Investors and the new decade
Posted by Luuk Jacobs on 20 February 2020
A new decade heralds new beginnings and change. We have been thinking about the wants and needs of Investors of the 2020s, their expectations for the Investment Management industry and what it should be delivering.
Compliance and Regulation
Even with the financial crisis of 2008 some way behind us, regulation and compliance remain a core concern. We do not believe today’s Investor wants new regulation, it is more a case of wanting the significantly enhanced regulatory framework to be adhered to and executed by the industry with diligence and compliance. Recent events at GAM and Woodford have shown time and again how execution and conduct are not always at the level where they should be and this is likely to cause concern. These might be the exception to the rule, but they nevertheless impact significantly the reputation of the overall Investment Management industry. Investors simply want to see that their money is well invested and governed, and that the industry lives up to the conduct expected from them.
With the regulation point addressed, we believe that over the next decade, investors would focus their scrutiny on, not only the ability of the industry to deliver on performance of the underlying investment, but increasingly on their ability to meet the investors expected personal outcomes [instead of only those of the large institutional investors]. Which begs the question: How can the investment industry deliver on more personal defined outcomes? Three building blocks come to our mind: Technology, ESG and fee transparency.
New and Emerging Technology
Technology has so far mainly been focused on creating operational efficiency including the ability to answer to regulatory changes. The introduction of Artificial Intelligence and the smart use of data has not yet been fully embraced and should be an opportunity for the industry to better deliver the outcomes that individual investors are looking for. The banking sector has already come up with some serious disruptors like Monzo, Revolut and N26. Who will be the equivalent disruptors in the investment sector? Could it be the GAFAs, who each have a huge client base and a multitude of data that with AI could create the products for the sought-after outcomes of investors? Alibaba has already started to explore this route in China. Its ability to access ongoing data of individuals should enable and position them to be at the forefront of investment product development, focused on meeting the growing need of individual focused outcomes. If not taking the initiative themselves, the investment industry, with these platforms owning the clients and their data, could potentially just become a service provider to the existing and new platforms.
Environmental, Social and Governance has been around for many years and it is full in the spotlight with the ongoing environmental discussions. Next to governments, historically the investment industry has been a leading force in this area, but Investors will want the industry to make itself accountable. With some governments now prioritizing economic development ahead of environmental considerations, the Investment Management industry is expected to play an even bigger role. For the investor and the industry, there is a need to get to a “rule book” for ESG overall and ESG reporting in particular. Today, it is difficult for an investor to understand exactly what the ESG considerations in their funds exactly mean, and the risks of “green washing” is abound.
Equally referring to the “S” in ESG, the industry has still a long way to go in the execution of the diversity agenda. For example, many gender initiatives are being undertaken, but the most recent data on Gender Pay Gap and women in senior positions do not show a trend in the right direction.
Clarity and transparency around the fees charged to investors are still issues to be tackled by the industry. The move towards passive investments over the last ten years has not necessarily resulted in significant reduction of fees. Equally, there are still “hidden” cost of Investment Management for the investor. Recent UK regulation on independent directors [on fund boards] combined with the Board’s assessment of value of funds [to investors] are important steps in this direction. We believe these regulations provide the right framework to encourage the transparency and clarity required form the industry; as we said earlier, the next decade should be used to implement and embed them.
Overall, there are major challenges ahead in this new decade for the Investment Management industry. However, we believe that this is not a doom scenario for the industry. To the contrary, we believe that it is well positioned to meet them, so long as it embraces not only innovation and technology, but also the changing landscape of client engagement, product development, conduct, governance, transparency and diversity. The next ten years won’t be an easy ride, but still one that we look forward to, to tackle with you.
Posted by Pierre-Yves Rahari on 6 May 2020Read post