Investment management: Disruption impact scale


Investment management: Disruption impact scale

graFINLAB6

Investment management: Key questions for consideration

 

Is a new segment of investors emerging as technology advances, and if so, how do I target them?

Will index investing change so significantly (such as micro-indices or crowdsourced indices) that it intersects with  some active investing?

How can cognitive computing be used to help manage enterprise risk?

What parts of the investment management value chain will use blockchain first? Core trading or customer  records management?

How can human capital be redeployed in the new automated environment?

Industry dynamics

Fintechs specializing in  investment operations will  level the playing field.

Magnitude: 5

Timing: 3

Competitive balance will shift over time as  technology enables small to midsize firms to  gain market share.

This will alter competitive dynamics away from  process execution to favor more human factors  (synthesis and decision making) and encourages  greater differentiation among firms.

Advisor Software is a cloud-based offering that provides  independent advisers with analytical and relationship  management tools formerly available only through the  largest wealth management firms.

Technology-enabled investment operations  outsourcing will help reduce compliance costs.

As incumbents  utilize third parties to  improve operations,  extended enterprise  risk gets more  difficult to manage.

Qumram tracks digital  interaction between financial  services institutions and their  clients to ensure compliance  with client communications  regulations.

Call to action

Team with data collection and analytics  providers to improve investment decision-  ing as new products, client segments,  and regulatory changes emerge. Private  equity firms and hedge funds will espe-  cially benefit from RegTech development  as regulators increase scrutiny.

Distribution

Increased sophistication of robo-advisers will alter distribution  models, forcing fewer traditional  advisers to move upmarket.

Magnitude: 4

Timing: 5

Robos use cognitive technologies to drive  automation of higher-value service, helping them  evolve beyond “online brokerage-plus” status.

Regulations (e.g., the Department of Labor’s Fiduciary  Rule) will spur growth in robo-advisory offerings as  product is decoupled from advice.

Through fintechs like Wealthfront, Motif, and Polly  Portfolio, more analytically driven capabilities like  bespoke portfolio construction, tax-loss harvesting, and  portfolio rebalancing become more broadly available.

Incumbents buy or develop robo-advisers to  expand credibility among client segments that  prefer this emerging service model.

After only one year in operation, robo offerings from  Vanguard and Charles Schwab are now the two largest  based on assets under management.

Call to action

Given that many robo-advisers have  found customer acquisition to be  challenging and expensive, accelerate  efforts to acquire or create automated  advice capabilities to keep up with  regulatory initiatives and to remain  competitive in both existing and  emerging retail client segments.

Offerings

Cognitive technologies and  automated advice will enable  the targeting of new customer  segments through lower costs  and increased customization.

Magnitude: 4

Timing: 2

Market potential will increase as robo  platforms enable more sophisticated wealth  management services to reach targeted or  downmarket segments.

Reliance on defined contribution  accounts as a feeder system for many asset managers will  decrease as robos drive new  segments, such as High Earner  Not Rich Yet (HENRYs).

Two new automated advice services targeting women  investors–WealthFM and Ellevest–to launch in 2016.38

Retail algorithmic trading, social investing,  and IoT will drive customized offerings and  new asset classes.

Wikifolio allows traders  to convert their bespoke  trading strategies into  financial products that  can be made available to  individual investors.

Call to action

Create the ability to optimize offerings  that align with cohort wants and needs  as a more customized and personal-  ized product landscape emerges.

Monitor technological developments in IoT to understand  how to develop new markets based on new sources of data

Customer experience

Investors are taking control of  their online/mobile experience  with a wider array of profes-  sional-grade tools.

Magnitude: 3

Timing: 4

Investors will increasingly gravitate to firms  that provide a more customized, social, and  empathetic experience.

Rizm provides sophisticated algorithmic  trading capabilities to individual investors,  attracting active traders who represent a  large share of the online brokerage market.

Incumbents will see increased expense to match the  trading and investing tools offered by fintechs.

Incumbents could lose the advice edge to crowd-  sourced expert opinion, which will gain quick  credibility among certain client segments.

But investors may be overwhelmed  by the increased level of advice along  with increased churn of entries and  exits by individual “experts,” adversely  impacting experience.

Call to action

Assess and experiment with the  active trader community to see how  technologies impact investor expe-  rience to prototype future services.

Expense could be a barrier—and rapid  cycling may catch some off guard—as  customer experience should move  faster than distribution changes.

Business economics

Incumbents’ scale and  process advantages are  diminished over time as  smaller competitors access  highly efficient third parties.

Magnitude: 3

Timing: 3

Commoditization of formerly high-value  advisory services, along with increased  outsourcing of process-centric talent, reduces  incumbents’ margins and cost advantages.

The blurred line  between “active” and  “passive” puts additional  pressure on traditional  active fee levels.

Costs of compliance will  likely be reduced after  an initial period of investment.

Algo and social technologies appeal to the active  trader segment, adversely impacting revenue of  online brokerage

Retail algo will force  incumbents to invest in  a stronger backbone to  compete.

Clients will not see a cost  reduction until process  execution technologies  mature further, as these  services will provide  competitive differentiation  initially.

Call to action

Shift focus to more specialized and  customized strategies and products  and remember to acquire new talent  in the front office that can profitably  support higher-value service delivery.

Operations

Investment managers are  increasing the pace of  middle- and back-office  outsourcing to offload cost/  time-intensive processes.

Magnitude: 3

Timing: 2

Greater agility and more instantaneous  analysis leads to improved operating and  compliance performance.

Boat Services is partnering  with the London Stock  Exchange to build a multi-  asset class trade reporting  platform to comply with  MiFID-II requirements.

Blockchain technology will gradually be adopted  for reconciliation, clearing, and settlement, de-  creasing cost and improving accuracy and speed.

Back-office functions  like clearing and  settlement will  accelerate to match  speed of trading.

Five major UK asset  management firms are  partnering to explore  potential uses of  blockchain technology  to reduce trading costs,  with savings estimates  possibly running into the  billions of pounds.

Call to action

Participate in blockchain-based utility plat-  forms to initiate technology improvements  that capitalize on more secure and straight-  through processing.

Create the ability to manage extended enter-  prise risk as vertically integrated middle- and  back-office infrastructures begin to fragment.