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Fund Distribution: great potential but how to unlock it?

26/09/2019

While certain areas of finance still have to fully recover from the 2008 financial crisis, there is one industry that has been doing especially well since then. However, demographic and digitalisation challenges are emerging with the potential to reshape the Asset Management industry completely. They will need to be addressed quickly if today’s players want to remain relevant.

Asset Management has been on a roll for years with impressive growth rates over the last decade. Riding not only one of the longest bull markets in history, but also a continuous increase in global wealth accompanied by low interest rates, Asset Under Management (AUM, a key measure of industry health) grew from USD 39 trillion in 2008 to USD 79 trillion in 20171 according to BCG (Boston Consulting Group). While AUM declined slightly in 2018 – that was largely due to an end of year market slump already forgotten –, net inflows for that last year (new money) remained strongly positive at more than USD 1 trillion2.

What’s more, the outlook for the industry seems brighter than ever. A survey by PWC3 puts 2025 global AUM at a comfortable USD 145 trillion. Even though bumps will inevitably happen along the way (such as the aforementioned market downturn of Q4 2018), underlying trends will continue to fuel growth and new ones will kick in as governments start to address their pension issues. As an example, Deloitte4 estimates that, following reforms, Australia’s superannuation scheme alone will grow from AUD 2 trillion to AUD 35 trillion by 2035.

Demography and digitalisation challenges

However, two main challenges are emerging that have the potential to reshape the industry completely. They will need to be addressed quickly if today’s players want to remain relevant.

Indeed, demographics and digitalisation will combine to remodel the relationship between the asset management industry and investors.

Starting with demographics, as Baby Boomers and Gen X’ers are ageing a new generation is taking over: the Millennials are those individuals born after 1980 and reaching adulthood from the 2000s. This generation is already an increasingly significant share of the workforce. In the US for instance, they will represent 75% of workers by 20305.

More likely than their parents to become entrepreneurs, they are building their own wealth but will also benefit over the next three decades from the largest inter-generational transfer of wealth in history, a staggering USD 59 trillion6.

Millennials are already influencing what products are proposed by the investment management industry. For a generation that will be around 60 years old in 2050, gloomy climate change predictions imply more concrete impacts for them than for others. This has partly driven the recent rise in ESG compliant fund offerings. Asset managers are also designing investment products targeting companies that can specifically capture Millennials preferences (such as a Millennials ETF by Principal Global Investors).

However, the challenge will be to reach that massive investor pool. In a 2014 survey7, PWC was taking the fictitious example of Wei, a young Chinese professional, on her way to work, and buying on her cell phone a fund recommended by her dating app and promoted by a large search engine that had teamed up with a fintech company for instant cash processing.

Millennials will expect simplicity and efficiency in their investment relationships, as they will be put off by anything they see as administrative and cumbersome. Obviously, their preferred communication channel will be mobile and transactions will need to be cheap and fast. A 3-day settlement cycle is difficult to understand when you can “settle” in a couple of hours the home delivery of the last fashionable shoes on Amazon. They will require dynamic reporting and the ability to share with their tribes on social networks.

They consider themselves as unique and not part of a client segment. As such, they expect a personalized experience and recommendations from trusted sources about products that appeal to both their needs and their convictions.

Disintermediate distribution with new channels

The good news is that all this is made possible by digitalization. Indeed, already today, big data analytics and robo-advisers can provide customized solutions to clients. That is if you have access to the data. To get to those data and answer Millennials’ expectations, the industry is trying to push for a more Direct to Customer (D2C) distribution model, this without alienating present distributors.

The bad news is that most industry players have little experience dealing directly with end retail customers. In addition, under pressure from stiff competition, average performance and cheap ETFs, they mainly see technology as a way to cut costs, through efficiency gains in portfolio management or middle and back office processes (for instance using blockchain and smart contracts to deal with investor transactions and registers).

However, the main disruption that technology and digitalisation will bring is the ability to both disintermediate distribution while opening up new channels.

For the moment GAFAs are busy on other projects, Amazon is looking at ways to disrupt healthcare in the US and Facebook announced the launched of Libra, its new cryptocurrency. However, in China, digital giants have already entered the asset management space. Yu’e Bao is now the world’s largest money market fund, promoted by an Alibaba subsidiary. It has been so successful that, according to the Financial Times8, Chinese regulators, worried about systemic risks, pressured it to downsize.

There is a saying in the industry that should a GAFA-like player decides to enter the market, the result will not be a “game changer” but more of a “game over”. It is probably more a matter of “when” than “if” a big tech firm makes the move.

Embrace revolutions to progress in this digital age

Hiring a Chief Digital Officer and defining a digital strategy that covers all the value chain and especially distribution is now becoming urgent for industry players, be it for asset managers themselves or their service providers.

The most agile firms have been teaming up with pure fintech startups such as savings apps proposing investment solutions adapted to Millennials. Meanwhile, service providers are building up distribution data analytics to support their asset manager clients.

Much more remains to be done. How to acquire clients in a digital age? How to communicate with them? How to gather clients’data and how to use this? Industries that have failed to do so have all but disappeared in favour of pure digital players (think of the last time you physically entered a travel agency).

Asset Management, long seen as a digital technology laggard (as described in a PWC survey9) now needs to learn fast and embrace demographic and digital revolutions if it wants to seize the growth ahead and remain relevant.

Let us be provocative and go further on fictitious Wei’s experience above. In a world of social networks with big data on participants, AIs (artificial intelligences) could cheaply provide personalized investment advice. Assets could be maintained in a blockchain-based distributed ledger, acquired through smart contracts and instantaneously paid for in social network-own cryptocurrency. In that environment, who would need a traditional collective investment fund anymore?

 

Article published in the September 2019 issue of AGEFI LUXEMBOURG

 

[1] BCG, Global Asset Management 2018, The digital metamorphosis
[2] BCG, Global Asset Management 2019, Will these ‘20s roar?
[3]PwC, Asset & Wealth Management Revolution: Embracing Exponential Change, 2017
[4]Deloitte, Dynamics of the Australian Superannuation System The next 20 years: 2015 – 2035, November 2015
[5]dynamicsignal.com/2018/10/09/key-statistics-millennials-in-the-workplace
[6]Boston College : https://www.bc.edu/content/dam/files/research_sites/cwp/pdf/Wealth%20Press%20Release%205.28-9.pdf
[7] PwC, Asset Management 2020, A brave new world, 2014
[8]https://www.ft.com/content/35bbbef6-20a8-11e9-b126-46fc3ad87c65
[9] PwC, Asset & wealth management revolution, pressure on profitability, October 2018

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