Fund managers are well-placed to survive the technology-driven disruption sweeping through the financial services industry, according to a new global report.
Published by the UK-based research firm Create, headed by Amin Rajan, last week, ‘Why the internet titans will not conquer asset management’ concludes fund managers should be able to retain their market positions despite the rise of sophisticated technological investment platforms.
“Asset managers will remain in the driving seat because risk management is in their DNA,” the Create report says. “Investing is a bet on an unknown future. Its success requires a deep understanding of risk and its dynamic nature. On the other hand, digital tools are simple algorithms that follow pre-set rules. They have their uses, but they also have their limits. ”
However, the study notes financial advisers will face the greatest technological threat as virtual mobile advisers, online advice systems and fund consolidation platforms undermine their market share – particularly in the mass-affluent audience.
“In the process, the main losers are likely to be registered investment advisors (RIAs) in the US, independent financial advisors in the UK and wealth managers on the Continent,” the report says. “Digitisation will demystify their craft and erode their competitive edge.”
But the funds management industry won’t emerge entirely unscathed from the technology revolution, according to Create. The study says “bifurcation” will see the growth of directly-distributed passive products while multi-asset, illiquid and alpha funds serve more specialised investment needs.
Retail-focused fund managers will probably face the greatest challenge, the report says, as passive models – including exchange-traded funds (ETFs) – gain market share.
For example, during 2014 Vanguard “more than quintupled assets to $4.2 billion” via its pilot ‘robo-advice’ program, Create says, posing “serious competitive threats to asset managers and intermediaries alike”.
However, while the global funds management may experience further consolidation, existing firms “are likely to retain their dominant position with large institutional clients, including pension plans”.
“The key differentiator of this business model is a full array of individualised solutions with a direct manager–client relationship or a relationship one step removed through intermediaries,’ the report says.