By Ross Ellis
By the time you read this commentary, it will need updating. Technology is transforming how we live, work and do business, and the pace of change keeps accelerating. It took more than 25 years for the cordless phone to get from 10% to 40% of US market penetration; smartphones reached that point in three years.
More than ever, companies must keep innovating if they want to operate more efficiently, pursue new opportunities and stay competitive. The annals of corporate history are littered with once-leading firms that failed to stay ahead of market and competitive trends. According to PwC’s latest global CEO survey, 61% of CEO’s worldwide expect new competitors to disrupt their industries in the next five years.
How does this relate to asset managers?
Over the past 50 years, the investment industry has produced many notable advances. But many inventions have been evolutionary rather than revolutionary, repackaging products or improving processes. Only rarely have investment firms applied technology to reinvent business models or value chains. Not a single investment firm appears on the Forbes 2015 list of the World’s 100 Most Innovative Companies.
The investment management industry has often been slow to embrace change, if not downright resistant. It is one more example of what Clayton Christensen dubbed ”the innovator’s dilemma” — the problem faced by established companies for whom pursuing new technologies and markets offers too little near-term return on investment to be worthwhile.
What’s more, asset management has been an enviably good business for decades, and the industry as a whole remains “in a robust state of health,” according to McKinsey’s 2015 industry survey. But investment organisations can’t afford to be complacent, and face rapidly growing pressures to innovate, whether they recognise it or not.
While the connections to investment management are not always apparent, we see five sweeping trends that asset managers must be thinking about and ready to act upon if they want to stay competitive.
“Googlisation”
MIT studies show that data-driven companies, like Google, perform better both operationally and financially, but unlocking the potential of big data isn’t easy. It requires corporate leadership, the right skill sets and considerable technology investment.
Top-performing asset managers are those who can bring data sophistication to multiple aspects of competitiveness. not just portfolio management. Operating data is at the core of big data capabilities, and having the right kind of operating platform is crucial.
“Amazonisation”
Online platforms are rapidly springing up around finance-related activities, and e-commerce giants, such as Amazon and Alibaba, are moving into lending and investment. This expansion of the industry landscape presents asset managers with threats, but also opportunities, including the ability to market new products/strategies and introduce disruptive solutions of their own, to meet elevated consumer expectations, and to address intensifying fee pressures.
“Uberisation”
The vertically integrated investment organisation still prevails, but escalating competition, costs, fee pressures and regulation are now pushing asset managers to rethink their value chains. The likes of Uber and Airbnb suggest a new kind of model, that of the technology-enabled network orchestrator. This allows companies to gain scale with low marginal costs, and also lets them boost the convenience, delivery speed and personalisation of their services. Research suggests that they can achieve better performance and higher valuations as a result.
“Twitterisation”
Social platforms and interactive digital media have grown explosively. While asset managers have been slow to venture into this new frontier, due in part to regulatory issues, the industry is beginning to catch up with the trend. Now big corporations can engage meaningfully with their customers, employees, peers and the world at large. While social media may entail risk, the long-term risks of not engaging with investors, employees and other communities online may be even greater.
“Watsonisation”
Named after the founder of IBM, a room-sized computer called Watson was one of the first to demonstrate how Artificial Intelligence (AI) can match, or surpass, human cognitive capabilities. AI has now advanced to cognitive computing systems that can learn as they interpret massive quantities of data. Predictive analytics is a hot area for developers. So are systems that can automate customer interactions, write news articles, conduct research, detect security risks, solve complex problems, and more.
Technology’s unfolding impacts on the asset management business are large-scale and pervasive.
Each investment firm must assess how emerging disruptions might affect its business, and where its most compelling challenges and opportunities may lie. The investment industry has a long and impressive record of success. But this is no time to be complacent. To stay competitive and take advantage of new opportunities, investment firms will need to think bigger and look beyond incremental improvements. That will take fresh thinking, a conscious shift in mindset and effective leadership at both the corporate and industry level.
Ross Ellis is vice president and managing director of SEI Investment Manager Services
