25 May Is technology transforming asset management fast enough?
There is nothing as potentially transformative for asset management than the digitisation of the industry. However, according to Accenture, while many firms have adopted certain innovative technologies, few have fully absorbed the potential of digitisation into the investment management business cycle.
Digitising asset management is about shifting definitively towards a customer-centric mindset. And there is plenty of evidence to show that properly integrating digital technology can give an asset management company a significant competitive advantage.
Is technology transforming asset management fast enough?
Asset management has traditionally enjoyed relatively high margins and a lengthy period of stability. As such, there has been little appetite for any profound changes in the way the asset management lifecycle is managed. And while some are already achieving the kind of digital transformation that will future-proof their business, others may find that coronavirus pushes them to do so earlier than planned.
It’s safe to say that the majority of very well established, and therefore more conservative, asset managers have held back from making innovative, disruptive changes. Rather than an industry that leads digital change, asset management is more interested in holding off until a digital strategy or technological change has proved itself.
Since the start of the coronavirus pandemic, however, there has been a renewed appreciation across every industry for the role digital technology plays in maintaining a global economy in a time of profound crisis. Without the kinds of technological advancement that are still relatively new, all business activity would have ground to a halt. The workers that have managed to keep going using the likes of PayPal, Google Apple and Zoom would not have been able to, and the situation around the world would be even more challenging.
In a world that is going through unprecedented changes, and with little collective idea of what the ‘new normal’ will look like, there is now an urgent need for the asset management industry to fully adopt the latest technology and transform their strategies.
Transforming asset management using innovative technology
It’s important to recognise that it isn’t enough to integrate the latest technology to make the necessary transformation. Rather, it’s about combining this with a shift in focus. As asset managers, we must focus on ways we can sell to our clients, rather than focusing on the product. To do this properly, we must fully understand exactly what clients need from us in this new normal, and then utilise technology to deliver it.
Asset managers must join other industries in offering clients a holistic experience, and not just concentrate on one aspect of it. Digital technology can be used to improve operational efficiency, for example, as well as to monitor and improve investment performance and how data, information and products are presented to the client.
Asset management has had to deal with the rise of investment alternatives, particularly over the last five years. These include passively managed, index-based products and exchange-traded funds (ETFs). There has also been a growing resistance to traditional fee structures as our clients follow examples set by other financial services, such as banking. Therefore, asset management firms that haven’t already undertaken significant digital transformation need to do so.
Keeping up with constant changes
Our industry changes constantly, and it’s clear that the pace of change speeds up every year. And as with other major industries, such as insurance and banking, there is a period of adjustment. Asset management firms are often split between going full speed ahead with new digital models and retaining traditional tenets of more contained expertise.
This can result in a digital framework that is neither fully digitised, nor fully traditional. And while this way of creating change can work to an extent, it ultimately creates a situation where true innovation cannot flourish. We’ve seen the way technology disruptors have turned industries upside down and forced collective change. In a world of automation, artificial intelligence, accessible technology and consumer demand, there is no longer such thing as the ‘status quo’. Businesses that refuse to adapt will fall by the wayside.
Evidence to show benefits of digital transformation
At AUM Asset Management, we regularly analyse the most recent information regarding digitisation the industry. For example, a report by McKinsey dated before the coronavirus crisis explains how firms that refuse to digitise could lose around a third of their revenue. Conflicting studies warn against being too aggressive with digital transformation as this can negatively affect revenue.
However, a separate report from McKinsey shows how successfully digitised firms can expect to reach 51% profit margins (against 30% for the general industry). The report also shows that asset management firms taking a digital lead increased their assets at a rate of 6%. This is twice the industry average. They also recorded an 11% increase in productivity, a 6.3% increase I market share and an excess revenue growth of 8.6%. Interestingly, they also reported lower technology costs than the industry average.
Even allowing for differences in the way a firm runs and its general efficiency, digital transformation offers myriad benefits to asset managers. Last year, a report showed that digitisation remains the most important priority for 80% of firms, and it’s likely that the pandemic has increased this number. However, just 6% are displaying significant investment in digitising their technology and therefore their operations. Just under two-thirds consider themselves at the “getting organised” stage of the process, and only half consider their digital plans are led by innovation. A third say that they intend to completely revolutionise their entire operating model.
As industry scrambles to work out ways to deal with the enormous challenges caused by coronavirus, now could be the best time for asset managers to replace old systems and invest in full-scale digitisation of their operations. In a time of long-term volatility, it’s vital that asset managers can deliver the flexibility and functionality that clients demand.