AM industry future: No tech, no gain
Last Monday, stocks, ETFs and options started to trade with no brokerage fees on Charles Schwab’s online brokerage platform. This US financial group’s move symbolised the digital turn, innovative and disruptive, currently taken by the whole financial ecosystem and the challenges raising from it.
Speaking at L’Agefi’s AM Tech Day in Paris, Xavier de Pauw, group head of strategic innovation and marketing at Degroof Petercam, said wealth and asset management-related tech companies used to be considered as challengers or disrupters ten years ago whereas now partnerships have become the norm. “This is a win-win situation as asset/wealth managers on the one hand need to establish services platforms and wealth techs on the other hand have understood how hard it is to acquire clients,” said De Pauw. He flagged that the fintech buzz brought investor attention on transparency, costs and made passive strategies more visible over the last decade.
For Emmanuel Colson, managing director, southern Europe at Simcorp, these are still very early days of fintechs within the asset management industry. He argued that asset managers succeeded in turning fintech and regtech disruption fears in a positive trend as they did adopt tools created by these companies.
“This momentum will increase and the adoption of these tools will be exponential. Now the focus for an asset manager is about the sharing cost approach. How do ‘deverticalise’ your business value chain? It means competition will be much stronger in core asset management business and that new business value chances will emerge,” Colson said.
Fintechs suddenly have a role to play in helping asset managers' change.
Rob Boardman, Virtu ITG Europe
Guillaume Lesage, chief operating officer and head of operations, services and technology at Amundi, recalled that at the beginning of the 2000's, the asset management industry required a lot of external softwares already. “The question for asset managers with a lot of softwares is how to reduce the heterogeneity and complexity of them. In the asset management industry, fintechs are fairly new compared to the payments universe. They can bring value and generate alpha.”
Rob Boardman, chief executive officer of Virtu ITG Europe, stressed that in the aftermath of the financial crisis, asset management firms saw their customer base attacked by very low cost operators among which those which ETF providers. This resulted in tremendous fee pressure, the necessity for economies of scale and more efficiency on the operational side. “They would like to do that faster with tech but they perhaps don’t have the expertise in house. Fintechs suddenly have a role to play in helping asset managers' change. Asset managers know they need to adapt and they want. But they ask themselves how to get it all done. A few very large players have decided to build their own ecosystem but generally the industry is moving away from that,” Boardman pinpointed.
M&A upcoming in the fintech world
Virtu ITG’s Europe chief said that the way fintechs mature will be a key driver in the asset management industry over the coming years. He reckoned that the trend for fintechs as they mature, in particular in Europe, are in the mood for future consolidation. “The merger of fintechs with larger players allows them to grow faster and get access to capital or distribution channels. There is a lifecycle for fintechs, these companies need to get scale too,” Boardman explained.
Simcorp’s Southern Europe managing director Colson argued that asset managers need to evolve towards an open platform model and to best leverage their ecosystem. “With this model, you need to be at the centre of the ecosystem to be able to connect to your clients everywhere anytime on everything,” Colson underlined.
As for the future of asset management companies, Amundi’s chief operating officer expects pressure on the firm’s margins and fees to increase, especially because of the MiFID II directive. “The cost will also be under pressure because of innovation. In terms of model and client demand, institutional investors will look either for players that can provide all types of asset management or very specialised boutiques. On the retail side, the focus will be more on the product, the way to distribute it. Retail clients will ask for solutions and advisors,” Lesage said.
If FAANGs enter the fund distribution space, the market will evolve.
Emmanuel Colson, Simcorp
Degroof Petercam’s head of strategic innovation said asset managers’ investments are becoming “ubiquitous” in the asset and wealth tech space, and particularly in the B2C space. Though he highlighted robo-advisors currently struggle to gain traction as demand needs to improve for them. “Because of the evolution of distribution channels, as a client, you might not care much about you are invested into as long as you find a solution to save for a specific goal,” he also stressed.
In the eyes of Virtu ITG’s Boardman, losers will be found among mid-sized asset managers that will still need to operate reporting and monitoring systems and at the same time to comply with new MiFID requirements and services. Therefore, their cost would be ten times higher. “Do clients want to pay the price to invest in mid-sized asset managers? The answer seems to be that they do not. Perhaps the decision will be different for nimble hedge funds.” Also Boardman raised the point that regulators are looking at the gains in market share of some fintechs. “They wonder about systemic risk, any abuse, as vital parts of the financial infrastructure are being run by unregulated firms. So I expect more regulatory focus in coming years,” he said.
FAANGs not interested by the AM business
As the asset management industry focuses ever more on data in recent years, would that open the door to FAANGs (Google, Amazon, Facebook, etc)? Simcorp’s Colson does not believe they would replicate the asset management model as it is too complex. “Still FAANGs’ business model is based on client experience. If asset managers achieve to be data and client-centric through an open management platform, there is no reason why they would be disrupted,” he said.
However, Colson drew what could appear as a nightmare scenario on the distribution side for asset managers. “If FAANGs enter the fund distribution space, the market will evolve. We could face a situation where FAANGs would dictate what investment funds manufacturers should be designing and at what price. Then we would be disrupted,” he suggested. De Pauw acknowledged that FAANGs could be additional distribution networks but rebuffed the idea they would disrupt the whole AM ecosystem.
Amundi’s Lesage assessed that the asset management business is sheltered from FAANGs’ entry because of its low profitability. “Asset management profitability is much lower than that of FAANGs today and it will continue to be. Our growth is one digit when there is two digit and I am not talking about 10% growth there. Also clients, both retail and institutional, look for stability, solidity and trust. You do not give your money to somebody you do not know. The only risk I see for us is to become a commodity. That is why we need to invest in our model and stay close to the clients,” Lesage outlined.
Boardman’s words echoed these of Lesage as he too does not think FAANGs fine the AM business attractive, returns on capital being low and the sector overregulated. “Fintechs will need to encroach to the financial sector whether that is buy-side, sell-side or custody. They will provide solutions and take away part of the economic value chain. I see in Facebook’s Libra a vehicle for them to attract the payments world. We should not underestimate FAANGs at all but there are pretty low chances that they would become wholesale financial companies,” Boardman concluded.