For decades, fund distribution followed a model where operators in a cascading chain each played a role in taking fees in exchange for adding “value” to the distribution. In 2016 that model appears to be one of the more obvious leftovers from the industrial age of financial services, where focus on product creation (versus client need and outcomes), information scarcity and high transaction costs were all part of the fabric of fund distribution. A perfect storm of regulatory change and evolution of new technologies and business models are presenting a once-in-a-lifetime opportunity to reinvent a category. The question is, who will reinvent it?
Across all of financial services, from Banking and Insurance to Asset Management and Capital Markets, we’re feeling the evolutionary pains of moving out of the Industrial Economy and into the new Information or Digital Economy. Progressive regulatory change, the continuing emergence and ubiquity of technologies like Artificial Intelligence (AI), Cloud Computing, the Internet of Things (IOT) and Blockchain, changing demographics and persistently low consumer confidence in traditional financial services providers are all propelling us in to a multi-decade period of change in financial services.
So how should fund market participants respond? By entirely rethinking fund creation and distribution through the lens of a digitally native state. This doesn’t mean simply creating a mobile app or investing in a Valley startup. The opportunities and threats are too large and important for incremental innovation. Fund managers, financial advisors and others should be thinking, ‘how would I build this company if I were building it in 2016’? How would I use powerful new analytics and big data to lower research costs or enhance alpha? How could I improve operational efficiencies in trading, settlement or custody via blockchain technology? How does my front-end and client experience, whether for advisors or clients, compare to the best and most commonly used consumer digital tools?
If the growth of robo-advising has taught us anything, it’s that using technology (in this case, automated, algorithmic asset allocation) and providing a transparent and easy-to-use service are the kind of digital ingredients that will win in the future. It is easy to dismiss robo-advising as a fad, but it is a very loud and clear signal that creative application of technology, transparency and low cost are what will separate the winners from the losers in the fund management and distribution business as in the Information Age.
The good news is that fund managers, financial advisors and other incumbents have the brand equity, regulatory expertise, distribution and scale that create a significant advantage over new entrants. But whether fintechs or legacy firms or even regulators drive the evolution, the development, distribution and consumption of funds and other financial services will look very different in 10 or 20 years. The question is, who will apply creativity and technology and drive evolution, and who will end up going extinct? Only time will tell.
Tom Ryan will be taking part in the panel discussion How Should Executives In The Asset And Wealth Management Industry Organize To Successfully Respond To Disruption In The Distribution Value Chain? taking place at FundForum NextGen Distribution in Boston, 25-27 October.