Edition: February/April 2018


Happening everywhere

With profound implications for asset managers and clients, as Absa Investments head Armien Tyer explains.

Smartphones, Google, Facebook and online transacting have changed our lives dramatically. Uber and AirBnB have respectively disrupted the passenger transport and hotel accommodation industries. These were opportunities seized by entrepreneurs. First the revolutionary changes happened slowly, then suddenly, and then they were everywhere.

They reflect a process that depends on context and means e.g. technological innovation, resources and business models. They don’t appear by magic. So, how and by what means is the investment industry now being disrupted?

Regulatory reform -- to ensure better outcomes for clients, reduce systemic risk and eliminate perverse incentives -- has been a key contextual factor for other disruption. This regulatory reform has created pressure on investment manager fees and improved transparency of who gets paid what in the value chain.

Tyer . . . revolutionary process
Tyer . . . revolutionary process

It has created pressure on costs in the business models of all participants in the value chain. To make this tangible, consider the impact of the Retail Distribution Review on adviser models and fees in the retail investment industry.

The long-term underperformance of most active managers has driven the adoption of passive strategies, products and solutions. Better risk models, improved benchmarks and higher levels of regulatory and fiduciary oversight and scrutiny have created a powerful confluence of forces, and the incentives for disruption of the existing status quo. Investment management has become a battleground of fintech disruption opportunity given the opportunities to create value and to scale success.

The industry is ripe for disruption in a digital “always on” reality. Why should entrepreneurs not look to arbitrage these forces and reshape this industry as they have others? They are set to blur the lines of where value is added in an already cluttered space.

Here is a brief summary of seven key technological forces today driving change in the investment industry and that will accentuate its complete disruption:

  • Big Data – The ability to store massive amounts of data, from a variety of sources, structured and unstructured, at ultra-low cost and monetize it for business and customer insights;
  • Quantum computing – Super computers that can compute complex data sets, to look for relationships, patterns and insights that wasn’t possible previously. This has profound implications for computing speed and analysis;
  • Machine learning has been around for decades.

However, with Big Data the ability to create algorithms to understand patterns – then to predict outcomes and learn from them – has grown exponentially. This is not fiction. It is already with us. There are several local firms that have entered this arena with Robo advisors. The extension of machine learning into Artificial Intelligence (AI) is also with us and is unfolding;

  • Blockchain has recently started and is already evolving for secure, encrypted, open distributed ledger recording of ownership and transactions. In asset management, as in other industries, smart contracts, enhanced cybersecurity and payments usages (amongst others) will become commonplace;
  • Robotics and Drone technology. Whilst being funded and extended initially for military use, these technologies are also becoming widespread. In investment management it is becoming a factor in servicing of clients, “chat bots” and also determining the winners and losers in industry value chains;
  • Social media platforms do not need much elaboration. We all interact with them. They have the ability to impact politics, fashion and build or destroy brands. This is both an opportunity and threat for investment management firms.
  • The digitalisation of everything. This is happening now, and it’s 24/7.

The impact of technological disruption is accelerating. It will transform the investment industry. No part of the value chain – advice, solutions, distribution, manufacturing, service – will be left untouched. Investment firms will increasingly need to factor this into their strategies. To paraphrase the Citibank chief executive: “We will need to think like technology companies with investment management licences.”

For investors and clients, the full set of implications is mixed and unclear. While costs, service, engagement, accessibility and communication will change dramatically for the better, what the investment outcomes will be – and whether they will better in a risk-adjusted sense – remains an open question.

Technology will replace a lot of what we do, but not the human mind. At least not yet.