Background
Like the rest of financial services, asset and wealth management are now migrating to nimbler business models, with the emergence of digitisation as the new ‘heartland technology’.
It extends well beyond just adding new digital channels for marketing or customer engagement. Itembraces the entire continuum,stretching from electronic artifacts and processes at one end, through the upgrading of legacy systems, connecting silos and delivering new services, to the current realm of big data, advanced analytics and artificial intelligence at the other end.Machines can do things previously unimaginable.
This is the first study of its kind to do a stock-take on the key drivers of digitisation in these two industries, their current state of adoption, the key blockers and enablers, the nature of the ensuing industry disruption, critical success factors and the nature of benefits experienced so far.
The study is based on a global survey of 458 asset and wealth managers from 37 fund jurisdictions with total AuM of $36trillion.Its key findings are presented below under six headings.
The structural drivers behind digitisation have the momentum of a supertanker
Three key drivers are promoting digitisation by changing the dynamics of asset and wealth management.
First, the ultra-loose monetary policies of central banks have borrowed against future returns by artificially inflating asset values and disconnecting them from their fundamentals. Nearly 90% of active managers have struggled to meet their benchmarks over the past two years.
Second, low-cost passive funds have been gaining strong traction throughout this decade; intensifying the fee and cost pressures for active managers.
Third, a new generation of investors is emerging, mainly involving digitally savvy Millennials. They are demanding immediacy, ubiquity and connectivity in their online investing.
- Implementation of digitisation so far has relied onsmall steps, not giant leaps
- Asset managers
Implementation has focused on eight digital tools (Figure1). Whereas 54% of asset managers have adopted social media, only 6% have adopted blockchain, most of whom are subsidiaries of large banks that are part of global consortia developing the new generation of blockchain.
At least one in every two respondents are still at the ‘awareness raising’stage in the adoption cycle for the majority of innovations.
Figure 1With respect to each of the eight key digital innovations below, in which stage is your asset management business currently?
Source: CREATE-Research/Dassault Systèmes Survey 2017
- Wealth managers
Wealth managers (covering private banks and independent financial advisors) are ahead of asset managers in the adoption cycle. A key reason is that they deal directly with their end-clients, whereas asset managers mostly rely on intermediaries (Figure 2).
So far, the main thrust of their approach is directed at creating multi-purpose digital platforms designed to enhance client experience– a new concept born of online shopping, facilitated by vehicle-agnostic operating platforms accessed at any time from any place – all in simple language that is at once engaging and informative.
Figure 2With respect to each of the seven key digital innovations below, in which stage is your wealth management business currently?
Source: CREATE-Research/Dassault Systèmes Survey 2017
- The cautious approach to digitisation is dictated by fear of the unknown
- Moderators
In money management, two sets of factors have been identified as moderating the pace of implementation.
First, many of these innovations are far more opaque than a hand-coded system. Until ways are found to make them more transparent to their creators and accountable to their users, progress will remain gradual.
Second, the prevailing IT infrastructure is ill-suited to new innovations. In good times money managers did not take advantage and upgrade their IT systems: there was no evident need. After all, consistently high profit margins were the norm. These also promoted the mindset that “if it ain’t broke, don’t fix it”.
- Accelerators
On the other hand, there are also forces accelerating the pace of digitisation. History shows that moderators typically dominate the implementation cycle in its early phase. Anything with no long track record is initially frowned upon. Over time, however, accelerators gain the ascendancy, as early adopters have an edge and change the competitive dynamics.
The key acceleratorsinclude:growing cost pressures, the rising importance of fees & charges as a key differentiator, the rise of low-cost passive funds, the market entry of fintechs and internet giants, and the growing social acceptance of digital innovations.
- Partial disruption is the most likely scenario over the next ten years
- Scale of disruption
After a headlong expansion over the past 20 years, the asset and wealth management industries are transitioning to their maturity phase. But the problem with living through a historic shift is that it is hard to spot at the time. Inevitably, a tug of war is evident in many asset and wealth management houses.
Some want to protect existing revenue streams via incremental changes, while others want to create a new future via disruptive changes – defined here as either creating a new market that didn’t exist before, or offering a lower-end alternative to the existing product, or both.
Currently, the incrementalists have the upper hand but, over time, the evolving structural dynamics of their industry will mean that business-as-usual is the least likely scenario in the medium term(Figure 3).
Figure 3 Taking a ten-year view, which one of the following scenarios summarises your view on the impact of digitisation?
Asset management Wealth management
Source: CREATE-Research/Dassault Systèmes Survey 2017
- External threats
Mega indexers and large wealth managers will continue to attract the lion’s share of the new money in motion. Some are developing their proprietary robo platforms. Others are forming alliances with fledgling robo advisors.Their competitors will need to respond in order to survive, at a
time when the internet giants are beginning to show interest in money management.
Three scenarios are likely(Figure 4):
- barbarians at the gate:envisages the external disruptors carving out niches at the commoditised end of the market
- the empire strikes back:envisages asset and wealth managers adopting digitisation in much the same way as most flag carriers who emulated the low-cost airlines by segmenting their client base and having different propositions for each segment
- peaceful co-existence: envisages alliances between the external disruptors and the incumbents, blending investment expertise with technology knowhow.
Figure 4Taking a ten-year view, which one of the following scenarios summarises your view of the competitive landscape?
Asset management Wealth management
Source: CREATE-Research/Dassault Systèmes Survey 2017
For both groups, the least likely outcome is “barbarians at the gate”, in the belief that investors will remain wary of trusting their money to a digital platform that lacks investment DNA and the associated brand. Also, legacy systems and legacy thinking will remain powerful barriers inthe absence of a perfect storm.
One thing is for sure: asset and wealth management are set to decouple from a stable past and re-anchor to a disruptive future. The only unknown is the timing.
These industries are exposed to the same curse as the music industry: winner takes all. A choice overload created by proliferating digital platforms will be turning investors towards advice algorithms. These, in turn, will be increasingly skewing investors’ choicestowards the biggest hits and the most powerful platforms.
- Easing the transition to a digital future needs a culture of leadershipsavvy on change management
Early adopters of digitisationhold that there is nothing inherent init that guarantees outcomes. It is about navigating through the fog to invent a new future far removed from old connections and causality. Without a clear business strategy and a group of far-sighted people committed to delivering it, no digital tool can make much difference – no matter how sophisticated.
Among early adopters, such a culture has enjoined top executives to adopt a leadership style that is stronger on deeds than words. Its core emphasis is on setting business vision and goals, along with a clear list of actions, timelines, accountabilities and incentives. This process has favoured consensus building at the ideas generation stage and a hard-nosed approach at the implementation phase.
- Early benefits have been experienced
Early adopters report the following benefits:
- Stronger market position by becoming more relevant in societies where digitisation is gaining traction
- New client segments by seeking to meet the unmet needs of client segments not covered by the existing distribution channels
- Enhance client experience thatimproves client loyalty as well as the prospects for up-selling and cross-selling
- Improve alpha generation by enhancing the people–machine interface when identifying price anomalies in financial markets
- Improve time to market by improving the product development process and the governance around product suitability
- Higher efficiencies by automating routine labour-intensive operations and improving the connectivity between various functional silos
- Ease the regulatory costs by onboarding new regulations within the existing compliance and reporting frameworks.
The asset and wealth management industry are at thedawn of a new transformation, more far reaching than anything experienced before.