Today New City Initiative is comprised of 43 leading independent asset management firms from the UK and the Continent, managing approximately £500 billion and employing several thousand people.
Published by Charles Gubert
Innovation is something asset managers should absolutely embrace. Simply disregarding change is a sure-fire catalyst for disintermediation, either from more forward-looking peers or new market entrants. At a time when active managers are losing assets and clients to cheap passive providers, it would be foolish for firms to ignore some of the technological advancements that are happening right now in financial services. Simultaneously, asset managers need full assurances that these technologies actually deliver value and are safe. As many of these technologies have been sensationalised, NCI takes an unbiased look at the progress made so far by disruptors, assessing how they may or may not benefit members.
Blockchain: Unfinished business
Blockchain is a product synonymous with unadulterated hype. Not only have most proof of concepts (POCs) at service providers led to nothing, but the Blockchain start-up market has undergone massive consolidation. Blockchain over-promised and under-delivered, although it is unfair to label the technology a failure. At only 10 years-old, Blockchain is still in its infancy and some trials – especially in post-trade equity markets, mutual fund distribution and trading of digital securities– have shown promise. In time, more tangible use cases will become visible, contingent on market-wide standardisation and interoperability being achieved. While Blockchain has lost its momentum lately, the technology should not be written off, as it may well play a meaningful role in asset management in the next few years.
Big data and AI
As returns receded, some institutional asset managers believed they could acquire a competitive and information advantage by using AI technology to disentangle big data, thereby energising performance. The reality has been somewhat different. Firstly, a lot of data – it turns out - is fake (often generated by malicious chat-bots or through spurious social media channels), meaning firms need to be extra diligent about inputting information into algorithms, particularly if those AI tools are being used to identify key trends and potential investments. As fiduciaries to client money, making an investment decision off the back of badly constructed or misinterpreted data could be fatal for any asset manager.
The next big obstacle is that asset managers need to validate where the information came from insofar it has not been obtained from illicit sources (i.e. stolen records) or in breach of the EU’s GDPR (General Data Protection Regulation). Such data due diligence is not a small endeavour, and many firms – especially boutiques - may struggle to carry it out effectively. In the context of growing consumer opposition towards organisations profiteering from data, some asset managers may feel it is not worth the risk. For now, the asset managers using big data analytics – are doing so to complement their research, not replace it. In time, this may change as firms become more sophisticated in how they acquire and analyse data.
Like Blockchain, robo-advisors promised an awful lot but delivered an awful little. With retail customers deprived of advice as a result of MiFID II (Markets in Financial Instruments Directive II), experts were confident that cheap robo-advisory services would democratise the investment process. This has clearly not happened yet. The profitability of robo-advisors is linked to scale, and most providers have been unable to build large enough customer bases. Equally, research is beginning to show that robo-advisory platforms have not delivered adequate performance. For instance, a recent study showed that robo-advisory users with low-risk portfolios achieved a return of 0.8% in the 12 months leading to June 2018, versus the 1.17% they would have accumulated had they invested in a cash ISA. At present, robo-advisors are not a threat to the wealth and asset management business.
What the future holds…
Even though some of the so-called disruptors have not uberised or dramatically reshaped the asset management industry yet, that is not to say they won’t. Technologies like Blockchain, big data and robo-advisory platforms will evolve and it is something NCI members should pay attention to. At present, the most significant challenge to asset managers lies with existing large technology companies. Asset managers only need to look at China – where the Alibaba-owned Yu-e Bao fund – has become one of the world’s biggest money managers, having only launched in 2013. Agility and open-mindedness will be critical if boutiques are to flourish as disruptors mature and become increasingly ubiquitous.
 Financial Times (August 24, 2018) Robo advisers fail to beat market benchmark