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Tech Magazine 2017

Asset Managers in the Fintech World: Doomed like Dinosaurs?

Around 65 million years ago the extinction of the dinosaurs started. 200 years later the dinosaurs were gone.

It is still uncertain what precisely triggered the shorttaken die-off of the dinosaurs. What is undisputed, however, is that the rather sudden change of environmental conditions caused the extinction of this species. The dinosaurs simply did not have enough time to adjust to the new environment by evolution. Several trends that fuel the development of Fintech have the potential to alter the business environment for asset managers as sudden and as dramatically as it happened to the dinosaurs. Those trends are client unhappiness, demographic and societal shifts, and technology

Client Unhappiness

In 2008 clients across the globe suffered from a blow to their financial assets. Many clients started asking themselves why they are paying professionals hefty fees for managing their assets and yet were still caught on the wrong foot. But the ramifications of the global financial crisis went far beyond a monetary drawdown. People started asking more fundamental questions about the role of financial intermediaries in general. This led to business models supporting the democratization of investment such as crowdfinancing and crowdinvesting. Moreover, the repercussions of the crisis were longer lasting than expected. Today’s zero interest environment still causes asset managers and clients alike to pull a long face.

Demographic Shift and Societal Shifts

It is no secret that many societies in western countries are ageing at an unprecedented speed. Ever fever working individuals are tasked with supporting an everlarger crowd of retirees. But the ratio of working to non-working population is just one aspect. The other factor amplifying the problems caused by increasing longevity are snowballing healthcare costs that need to be shouldered somehow. Yet, whilst we see aging societies in the western world, we see growing middle classes in eastern societies, such as China. A larger affluent segment is now the basis for a bigger demand for asset management services.

Technology

Today’s standard smartphone has a memory that is about one million times larger than the computer that put the Apollo mission on the moon. At the same time, it is approximately 800 times faster but costs only a tiny fraction of the Appollo Guidance Computer. This impressive technological progress renders possible not on only entirely new distribution channels on the front end, but also novel business processes on the backend. Artificial intelligence will increasingly influence portfolio management, virtual agents with speech recognition capabilities will gradually take over customer support and advanced analytics will become the standard to crunch big data whilst using the resources of the cloud. APIs will ensure a seamless integration of IT even across company borders.

Interplay of Trends

Some of these trends will also reinforce each other. For instance, unhappy clients are not expected to become much happier any time soon in view of a zero-interest environment that makes it virtually impossible for them to generate interests for their retirement. Furthermore, the dramatic demographic shift will also cause a large share of assets to be passed on to a younger generation soon. The younger generation is not only more tech-savvy than the older ones, but they will also demand an entirely new type of user experience, most likely device-based and self-directed. The generation that grew up with Google, Facebook, and iPhone is less likely to keenly interact face-to-face with a grey-haired representative of the financial services industry. Fintech firms strive in these conditions. Building on latest technology they help unhappy clients to tap into new sources of interest, they promise to be more transparent and to charge lower fees than incumbents. New financial planning tools provided by Fintech firms as well as performance comparison portals sooth the worries of troubled pension savers. Robo-Advisors are providing affluent clients with wealth management services which were previously confined to high-net worth individuals. By doing so they increasingly poach in the preserve of traditional asset managers.

Now or Never

Incumbent wealth and managers now have the chance to embrace these trends and to adapt to the changing environment. They can do so on their own, or they can team up with Fintech firms through loose co-operations, strategic alliance or mergers and acquisitions. Yet it is important that asset managers evolve at a higher pace than before. Otherwise the fate of most asset managers is sealed just as it was for the dinosaurs.

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Patrick Schüffel Institute of Finance, Haute école de gestion Fribourg