According to a study from Wells Fargo, the global financial industry is spending $150bn a year on automation & technology. On the asset management side, the Digital Readiness Survey, a research conducted by Alpha FMC – which covered 31 global companies with a combined €20tr in assets – found that year-on-year average spending on technology and digital initiatives had doubled, from €10m in 2018 to €18.9m in 2019.
A total of 8% of full-time resources are now focused on digital transformation, and around one fifth of respondents stated that they spend in excess of €50m on such tasks.
Digital is now seen as a priority in the sector, according to the research, with 38% of respondents classifying themselves as "fast followers" of innovation, up from 9% twelve months ago.
Similar findings are reported in a study from element22 and UBS AM [1], covering 59 asset managers in Europe and the US representing more than $15.6tr of AuM: firms spent $400m on alternative data in 2017 and plan to spend more than $1.7bn by 2020. And there is a significant growth expected in the operational use of them (+70%) and advanced analytics (+180%) over the next three years.
The reason pointed by the report is that 77%of asset managers have significantly overestimated their analytics and data capabilities. And the report concludes that firms need to drastically increase the amount they plan to spend – “by anywhere between five and 20 times” – in order to meet their expected growth targets.
This spending essentially aims at leading to lower costs and drive efficiency. But is this really the case?
'Digitally mature' asset managers have better efficiency than slow adopters
According to the Alpha FMC research [2], asset management firms with sophisticated digital infrastructure [3] demonstrated four-time stronger net AuM performance than those slower to invest in their technological capabilities over a two-year period. Thus, asset managers with higher levels of maturity had net flows of +2% of their total assets. Those at the lower end of digital maturity had a figure of -6%.
To explain the result, digitally mature contributors say that the ability to win, retain & grow client AuM was heavily influenced by their digital capabilities.
The observation is similar for BCG,for which effective Data an Analytics management can have atransformative impact on distribution, operations and investments, leading to a 5% to 10% uplift in revenuesand gains of 10% to 30% in efficiency.
According to this report, digital transformation of business models is becoming a prerequisite to remaining competitive in the asset management industry, which is – and will be – affected by market volatility, competition and economic uncertainty.
For the moment, as few as 20% to 30% of asset managers globally are investing in data and analytics “with conviction” across a broad range of areas. The majority of firms are holding back on significant investment, waiting for technology to mature, for use cases or specific areas of implementation to become clearer and for return on investment to be established… hoping not to have fallen too far behind the most advanced companies.
Distribution and investment management have the best potential
As exposed in a former article, Artificial Intelligence has started to give results in portfolio management and investment decision making. A study conducted by Liquidnet [5] – a global institutional investment network –, the use of data and technology is increasingly helping to demonstrate performance for 50% of respondents. 21% of them note that innovations such as Natural Language Processing or robotics already have an impact on investment processes.
The Alpha FMc’s report found that asset managers are increasingly prioritizing digital developments to improve the client experience. 73% said shifting customer and client expectations of digital sophistication are the biggest driver of spending. This is achieved by affecting resources towards client experience design, data and automation of operational activities.
This expenditure trend is confirmed by BCG, which has identified a “particularly strong potential” in areas where firms are lacking in technological capabilities, such as distribution and investment management. Data can thus be used to get a better understanding of customer and adviser ‘DNA’ and to provide more tailor-made content, informed by clients’ actions, decisions and behaviors, and ensure that they are engaged via the right channel at the right time.
Opportunities also appear in automating operations and replacing legacy systems with modern cloud-enabled platforms, which could cut costs by 15% to 30%, according to BCG.
Technology fueling growth in China's fund industry
According to a recent research, the development of new technologies is providing an impetus for the growth of China’s fund industry and could help push assets to Rmb737bn ($107bn) by 2022. These tech-designed asset management products and services include artificial intelligence-based advisory services, connecting investors and products based on their risk profiles and tailoring custom education.
Thus, China’s 'intelligent asset management’ industry recorded a compound annual growth rate of 191% in the past three years. The market ballooned from Rmb30.07bn in 2016 to Rmb254.7bn last year, and is anticipated to continue expanding faster, reaching a more than 30% CAGR over the next four years.
The lack of professional investment advisors and the government’s own push to further meld technologies and finance are some of the reasons for the growth of China’s asset management industry. China’s wealthier and more tech-savvy investors are also demanding more wealth management services tailored to meet their specific needs. And the and the effect on growth is all the stronger as Chinese citizens saw their disposable income rise from Rmb18,311 in 2013 to Rmb28,228 in 2018.
Challenges: digitalization is not (only) a question of money
The amount of money spent is not necessarily an indicator of being the most successful. “It’s how you spend it that will add value”, says BCG.
In this respect, according to Liquidnet study, the hiring of data scientists is a priority for 63% of managers. The use of technology companies is also a strong development axis: 51% believe that external technology and data providers are the most important source of disruption for industry.
But money can’t buy success. “Firms now recognize that digital transformation is not simply about buying technology and talking about client centricity", mentions Alpha FMC, which also reports than half of respondents said culture and organization were more important in driving digital change than having the right tools at hand. Thus, the lack of senior leadership on digital transformation plans has become the greatest impediment to further progress, legacy technology being relegated to 4th place.
The report concludes that firms at the higher end of the scale of digitalization tend to have strong digital leadership, a clear mandate (and resources) from their ExCo, mature adoption of agile ways of working and 2+ years of good delivery via their digital & data platforms. They also have capacity for innovation and have advanced their ability to engage and work with FinTechs.
Author: Pascal Buisson - December 2019
[1] Analytics Power 2019 - Link - [2] The State of Digital Readiness of the Asset Management Industry 2019 - Link - [3] Alpha FMC’s digital maturity framework covers 9 areas ; Leadership, Digital Strategy & planning, Evidence of client centricity, Omni channel capability, People/Skills/Culture, Agile ways of working, Digital platforms, Data & analytics, Innovation/FinTech set up - [4] Global Asset Management 2019 – Link - [5] Study conducted from April to June with 42 managers responsible for some $11,400bn of AuM - [6] Source : Shanghai Lujiazui International Financial Asset Exchange and iResearch (China.org)
