide opportunities to sharply reduce costs, increase flows, and produce tech-enabled alpha.
Examples of FinTech along the value chain
There are already multiple companies established throughout the value chain, enabling asset managers to pick and choose which partner would best suit their operations. AlphaSense, for example, is a specialised search engine that targets investment firms. Making use of advanced linguistic algorithms, such as Natural Language Processing, AlphaSense scours through a variety of financial documents and press releases, significantly reducing the amount of time investment professionals spend on research.
FundApps is a largely US-based company that, using its cloud-based platform, facilitates shareholder disclosure reporting and filing across the globe. Providing instant updates and access to a comprehensive regulatory database, FundApps automatically processes client data and generates regulatory filings for more than 85 jurisdictions.
Tech-enabled investing is blurring the lines between traditional financial services companies and technology companies. Leaders within the industry are stepping up their usage of technology within their portfolio management systems. BlackRock has, for example, launched iShares Evolved funds that actively make use of advanced technological techniques - such as machine learning - to classify companies into multiple sectors.
FinTech players can help asset managers automate from back office to front office (see Figure above). Asset and wealth managers are well positioned to automate by digitalising their value chains. In terms of automation of the asset management industry, blockchain represents a possible revolutionary technology for asset servicing in the near future. Northern Trust, this year, deployed a new blockchain-based system to record transaction information for a private equity fund run by Switzerland-based Unigestion. This is one of the first commercial usages of the technology within the industry.
Employing large data sets and technology to process data, find connections, and test investment strategies will allow tech-enabled asset managers to produce above market returns. Manageable key metrics will allow for reduced inefficiencies when servicing clients which will in turn lead to attracting new flows. Impacting all areas of asset and wealth management, technology will change the way asset managers are able to deal with margin pressure. Independent of the size of the asset manager, it would be advisable that a strategic evaluation of their entire value chain is carried out. This is where managers will be able to identify where digital transformation can lower costs and increase efficiencies within a strategic timeline.