The Uber Moment of Asset Management Just Ahead

The world has seen unprecedented disruption from technology in many sectors, as major trends such as Cloud Computing, Big Data and Internet of Things converge to what some say is the fourth industrial revolution. Now this trend is reaching asset management.
 
Our predictions
 
Our predictions for asset management in this new world are:
 

1. Large mergers in the highly fragmented fund industry driven by a trend to lower fees and therefore a reach for scale.
2. Smaller industry players who really aim to understand their customers and implement 'ease of use' for the clients have the potential to jump ahead in this game.

 
The Finance sector, in particular the asset management industry, has broadly been slow to adapt this change. One reason for this is that the sector is quite conservative but it is also in our view due to financial regulation actually protecting the incumbents.
 
Technology had already an impact
 
However, we have seen technology making inroads into asset management. Let us list three examples:
 

• Exchange Traded Funds (or ETFs) would have been not possible without fast computer technology to easily replicate indices of all types.
• High Frequency Trading obviously uses improvements in communication speeds thought impossible a decade ago, opening an area for new sources of returns.
• The Internet has triggered transparency in the sector, on fees, on performance, on manager changes et al. We are now able to 'prove' that stock picking is not adding value.

 
Zero fee funds coming?
 
In our view, the industry is just about to see the full impact of technological change. Despite rising markets over the last couple of years, fees already came under pressure. This likely has been only the early inning as they say in baseball, and we may see even zero fee funds being offered. Commoditized offerings simply cannot be differentiated by definition and the price approaches the cost.
 
According to Morningstar 70 % of all net flows in equities went into passive products in 2015, hence this trend is affecting the whole industry. Passive funds have typically lower fees than actively managed funds and reached already a 40 % market share in the US fund market for equities.
 
Industrialization next stop
 
Where is threat, there is also opportunity for agile players. The industry is mostly still not using the latest technology, has not cut all the processes into modules and automatized them as the manufacturing sector did many, many years ago.
 
Here, new technologies such as Blockchain could be helpful. While the concept may be close to its peak in terms of the Gartner hype cycle, we see a lot of areas where the technology can be applied. Isn't it an anachronism that we can deliver milk in one hour but shares settle three days later? 
 
Will the Alphabets and Amazons take over?
 
We do not think so as those companies have other, easier targets first. Finance is highly regulated and complex, and you need domain expertise to be successful. However, the asset management industry could profit from implementing the customer centric obsession tech companies demonstrate. Where is the Amazon type recommendation engine for financial products?
 
Uberization
 
Some think that Uberization stands for tech companies replacing banks and asset managers. Yes, firms such as Alibaba have demonstrated their ability to raise $ 100 bn quickly via using their platform. Uber stands though for the 'gig' economy, for a highly efficient, mostly outsourced operation that uses the latest technology and increases the efficiency of underutilized assets. Netflix or Apple demonstrated what ease of use means, Tesla shows that your product feels fresher if you car comes with a regular software update. Hence, the Uber Moment of Asset Management will create an avalanche of new, easy to handle tools and new players who are betting on this technology are likely to gain share.
 
They did not believe it in the taxi and hotel industry before it was too late. Be warned it may happen also in asset management!  
 
There are many more themes we could address here but leave them for a later blog post (please visit www.hcp.ch). For those in Switzerland, please feel free to attend my presentation at the CFA events in Zurich and Geneva this week.
 
Bolko Hohaus, CFA; HCP Hohaus Advisory
 
HCP Hohaus Advisory is a company based in Switzerland focussing on state of the art, innovative asset management solutions.