The Old Guard

With the turmoil of 2008, we saw a microscopic lens fall upon the financial services industry. Investment banking and capital markets were primarily the areas scrutinized by the regulators, governments and the general public, and the so-called “casino banking” that took place. The banking industry had never had it so good, with previous deregulation and trading freedoms to invent financial products which benefit both industry and investors.

However, the most likely to suffer in the market, either directly through defunct mortgages or through mutual funds or other collective investment vehicles, were investors. Investors in this context include pension funds, mutual funds, family offices, sovereign wealth funds, high-net-worth individuals (HNWIs) and retail clients.

The asset and wealth management industry was largely seen as a victim, rather than part of the problem. If we look at the performance of asset management over the past 30 years, we have consistently seen the underperformance of active management. With fees considered, a large majority of the funds have not, on average, delivered good performance over their lifetime. Fundamentally, the industry has “no economic justification for being as large and rich” as it is.¹ It has made fund managers and fund management company owners wealthy, but the investors who pay their fees have not had their returns.

Current Market and Innovation

With the emergence of new technologies and business models, the industry is ripe for disruption. However, incumbents do not appear to be concerned, even though they pay lip service to innovation and are purporting to undertake a digital transformation. Clayton Christensen has famously said that it is mostly difficult for incumbents to innovate due to their blind spot for disruption.² It is difficult to see for the industry because of the ingrained assumptions, processes and, more than that, arrogance and complacency that permeates senior management. When threats come from innovative companies outside their traditional set of competitors, they find it hard to imagine that the industry will be disrupted. Furthermore, the ability for these businesses to shift their operating and business models because of vested economic interests (and the internal capability to make that transformation) is often lacking.

The Future Will be an Industry That is Digital

Digitization enables easier access to alternative asset classes (e.g. private equity, venture capital, hedge funds) and new asset classes. For example, initial coin offerings (ICOs) have emerged as a new way of investing in companies. These offerings have grown significantly in 2016/2017 and will continue to do so.

There is also a large movement in the traditional asset management industry from active to passive-based investments, and the move has gathered pace. Boston Consulting Group forecast that between 2016 and 2020, passive asset investment such as ETFs (exchange-traded funds) will account for 42% of all investments – up from 10% in 2008 – with a total market size of $71 trillion.³ In addition to this, a growing interest into robo-advisors and purely digital asset management continues, with companies like Betterment and Wealthfront also growing.

The Coming Shifts

Shifting sentiments, better and more easily accessible investment choices, better access to data/information and transformation of multiple industries to new business models are some of the reasons why the asset and wealth management industry is likely to change. Technology-driven democratization is driving smaller family offices and retail investors to look for alternative ways of investing, with the promise of lower fees, transparency and better returns.

As new asset and wealth managers emerge, they will use digital, data and analytics-driven models to provide scalability, accessibility and transparency, and more liquid and wide-ranging choices to investors. The end-to-end management of investments will be almost completely automated, and decisions will be driven by aggregated data, artificial intelligence (AI) and machine learning models, algorithms and risk models and, finally, the whole stack will be supported by the application of blockchain technology. For investors, this change will offer a multitude of benefits:

• Transparency of their entire portfolio, visibility of asset performance, real-time risk calculations and detailed data on their assets.
• Granular control of assets using digital channels and real-time adjustment of portfolios.
• Management, of active or passive investment strategies, diversification and easier regulatory reporting and analytics.
• Access to countless investment opportunities offered by digital channel purchasing and management.

The 21st-Century Asset and Wealth Manager

The digital asset or wealth manager of the 21st century will be driven by machine learning AI, engaged and managed through digital technologies, and will leverage the emerging new economy models.

Emerging new economy models are transforming how investors can reach and invest in businesses, driven by data/AI, transparent, with new risk and investment models. Traditional asset and wealth managers cannot reach those investment opportunities that are emerging.

• Marketplace lending and crowdfunding. This model is suited for investors wanting to put their money into marketplaces. Building out new risk, credit and investment models with data-provided marketplaces (and other external, public and proprietary sources) enables individual investments as well as portfolio investments. Active and passive models also exist, again driven by data and leveraging AI and machine learning models for investment.
• Blockchain-based ICOs. As new investment routes are emerging through ICOs, investors can invest in those offerings directly. These are potentially high-risk investment types. Numerai, for example, combines new types of AI-driven investment by issuing their own token to investors.⁴
• New economy companies. With digital transformation on the rise, new economy companies need investment in a different model compared to the traditional asset and wealth management models. For example, Uber drivers who require loans for their cars cannot get them from traditional lenders or investors. With the availability of data and analytics of drivers from these types of companies, new investment models can be created to enable digital investment and management.
• Emerging markets investments. As the emerging markets grow and start-ups create new operating models, investors have the opportunity to reach these businesses through digital investment channels where asset managers do not invest directly or can’t reach them.

We are also seeing the emergence of new types of hedge funds, driven by machine learning and AI models. Sentient Technologies (which raised $143 million of funding) and Aidyia (a Hong Kong-based hedge fund) are building these funds from the ground up, applying these new models.⁵

New Opportunities and the Future

Investors are now restless. They’re not seeing traditional asset managers provide returns or reasonable fees. With liquidity being abundant, investors (family offices, institutional investors, sovereign wealth funds, pension funds, retails investors) are more willing to look for alternative investment opportunities and channels. As the world undergoes a digital transformation, and with the emergence of new businesses, markets and operating models, the time is right for a new way. A new set of asset and wealth managers are coming. They are driving operating models and costs significantly lower than the incumbents. They are transforming investment in traditional listed markets, driven by leveraging machine learning and AI, and they are looking at their own (and market) transformation by leveraging technologies like blockchain to make themselves even more efficient. These managers will move away from stock picking and identify new sources of alpha.

New and emerging start-ups are attacking every aspect of the traditional asset and wealth manager, by focusing on new business models such as marketplace investment models, where the firms don’t need to comply with the regulations of traditional asset management firms (because they don’t have a fund structure or take investments on their own book). Digital asset management businesses are built differently, by creating a fantastic digital customer experience, automated underwriting and investment processes, agile software development methodologies and transparency built in. They provide end-to-end investment control and management of their investments in real time, and clearly and concisely declare fees, with these fees being significantly lower and not based on a percentage of assets under management (AUM) but fixed charges regardless of portfolio size.

The engine of these companies is driven by collecting, organizing and feeding data into their own machine learning and AI models, and continuously evolving those models, refining them for better underwriting, risk and investment.

The future’s bright, and the future of asset management may already be here through the new start-ups. Watch out BlackRock, they’re coming!