Disruption can be driven by a variety of forces either on its own or in tandem. These forces can be political, regulatory, social, competitive, technological, business model and innovations in a variety of forms. This article looks at technological advances that are disrupting the investment management industry. Disruptive change may seem to appear from nowhere but it is a process that has its root causes or drivers, even though they may be complex and unpredictable.
A notorious and once enormously powerful warlord, regarded as the richest man in the world during the height of his illicit trade, was asked: “how did you became penniless and on the run?”, and he responded: “first it happened slowly and then very suddenly!” This anecdote accentuates the underlying theme of how change manifests in our daily lives. Often, the seeds of change, disruption, destruction and reversal of success have already been sown long before it becomes obvious or mainstream.
Consider ubiquitous smartphones, online transacting, and google as the dominant information source, Facebook as the dominant social media network, the rise of Uber and Air BnB as a few examples that have changed our lives dramatically, but have on closer examination just “suddenly” appeared. They were opportunities seized by entrepreneurs. Disruptive, revolutionary, exponential change when viewed as a process, is dependent on context and means (technological innovation, resources, business model). It is thus “slow, then sudden, and then everywhere”. Simply put, disruptive change doesn’t just magically appear!
So, how and by what means is the investment industry now being disrupted?
Regulatory reform to ensure better outcomes for clients, reduce systemic risk, eliminate perverse incentives have 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. This has created pressure on costs in the business models of ALL participants in the value chain. To make this tangible consider the impact of RDR 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 one of the battle grounds of fintech disruption opportunity given the value creation opportunities and to scale success.
The industry is ripe for disruption in a digital, “always on” reality, and 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.
What follows below is a very brief summary of seven key technological forces driving change today, and that will accentuate the complete disruption of the industry.
- 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 very complex data sets, to look for relationships, patterns and insights which wasn’t possible before. This has profound implications for computing speed and what can be analysed.
- Machine learning has been around for decades. However, with Big Data, the ability to create algorithms to understand patterns and then predict outcomes and learn from them has grown exponentially. This is not fiction and is with us already. There are several local firms who have entered this arena with Robo advisors. The extension of machine learning into Artificial Intelligence (AI) is also with us and unfolding.
- Blockchain, or the secure, encrypted, open distributed ledger recording of ownership and transactions has recently started and is already evolving. In asset management, as in other industries, smart contracts, enhanced cybersecurity and payments usages amongst others, will become common place.
- 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 and their ability to impact politics, fashion, and build or destroy brands. This is both and opportunity and threat for investment management firms.
- The digitalisation of everything. This is now, it's happening, and its 24/7.
In conclusion technological disruption is here, the extent and depth of its impact accelerating and it will transform the industry. No part of the value chain will be left untouched- advice, solutions, distribution, manufacturing, service, will all be impacted. Investment firms will increasingly need to factor this into their strategies. To paraphrase the CEO of Citibank, “we will need to think like technology companies, with investment management licenses”.
For investors and clients, the impact 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.