Opportunity in chaos: Asset managers turn to FinTech as marketplace evolves
12 January 2017
Category: News, Asia, Global, Hong Kong, Singapore, Taiwan, USA
By Sébastien Chaker*
A long process of disruption and adjustment as developments ranging from the technological (e.g. the Chinese invention of gun powder) and the social (e.g. the Protestant reformation in Europe) to the economic (i.e. the rise of the Asian tiger economies in the 1980s and 90s) have forced a fundamental reimagining of ways of thinking, acting and doing business throughout global history.
It’s not hard to imagine that we are at another such point in history as powerful megatrends are again forcing governments, companies and individuals to rethink accepted patterns of living, working, investing and spending.
The asset management industry has not been immune. Indeed, many asset managers across Asia are now scrambling to redefine their core business models in the face of:
Demographic changes that are seeing aged populations swell, boosting demand for stable and reliable recurring income that is increasingly hard to come by.
Historically low interest rates, which have left previously high margins razor thin even as investors are becoming more adventurous in their search for stable and steady returns.
A massive shift from servicing wealthy baby boomers to a new generation of digitally savvy and environmentally and socially conscious millennials who do not shop for investments in the same way as the generations that preceded them.
At the same time, the industry is facing unprecedented challenges, as the disruptive force of the internet and related technologies seems to amplify with every passing year. Perhaps nowhere are these challenges more apparent than in asset managers’ attempts to adapt to the still-emerging “financial technology” – or FinTech – revolution shaking the industry’s foundations.
On the one hand, the FinTech revolution is sending a shock through the industry. Many asset managers fear for their very existence as the emerging generation of young investors flock to robo-advisors for automated investment advice and build portfolios comprising low-fee, passive investment vehicles such as ETFs.
Meeting the investment needs of these young investors – and doing so profitably – is no small challenge for asset managers that have historically enjoyed fat margins.
But some asset managers are rising to the challenge, realising that amid the chaos of change there is an opportunity to tap into new drivers for assets under management and revenue. These managers are innovating in the FinTech space, looking for new ways to drive profitability via products and services that are cheap, transparent and flexible enough to appeal to young investors with limited financial wealth and little patience for high fees.
Navigating a new landscape
A key challenge for traditional asset managers trying to adapt to the new market landscape is learning how highly connected and perennially networked millennial investors think. This includes how they find information about investment products, what drives their decision-making and how they implement their investment plans.
The asset management industry has traditionally been a multi-layered structure whereby asset managers manufacture and manage investment products – generally in the form of unit trusts – and banks and insurance companies market the products to investors. In the FinTech age, young consumers seem more interested in going directly to the source, getting advice and purchasing investment products straight from the manager.
Most asset managers are not set up to do this in an efficient and profitable manner. Some of the bravest are meeting this challenge by clasping hands with their would-be challengers.
By forming alliances with FinTech providers, they are acquiring the tools and knowledge necessary to glean new insights from their vast troves of customer data, enabling them to design investment products and craft customer experiences in ways that are appealing to millennials and potentially profitable for financial service providers.
Goliaths at the gate
But not every FinTech start-up will be “brought into the fold”, so to speak, through strategic alliances. Some new and emerging FinTech companies have the ambition – and the scale and financial resources – to potentially be strong rivals.
One of the key factors at play here is regulation. In a less tightly regulated market such as China, existing financial services giants such as ICBC are being forced to reckon with FinTech competitors such as Ant Financial, which has the full force of Alibaba behind it, one of the most powerful e-commerce companies in the world. In Taiwan, asset managers are benefiting from FinTech innovation thanks to local regulators. The FSC continues to approve fund houses’ investment in FinTech start-ups, allowing them to develop their e-commerce businesses. A recent example was the launch of an online distribution platform by Fund Rich Securities in October last year.
There is currently no equivalent to Ant Financial in more tightly regulated Asia markets such as Hong Kong or Singapore, or even in the US, where early challengers such as Paypal were largely defanged by regulations. However, the question remains when a truly global giant such as Amazon or Google will decide the time is right to flex its tech muscles in the financial space.
Fortune favours the bold
The only way traditional asset managers can navigate these and other challenges in the rapidly changing financial services industry is to move quickly to reduce their costs, streamline their distribution and sharpen their knowledge of a broader and more diverse universe of clients, including digitally savvy millennials.
Calastone has approached these challenges by helping asset managers increase process automation, helping industry players deploy powerful data analytics tools to better monitor and understand their cost structures, distribution network dynamics and clients and adapt quickly to meet emerging regulatory requirements.
Asset managers who resist these trends are likely to see themselves displaced by peers who move more quickly to meet the needs of the emerging demographic or by the entry of new and powerful rivals as regulations shift to accommodate new ways of doing business.
*Sébastien Chaker is managing director – head of Asia at financial technology firm Calastone