Disruption Ahoy: the rise and rise of robo-advisers and tech giants

Asset managers must be cognizant of the potential revolution that market disrupters such as robo-advisers and technology giants will have on their businesses going forward.

The role of robo-advisers, which provide automated, algorithm-driven portfolio construction advice without any human interaction, has grown as tech-savvy investors increasingly see them as a cost-efficient alternative to the traditional investment adviser. Many robo-advisers have utilised technologies which appeal more broadly to younger investors.

Large asset managers have taken note. BlackRock recently bought FutureAdvisor, a San Francisco-based robo-adviser, while Schroders acquired an equity stake in Nutmeg, the online wealth adviser. This growing embrace of robo-advisers comes as many asset managers increasingly view this disruptive technology as an opportunity set rather than a threat to their operating model.

“Robo-advisers provide an excellent opportunity for asset managers to reach new generations of investors, particularly those aged between 20 and 30. This client segment wants flexibility and instant services. Having high-quality customer experience and user interface is critical, and it needs to be accessible. This is why asset managers and technology firms are launching or acquiring robo-advisers,” said Alexandre Rochegude, partner at KPMG in Luxembourg.

"Robo-advisers provide an excellent opportunity for asset managers to reach new generations of investors, particularly those aged between 20 and 30"

Technology giants such as Amazon, Google and Facebook could potentially pose a threat to asset managers. 79 per-cent of asset managers told a State Street survey in July 2015 that a non-traditional technology market entrant could disrupt their core business. Google, which already has a sizeable venture capital arm that has invested into market disrupters such as Uber, signalled in 2014 that it was exploring a foray into asset management. Alibaba, the Chinese e-commerce business saw its money market division – Yu E Bao – accrue nearly $90 billion in assets in under two years.

“It is hard to gauge whether technology giants will enter asset management. However, we have seen non-financial institutions such as technology firms providing banking-type services through payments and lending platforms,” said Rochegude.

Nonetheless, it is widely believed that these technology players will be reluctant to incur the significant regulatory costs that providing financial advice brings. However, technology giants – such as Facebook – would be better poised to establish distribution arms. This would give asset managers an entry point to the user-base of these technology firms. “These technology firms have the users and their global distribution reach is huge compared to even the largest banks or asset managers. They are very capable of selling products to their consumers and they possess enormous amounts of data on their users. As such, the potential of their distribution capability is significant,” commented Rochegude.

Fund managers need to embrace digital technology, which at the most basic level would be developing user-friendly mobile applications enabling real-time investor reporting or even having a meaningful social media presence. A survey of CEOs at asset managers by PricewaterhouseCoopers (PwC) – Redefining Competition in a World without Boundaries – found the majority concurred digital technology was strategically important to their businesses. 71% said mobile application technologies for customer engagement was important.

"Fund managers need to [develop] user-friendly mobile applications [to enable] real-time investor reporting"

Some firms are making in-roads. The deluge of regulatory reporting expected of fund managers through the Foreign Account Tax Compliance Act (FATCA), the Alternative Investment Fund Managers Directive (AIFMD) and the incoming Markets in Financial Instruments Directive II (MiFID II) will force firms to collate and collect huge swathes of data about their businesses and investors.

The costs associated with this regulatory reporting – be it building the internal infrastructure or outsourcing to third parties – could be outweighed by the commercial benefits, particularly if firms start harnessing the data on their investors and businesses to identify either inefficiencies or commercial opportunities.

Rochegude highlighted fund managers were sitting on huge volumes of data but had yet to utilise it to its full potential, particularly around investment advice and client relationships. Furthermore, he added fund managers should use publicly available data on social media to better understand their clients’ needs around investing.