Asset management finally embraces FinTech
Written by Peter Walker
After cost and communication criticism from the regulator, the asset management industry is increasingly turning to technology for efficiencies enabling fee reduction and accessing the next generation of investors.
Last summer, the long-awaited Financial Conduct Authority (FCA) asset management market study confirmed what many commentators had claimed for several years – massive fund houses had become complacent, offering clients’ passive performance for active management fees.
The wide-ranging report found evidence of “weak price competition in a number of areas” and “despite a large number of firms operating in the market”, firms were making “sustained, high profits over a number of years” while “investors are not always clear what the objectives of funds are”.
This April, the regulator set out new rules to improve transparency and accountability, with chief executive Andrew Bailey noting in a speech that advances in technology like straight-through deal processing (STP) and distributed ledger technology (DLT) have the potential to change the industry for the better.
“Asset managers continue to look for ways to increase efficiency in their front and back offices,” he stated. “The advent of DLT opens the potential for STP to become even more efficient – potential benefits include more efficient management of counterparty risk, enhanced reconciliation and lower collateral requirements.”
Another area of growth is artificial intelligence (AI), with risk management, compliance, investment decisions, securities trading and client relationship management all potentially benefitting. “Investment managers may well have to increase their technology spends to keep up with AI developments,” noted Bailey, adding that supervision remains a challenge and may raise issues of accountability.
Ian McKenna, director at the Finance & Technology Research Centre, said there is a symbiotic relationship between regulation and technology, as if regulators mandate certain behaviour, this is often a catalyst for technology adoption.
“Unfortunately many firms will only do things when they are forced to under threat of fines, but that means technology investment is often rushed and done badly,” he commented. “I think this is where we will see the laggards and leaders in this industry become clear.”
Dan Jones, head of UK digital capability at management and technology consultancy Capco, pointed out that while Open Banking and digital-only challengers have woken up the banking sector, savings and investments have so far remained relatively untouched by FinTech.
“Obviously there are the likes of Wealthify and MoneyBox that are getting more established, but there’s an opportunity for wealth and asset managers to link current accounts with savings and investments,” he said. “Typically people start to think a lot more about saving for their future in their mid-30s, so if you can bring the concept of saving in earlier, then in addition to obvious benefits for the individual, the asset managers get to increase their assets under management.”
McKenna argued that FinTechs are taking advantage of different channels and reacting to consumer demands around personalisation. “Millennials may not have much money to invest now, but if you don’t communicate with them at this stage, then you won’t get their money once they’ve made it or inherited it later,” he added.
Financial software firm Crealogix recently published a digital wealth management guide, which stated that Millennials are set to inherit more than $30 trillion from their Baby Boomer parents, but will not necessarily stick with the same fund managers – favouring whichever firm can give them access across multiple channels and devices, with clear pricing and easy communication.
Jo Howes, commercial director at Crealogix UK, said there is still a perceived lack of necessity among many industry veterans, as there are less obvious disruptors or regulatory pressure than in the banking sector for instance.
“But some wealth managers are hearing the wakeup call, and those that do something now could reap the rewards,” she stated. “For those that want to bring something to market, there are ways to liberate data without ripping up legacy systems, and develop an app without having to build from the ground up.”
However, Stephen Mohan, chief operating officer at fund transaction network Calastone, pointed out that improving the front end can just be like putting lipstick on a pig if the back office is still a mess.
“I like the idea behind these apps that let you round up and save pennies in a pound, but for investment it just isn’t practical, because of the associated processing and transaction fees,” he said.
However, Calastone has been running proof of concepts on DLT, in an effort to mutualise the marketplace. “The testing has been to make things scalable and from next year it should be the basis of everything we do. It will make for a step change in costs, potentially bringing them down enough to encourage that type of penny investing,” Mohan continued, adding: “The funds industry has sat back in terms of innovation, and consequently has been overtaken by payments, but blockchain presents an opportunity for a great leap forward.”
Blockchain to the rescue
Brian Smith, senior director of product and innovation at financial services software provider DST Systems, agreed that some asset managers are more forward facing than others, but those that have adopted new technologies are starting to move ahead of the competition.
“The big global players really want to do something meaningful in the blockchain space,” he explained. “So far, blockchain technology has helped solve the reconciliation challenge, but could it be applied to trade settlement?”
While scale is usually an advantage for these multi-billion pound institutions, legacy systems have held back technological development. Smith said alliances are increasingly being built up in the industry between traditional players and FinTech startups to help tackle this innovation inertia.
Numerous operational processes underpinning the £65 trillion global asset management industry are in stasis and have been so for more than 20 years. Fund transactions still take several days to settle, mainly because the mechanics behind the scenes continue to be manual.
Through the establishment of a mutualised distribution infrastructure, Vince Lucey, managing director of innovation at Calastone, estimated up to 70 per cent of the costs associated with traditional distribution methods could be eliminated, which translates to approximately £1.9 billion in savings.
BNP Paribas Asset Management successfully completed a full end-to-end fund transaction test late last year, using FundsDLT, a blockchain-based decentralised platform for fund transaction processing developed through collaboration between Fundsquare, InTech and KPMG Luxembourg.
Said Fihri, associate partner at KPMG Luxembourg, explained that the pool of asset managers using FundsDLT to perform test transactions is expanding, with firms from the US, UK and Germany entering into discussions.
Meanwhile, the world’s largest asset manager, BlackRock, recently revealed it has set up a working group on cryptocurrencies. Chief executive Larry Fink stated that while he does not yet see huge investor demand, his firm “are a big student of blockchain”.
Romal Almazo, cryptocurrency lead at Capco, said the move will definitely legitimise the emerging financial technology, but warned there are still a number of critical issues holding back institutions at the moment.
“The market is still very much unregulated, including how crypto exchanges deal with customers,” she said, adding: “For institutions like Blackrock to start investing, an FCA-regulated trading platform will need to be approved, along with tighter controls and solutions around the handling and storing of digital assets.”
The Tax Incentivised Savings Association (TISA) recently launched the first phase of a project to bring open standards to asset management, arguing that if the industry were to deliver new digital customer solutions based on disparate legacy systems, it would create significant costs, friction and security issues.
Harry Weber-Brown, digital innovation director at TISA, stated: “The aim of the TISA Open Asset Management project is to develop and implement open standards and APIs designed to put consumers in control of their data, lowering costs and creating an easier way to move, manage and make more of their investments.”
On the basis of the interest generated by the project within the asset management sector, there is a willingness to change, he explained. “TISA is spearheading this project with the hope that it will enable established asset managers and FinTechs to work together in the development and adoption of open standards to drive positive industry change, as we experienced with TeX [TISA’s electronic asset exchange].”
Meanwhile, the Investment Association has set up Velocity, a FinTech accelerator for the asset management industry, which aims to find new technological solutions to increase business efficiency and enhance customer experience.
John Glen, economic secretary to the Treasury and City Minister, said that collaboration with FinTech is key to ensuring the UK’s industry remains globally competitive. “There are over 93,500 people employed in the UK’s asset management sector, so the FinTech Accelerator - the first of its kind for the sector - will be fantastic news to them and to future entrepreneurs hoping to crack the market,” he concluded.
Roger Miners, global chief marketing officer at BNP Paribas Asset Management, commented that there is a significant engagement opportunity offered by new technology, with better customer service and more targeted communications enabled by easier access and use of existing information stuck in IT systems.
“Technology helps us to be more efficient, making savings we can pass onto clients, which is one way we can respond to the FCA’s asset management review,” he said. “Specifically we’ve been working on blockchain, automating changes to fund prospectuses, using AI to help with translation and to drive chatbots for retail customers.”