The Impact of Technology on Asset Management
As we start a new decade and our inboxes fill up with predictions for 2020 and beyond and perhaps a few reviews of ‘Project 2020’ strategic plans previously written, we at marketßeta are reminded of the following Bill Gates quote:
“We always overestimate the change that will occur in the next two years and underestimate the change that will occur in the next ten. Don't let yourself be lulled into inaction.”
Arguably the last 10 years, post GFC, has been a relatively benign environment for asset managers. But like many others, we believe that the pace of change is accelerating, and that technology is driving at least part of the change.
We consider some of the major components of the where technology is driving this change:
Migrating Legacy Platforms
Value Chain Disruption
Asset managers are beginning to realise the importance of data across the value chain. From front office (index content, alpha signals and market flows), back office (largely a cost and efficiency drive) and distribution (client acquisition, service and insight).
The Asset Owners are also aware of the value of data and are increasingly accessing and analysing it directly. Environmental, social and governance (ESG) is a great example of this whereby Asset Owners are driving the definition of their own investment content to reflect their values. How long will it be until similar self-service ESG ‘values’ driven content is available to retail investors?
Valuation multiples of data-driven firms are significantly higher than other industries. Data vendors are increasingly ‘in demand’ and we can see consolidation in this sector as well as new disruptive entrants. The value of servicing components of the workflow, from a data perspective, has greater value when aggregated together with other components to form proprietary value. This will provide Asset Managers the ability to outsource non-core activities.
Migrating Legacy Platforms
Most asset managers have under the bonnet a host of legacy and sometimes very old technology. Whilst these platforms are fit for purpose and robust, they are typically not able to cope with the ever growing pressures for real time, on-demand, transparent, customised, global, multi asset solutions that new clients demand. They also require a significant degree of on-going maintenance and therefore cost as well as risk.
Whilst many new technologies have been developed to service components of the workflow, they are typically bolted on to out-dated legacy core platforms (OpenFin, Finbourne et al). Behind most financial service firms there are lurking some very old technologies, some over 40 years old. Again, whilst some are still working well and do not pose some existential crisis, they are, at the very least, at breaking point, with very little talent to service them.
To date, ‘full’ outsourcing has not been desirable, available or practical. We believe that all three are now changing and in the next few years significant migrations in operating models will occur. The question of timing will depend on your evaluation of risk, costs and opportunities.
The 3rd component where technology will drive significant change in asset management is in transparency. Greater transparency is being demanded from multiple sources, from regulators, from asset owners and from other participants in the value chain. It is being demanded in multiple areas, investments (returns and costs, value for money), and performance. Even the last bastion of opacity, Private Equity, is coming under pressure to be more transparent.
We see this as the single largest catalyst for change. However, the legacy platforms are not built to provide this, and the data is not necessarily available. We see the developments in the technology sector in multiple areas (AI, blockchain, big data, distributed cloud, even 5G) contributing to huge changes in investor behaviours and demands for transparency.
Undoubtably this will uncover some of the conflicts of interest, unmask less well-run businesses, reveal sub-optimal strategies and will enable those ahead of the curve to grow investor trust and increase assets.
Value Chain Disruption
Perhaps the largest area of change will come from the partnerships formed between technology firms and participants in the financial service value chain. The ongoing drive by Asset Owners to take control of their investments and the enabling element provided by technology will, we believe, result in significant moves in both firm boundaries and value chain apportionment.
It seems hard to believe that given the movements in other sectors, such as ‘Health Tech’, that ‘Wealth Tech’ won’t be far behind. It remains to be seen in which direction and in what combination the partnerships will form and how positions in the value chain will be altered.
Significant, large scale, corporate activity is already evident (Charles Schwab purchase of TD Ameritrade for $26bn, LSEG purchase of Refinitiv for $27bn, State Street purchase of CRD $2.6bn). Perhaps less visible, but potentially even more disruptive, are the partnerships being formed in the ‘platform’ space. We see significant opportunities for smaller deals to provide great impact, creating the long mooted ‘roll up’ strategies.
The ongoing demand for value for money and improved customised service is resulting in consolidation at the Asset Owner and Asset Manager levels. For firms to thrive and survive they will need to embrace technology in a much bigger way. Simply bolting on some ‘big data’ analytics or a bit of AI is not enough.
What does the optimal road to success look like? We see existing participants in the value chain combining, in new ways, with modern technology firms, enabling them to provide superior customer experiences for existing clients and to capture new ones. As we welcome the new decade, we wish Microsoft Azure a happy 10th birthday, and wonder what the next 2 years will bring for the Asset Management industry.
We welcome your views on the ongoing debate.
 The world’s largest fund managers – 2019. Willis Towers Watson, Thinking Ahead Institute. October 28, 2019
 “Private equity should become less private to address onslaught of criticism”, PitchBook Playbook 4Q 2019.
 CBInshights, 2020 Tech Trends, Jan 2020.