We are currently working alongside some fantastic asset management (AM) clients in Europe, which has allowed us to delve into some of the current dynamics shaping the European AM sector, research its emerging and still-tentative relationship with digital and social media, and explore some of the fundamental challenges that are influencing the industry’s transformation.
It is a fascinating area, not least because of the enormous opportunities available to both new FinTech-enabled market entrants (who generally enjoy greater agility and lower costs), and established AM firms who are prepared to transition their business towards a more digital, social and consumer-facing model in the next few years, along the lines of what some US firms have successfully achieved.
When looking at the globalising effect of new technologies, the interconnectedness of global financial markets and the international outlook of most private investors, the distinctions between Europe, the US and emerging markets are not always relevant. But significant differences do exist between international firms: business culture, investment outlook, attitude to risk, availability of retail consumers and regulatory constraints all contribute to this differentiation.
This, in turn, impacts the way these firms operate, but for the purpose of this blog post I shall focus largely on challenges to European AM firms, which is where we believe most of the required modernisation and digital transformation needs to happen.
>You may also be interested to read our research report on The Barriers to Digital Transformation which includes our latest thinking on organisational structures and agile attributes.
Low adoption, baby steps
At first glance, social technologies and investment management make for strange bedfellows: the open-networked, emergent, loosely-joined and conversational qualities of the social revolution do not appear to sit well with the highly-regulated, fiduciary, exclusive and innately conservative aspects which characterise much of the European AM industry.
More fundamentally, since AM firms have historically derived most of their business through intermediaries, the exposure to (and pull from) the end users of their investment products have not been felt by this industry in the same way as other financial services sectors, such as retail banking and insurance.
For those AM firms that have engaged, the early rewards have been worthwhile; but to date these have largely been firms located in the US, where the market pressures to move towards the consumer end of the market has been stronger.
In Europe, the majority of AM firms are still stuck in a ‘wait and see’ pattern, with many reporting some typically early-stage barriers to adoption, ranging from lack of a coherent social strategy and internal coordination, to concerns about potential brand damage, lack of relevant skills and a scepticism on the part of senior managers.
For these reasons, and like many other industries before them, AM firms have not so far needed to take digital and social media too seriously: sitting on the sidelines of adoption, watching what their traditional competitors are doing (if anything), and only taking occasional baby steps, feeling relatively safe in the knowledge that their core business has no compelling reason to engage online with anyone other than their intermediary channels, and with only occasional glossy reports and highly-designed glances aimed towards end-buyers.
Most firms – but by no means all – have made some forays into social media, by adding a ‘presence’ on what they still largely perceive as add-on ‘channels’ for their traditional marketing strategies. However, very few firms have gone beyond republishing corporate or technical investment content on social platforms, or releasing talking head videos in an attempt to establish the value of their expert opinions.
As the UK Investment Management Association said last November, in its response to the Financial Conduct Authority’s proposed supervisory approach to financial promotions in social media:
“For now at least, most of our members are more interested in the potential of social media in the areas of brand awareness and thought leadership rather than financial promotion per se.”
Business as usual?
Are AM firms right to believe ‘social’ is nothing more than a marginal add-on to existing marketing channels, rather than a business-critical skillset needed to compete in a rapidly-expanding, global, digital economy?
After flatlining in the four years since the 2008 crash, assets under management (AUM) have been growing steadily in the past few years and profits have also been rising, which would appear to vindicate those in the industry who believe there is no need to modernise a business model that has proven very profitable, and has remained essentially unchanged throughout the second half of the 20th Century.
However, if we look beneath the surface, things have not quite gone back to business as usual. A significant proportion of recent global AUM growth was not driven by an expansion of net new business, but is largely the effect of the appreciation in equities since the crash inflating the valuation of existing assets. At the same time, while profit margins are rising, these have struggled to recover fully and are still lagging pre-crash levels by several percentage points. Revenues have grown more slowly than assets, while costs have risen faster than revenues.
So what’s going on?
Trends forcing change
In a globally-interconnected and increasingly tech-savvy marketplace, several trends are coming together to place unprecedented pressure on the AM industry. There is some variation in the way these are viewed by various industry analysts, but we have summarised the main points we believe AMs need to address in order to regain and retain both market share and long-term profitability below:
Let’s now look at each of these trends in turn, to understand how they already affect the AM industry.
Increasing regulatory pressures
The regulatory changes introduced since the financial crisis have hit the AM industry hard. UK Retail Distribution Review, European Market Infrastructure Regulation (EMIR), Packaged Retail Investment Products (PRIPs), Markets in Financial Directive (MiFID) II and III… the list goes on. The combined effect of these is forcing the revision of AM business models, normalising a previously unheard-of level of transparency around fee structures, intermediary chains and AUM performance data.
These changes will have to be managed by the industry as openly, transparently and inexpensively as possible, to avoid further pressures on profit margins. At the same time, we believe that traditional PR and marketing departments, and their agencies, will struggle to cope in the coming era of transparency by default.
Shake-up of distribution channels
Increasingly, intermediaries are moving away from a personal face-to-face service being provided to clients, and onto online platforms and virtual interfaces. Simultaneously, end-user demand for tailored investment solutions (as opposed to the vanilla, risk tolerance-based portfolios typically offered by wealth managers, private banks and IFAs) is steadily increasing, further challenging both the quantity and variety of investment products made available by AMs.
In truth, there are too many investment products on the market that are virtually indistinguishable from each other, and too many of these have not performed sufficiently to justify their continued existence, at a time when performance information and investment-level data is easily available to the end customers. This is forcing the rationalisation of products on offer and creating opportunities for end customers to request more tailored solutions for requirements that do not fit established investment patterns.
Most importantly, the long-established fund intermediary sales model means that most AMs do not own any end-client investor relationships and are therefore extremely vulnerable to changes in their channels to market. The risk of disintermediation has, in theory at least, always been there – but technology is making this happen faster and more visibly than ever before. This, in turn, has opened up an important – and arguably existential – debate within the AM industry on whether the time has come for some AMs to bypass intermediaries altogether and go direct to consumers using online platforms, as some are already doing.
Changing investor behaviours
If the recent crash has taught us anything, it is that investment management is essentially an exercise in consumer confidence and trust. Obvious as this might seem, the AM industry is built on the notion that if you have spare cash to invest, you would do much better giving it to a professional money manager, who can hunt for a return on your behalf, than keeping it in a bank account or stuffing it into your mattress.
Market ups and downs aside (you should always invest for the long term, so the adage goes), this notion has largely held true for so long that consumers became accustomed to being charged percentage-based fees, commissions, and retainers all along the AM and intermediary chain, because ultimately these management fees could easily be built into the return and justified by overall return performance. Just as we trust our doctor to know what’s wrong with us when we are sick, so we have trusted money managers to move our cash around to maximise profits and minimise risks.
This central tenet of AM has recently been challenged by sustained financial markets uncertainty and the amplification of market issues by mass media and the internet. Without stretching the previous medical metaphor too far, just as we now research our illness online before visiting our doctor, so in the post-crash age of ubiquitous connectivity, we have all become much more knowledgeable in financial matters and believe we can do just as well as the technically-trained professionals – and sometimes, we do.
Whether this is a risky proposition or not remains to be seen, of course, but what matters is that, given poor recent performance, we are witnessing a widespread loss of confidence in investment products, higher-than-usual levels of risk aversion (capital preservation, rather than the hunt for returns, is now more important than ever) and this is compounded by low levels of customer satisfaction, which are partially based on investors asking harder-than-ever questions from a more technically-informed perspective than was possible before the age of the connected social web.
To put it another way, if active fund managers are unable to deliver alpha, we can easily sign onto a platform, pick a handful of low-risk bluechip stocks, buy a passive index tracker fund or a few ETFs, and get beta ourselves – all at a small fraction of the cost of engaging a professional AM through an intermediary. This consumerisation of investment management has been around for a while, but it was brought into sharp focus by the recent (and arguably still current) upheaval in the financial markets, together with the masses of readily-available, investment-grade information, opinions and recommendations available to us online.
Evolving demographic landscape
The above trends are also made possible, in no small part, by the demographic shift occurring across all industries. Much has been made of this already by countless social media gurus (for better or worse), but the online-savvy Gen Y is now earning enough to become a powerful force in consumer investing (either now or in the very near future); the mainly-online Millennials will follow suit in the not too distant future; and the economically-powerful Baby Boomers’ adoption of digital and social media is on a par to that of Millennials.
These are fairly obvious realisations, but there are other, industry-specific statistics emerging from research published in the last few years that AM firms really should take notice of:
“While most investors continue to rely on a variety of resources for investment information, nearly 70 percent have reallocated investments or began or altered relationships with investment providers based on content found through social media.”
Although these studies are focused on the US market, according to com.Score, as of December 2012 North America accounted for only 13% of the global internet audience, with Europe at 27% and APAC at 42%, so it seems only a matter of time before similar dynamics play out elsewhere.
Digital & FinTech disruption
In some cases, these collective pressures will provide existential threats to some firms within a very short timeframe, but they are also fostering the arrival of new, digital-first or digital-only entrants into the AM industry, whose greater agility, negligible cost base, appeal to the growing socially-literate demographics, and ‘long tail’ specialist product reach makes their business model not just possible, but inevitable – and potentially hugely profitable.
The growing challenge from FinTech startups is already evident with the arrival of Nick Hungerford’s brilliantly-executed Nutmeg (which Schroders recently took a significant interest in); Covestor and eToro, essentially mirrored investment platforms which combine game dynamics with social networking to emulate successful investor portfolios and behaviours; while investors can also easily obtain better-than-beta returns from a variety of online crowd-lending and P2P platforms.
Elsewhere, ethical investment platforms, such as the CleanTech-focussed Abundance are filling a gap in the market for simple, online ethical investment (which seems a clear opportunity, given that it is almost impossible to avoid ‘problematic’ securities within most managed funds), while the type of diversified financial services group pioneered by Anthemis’s Sean Park and Udayan Goyal and dedicated FinTech incubators in several global startup centres are already dreaming up the next wave of disruption to the AM industry.
At the same time, consumer FinServ companies and large retail brands, historically AM clients, could also enter the fray by leveraging their brand equity on direct-to-consumer online platforms, following the well-trodden path of consumer brands moving to consumer professional services. Tesco, Virgin and Direct Line, to name a few, already offer credit, savings and commodity legal services to their customers. They already possess a significant transactional, digital and customer service infrastructure, derived from their historical retail operations, so moving further into the consumer end of investment management is well within these companies’ reach, should they choose to go in that direction.
As I wrote recently, much more serious challenges will also eventually come from the tech giants, as and when (rather than if) they awake and come after the established investment management industry.
What happens next?
There are different versions of events regarding what AMs need to do in order to equip themselves to operate profitably and competently in the new digital reality of the 21st Century and new perspectives on these topics emerge all the time (the latest I’ve seen is Yann Ranchere’s excellent blog post last week).
Some AM firms may not feel that the threat is immediate, but the clock is clearly ticking – or, as the Economist Intelligence Unit suggested recently:
“Over the longer term asset managers need to engage fully with the seismic shifts shaking up the industry… The biggest concern is that asset managers, who have historically controlled a significant part of the value chain, will lose out as platforms, insurance companies and other[s] all aim to get a greater slice of the cake… In this landscape of significant changes, perhaps the first thing to understand is who the competitors are.”
There is still some time for the European AM industry to make these changes (e.g., EY believes that 2020 is the timeframe within which something of a digital end-game could occur) and indeed some AM leaders are already making them. However, the adoption starting point and internal capacity for most European firms is so low, and the culture so resistant to change, as to suggest a potentially existential threat for some who are unwilling to quickly and decisively grasp the digital and social tech nettle.
As ever, market threats also bring opportunities and AMs are, collectively, the undisputed experts at benefiting from market lows, as well as highs. However, in order to move beyond the currently-prevailing uses of social media for ‘channel marketing’, AM firms need to better understand the digital landscape, develop their own online ecosystems, and acquire the in-house skills and capabilities required to undertake a process of gradual, effective digital transformation to help address these emerging, systemic challenges and evolve their business models to take advantage of the emerging opportunities.
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