Talk of innovation dominated ITAS 2015, but should asset managers be worrying about the issues of today or the tech troubles of tomorrow?
‘Robo-advisors’ are in the building, and asset managers will have to kick-start their innovation plans if they want to stay in business. This was the recurring theme at the International Transfer Agency Summit in Luxembourg in February.
With many-a Steve Jobs analogy and comparisons to car factories, transfer agency professionals grappled with the concept of tech-based players entering the market, introducing revolutionary ways of investing. Some thought the changes are still a way off, while others predicted a shake-up in the next two to three years. Others, while accepting that modernisation is on the horizon, felt that the industry is still reeling from regulatory changes, and should get to grips with this before worrying about a futuristic funds dystopia.
Keynote speaker and director of product innovation at International Financial Data Services, Phil Goffin, is a firm believer that the time to innovate is now, and that asset managers should be embracing new technology.
He claimed that, not only is technology becoming more powerful, but customers want more control over their own finances. Historically, the technology has been developed based on the needs of the industry, not those of the end user.
Goffin said: “People do everything from an engineering perspective. They think about the technology and build the product upwards, rather than thinking about the customer experience, and building a product around that experience.”
“This industry has never operated like that, but it has to start, because the market is changing.”
With the dawn of smartphones, tablets and the online lifestyle, people are not only shopping online, but also keeping an eye on their accounts and moving money around in a few swipes. At the same time, the financial industry as a whole is losing the trust of the ‘average consumer’. People will become more inclined to trust ‘robo-advisors’, artificial intelligence and peer interactions than they are human financial advisors in the near future.
“It is a behavioural change, but we will adapt to that. A computer will be able to tell you much better what your needs are, based on your data points and behaviours, what you’re doing, your requirements, your parameters, and it will suggest tailor-made products for you,” said Goffin.
“It won’t try and push a product on you that will make it more money, because it’s a computer. It doesn’t care about that.”
According to Goffin, the market is shifting in the favour of the investors. Technology moves so quickly, especially in comparison to the funds and investment industry, and those firms that don’t jump on board could be too late. By the time there is a noticeable change in the market, the damage will already be done.
“You cannot look to the past of our industry in terms of the timing patterns of change, because, historically, it has taken forever,” he said. “Because technology is moving so fast, and computing power is accelerating, the rate of change is now exponential.”
Another speaker who emphasised the power struggle between asset managers and investors was Mark Polson, founder of Edinburgh-based financial services consultancy The Lang Cat.
Polson’s view was that, while industry players are catching on to the idea that big changes are going to become necessary, and accepting, in theory, that they should hand over some of the power over to investors, most managers are not actually making bold enough efforts to achieve this.
Polson referred to the powers of thermodynamics, suggesting that there is a finite amount of power available in any relationship. If managers wish to give investors a larger slice, they’re going to have to relinquish some of their own.
Like Goffin, he identified the dangers of looking backwards in order to move forwards.
He said: “We shouldn’t believe that the way things have been has anything to do with an end state. That is brutally hard to do.”
He also said that the process has become over-complicated, suggesting that clients become so frustrated by the complexities of investment that they lose interest altogether.
“We do make things fundamentally complex. We seem to enjoy it. Clever people make things complicated; very clever people can make things simple. It is hard to get people interested in the mainstream funds industry when the mainstream funds industry is in the way.”
According to Polson, funds must establish clearer communication channels in order to win back the trust of their end users. His solution, however, involved revealing a more human side to fund managers, with offline support and clear concern for investors’ interests.
“The industry has outsourced caring about clients to intermediaries for too long.”
He suggested that if managers reach out to ‘hug a client’ they should be warned that dissatisfied customers might not be particularly receptive, and firms should be ready for this. There is a chance that industry clients could be so disillusioned with the service they have received in the past, that they will be the ones resisting more communication now.
Polson takes the relationship between fund manager and investor back to its human elements of communication and mutual respect, while Goffin, although also focusing on the customer experience, believes in a more futuristic solution.
In line with his theory of clients putting trust in ‘robo-investors’, he showcased prototype platforms for personal fund management and ‘micro-investing’. Aesthetically pleasing apps and websites will allow clients to invest a dollar or two at a time, sharing their progress and their successes, and keeping track of their funds with easily comprehensible charts.
According to Goffin, the UK is one of the only jurisdictions supporting this kind of development, with the Financial Conduct Authority setting up a new unit, Project Innovate, to help financial technology start-ups. These apps almost ‘gamify’ the investment process, using complex algorithms to scale down the market and make it accessible for the everyday user.
“A number of innovative start-ups will continue to enter into the financial services arena in the next two to three years. It’s not an easy thing to do, set up a new entrepreneurial start-up in a highly regulated environment, but in the UK there is significant government support and investment into financial technology incubation,” said Goffin.
“Savings and investments have traditionally been a complex journey for the consumer, but they need to be simple and reflective of individual needs. The user experience has to enable this simplicity and behavioural acceptance.”
On the small scale, this is an attractive prospect, fusing the finance and technology industries for the benefit of consumers, expanding the funds world to small, individual investors, and even making it fun. It’s when the tech giants get involved that the game really changes.
Goffin referenced Yu’e Bao, the online fund launched by Chinese ecommerce group Alibaba. The trade giant quickly became China’s biggest money market fund in terms of assets under management, due to a high rate of interest, ease of use, and, according to Goffin, because of its existing customer base.
Now, he said, it’s only a natural progression for the global tech giants such as Google, Apple, Amazon and eBay to follow suit in entering the savings and investment market.
“They’re social businesses, they have a large customer base, and they’re transaction and payment-centric. From a customer perspective, trust already exists. The customer has already provided personal data as well as transactional information, and had social interactions.”
“They have the brand already, they have customer affinity, they just need to launch simple savings or investment products. And what does that do to our traditional industry of asset managers, intermediaries and distributors? It will mean evolve or die.”
Despite Goffin’s conviction of an imminent threat, in other presentations the focus remained on the present and the challenges in the market now, rather than those to come.
In a panel session on the data held on fund flows, an audience member summed up the mood of the room, saying: “What I’m worried about is how I comply, and how I will comply in the future. That is what I am worried about now.”
The general consensus seems to be that the regulatory storm is far from over. In fact, in an on-the-spot poll, when the audience was asked to rate their readiness for the wave of regulatory requirements, 50 percent of attendees rated themselves as 50 to 90 percent ready. As many as 25 percent felt only 20 to 50 percent ready, and the other 25 percent felt at least 90 percent prepared.
Attendees were most comfortable with anti-money laundering and know-your-client rules, with 75 percent evaluating their readiness as ‘good’ and only 6 percent answering that they had ‘still a number of issues’.
Only 8 percent, however, were confident in their readiness for the Markets in Financial Instruments Directive II and Regulation. While 17 percent said they were more or less prepared, 58 percent admitted to still having some issues, and 17 percent said their readiness was ‘not so good’.
Generally, the majority of participants saw potential benefits in the regulations, however, when asked if they could derive benefit from the Foreign Account Tax Compliance Act (FATCA), 75 percent responded with a resounding ‘no’. Only 8 percent said yes, and 17 percent were unsure, answering ‘maybe’.
One pannellist said: “FATCA may have a benefit to society as a whole, maybe, but not to the industry. The whole world of corporate tax is changing, and the message is, just get on with it.”
He also pointed out that without regulations, many of the attendees would be out of a job, and said: “We shouldn’t be scared of regulation. We’ve got to live with it, so we’ve got to make the most of it.”
Another panellist argued that reporting obligations come with added benefits, allowing firms to use data for their own rationalisation. Firms should see regulation as a reason to create new structures in their business, structures that are adaptable for future purpose.
The topic then returned to the needs of the end user, with a panellist saying that regulations are beneficial as a means for regaining the trust of the client.
The panellist said: “Politicians are dictating the industry because clients don’t trust industry professionals. When the end user buys a product, they don’t expect to be ripped off. They expect to have a long-term partnership, and that’s what we have to give them. We have to get that trust back.”
Ultimately, it all comes down to trust of clients, and the perception of the finance industry to those on the outside of it.
Whether the answer lies in robots and tech innovation, or in stripping back the layers of an over-complicated industry, the key to future success is getting the customers back on board.
As one speaker concluded: “The funds industry is much safer than many other parts of the industry, but we are all the financial industry, and so we suffer together.”
