The many faces of innovation; opportunity and threat

The definition of innovation goes from as simple as the Cambridge dictionary “the use of new idea or method”, or “something new or different introduced” to Wikipedia’s “production or adoption, assimilation, and exploitation of a value-added novelty in economic and social spheres; renewal and enlargement of products, services, and markets; development of new methods of production; and the establishment of new management systems. It is both a process and an outcome”.

When innovation is discussed in the Wealth and Asset Management industry it is more so connected with the implementation of digital and technology; be it blockchain or a new platform to trade investments or do your banking, or more modestly to use video conferencing (Zoom, Blue Jeans, etc.) or business discussion platforms (Teams, Stack, etc.). Although these technologies have entered or even taken over our current business lives, most or all of them have been around for a while. You could also argue that our industry being global and having already an infrastructure that supported the associated travel and people being connected in multiple locations made it more resilient than others but not necessarily innovative.

Is accepting and embracing these technologies during Covid therefore an innovation of technology or more one of innovation of the people working with these technologies, and thus more of innovative management styles.

With lockdown in various version likely to continue in various shapes and forms until we reach certain levels of vaccination and spring be upon us, we believe that we will also see the emergence of innovation beyond engagement.

An area of innovation will likely be in the area of mass personalisation to meet personal desired outcomes. Aperio (recently being bought by Blackrock) is an early example of how customizing tax-optimized index equity separately managed accounts (SMAs) reflects each client’s unique risk, tax, and personal values preferences. Where SMA’s have been the exclusive foray of institutional investor and Ultra High Net Worth Individuals (UHNWI), the customized and bespoke management could, helped by technology, enter the world of individuals. It could for example manage not just your personal pension or standalone investment portfolio but more broadly aligned with life events around house purchase, parenting, education, taking a year out for travel, upskilling, etc.

With ESG being currently left, right and centre when it comes to making investment decisions, innovation could bring the involvement to a more individual level in which investors could choose to opt in certain pre-defined proxy-voting policies.

Within this the investor could move from currently being very much a transactor to becoming a subscriber.

We already have become through self-management our own bankers and travel agents. Will we also become our own investment manager, and can asset and wealth manager make their clients more self sufficient?

A move to “investor self-sufficiency” and “subscriber model” has for the banking and the travel industry not happened overnight and neither will this be for the asset and wealth industry.

Some specific challenges will be around parts of the value chain that need to come together and better aligned. For example, the distribution of funds needs to be streamlined, with multiple channels being cut out and become a more direct connection between investor and investment manager. Some initiatives like FundsDLT[1] aim to address this with distributed technologies / blockchain.

Also, data management needs to move from knowing what the elements of it are and where it is stored to understanding the information it holds through sophisticated analytic engines and through that being able to create the bespoke investment products for investors. Typically, this is adding value by turning data into information .

Regulation will likely also be a key factor as for example with (liability for) suitability of products now being defined through standard questionnaires (for non-professional investors) moving to profiling of investors through available data interpretation.

As highlighted in our recent podcast on innovation, a key factor in being a successful innovator is setting the right values and culture within a company as a whole and not just for a small group of innovators in a “garage”. Innovation needs to be embraced at the top level and being instrumental to strategy.

The Covid crisis in this sense might have been a blessing for the industry, with the discussion around innovation being propelled from not just implementing technology but innovation in economic and social engagement, personal driven outcome products and services, overhaul of the value chain and new (business and investment) management philosophies and systems.

The stakes are high a development and implementation of the right strategy have never been as challenging; the different faces and areas of innovation are to be aligned and the interdependencies well understood.

If the opportunity is not embraced, competition could come from outside players like GAFA[2] or new entrants. A faith not unfamiliar to other industries.

[1] FundsDLT is a Luxembourg-based company seeking to streamline a range of fund distribution activities by using blockchain to automate and mutualize processes in a secure manner

[2] Google, Amazon, Facebook and Apple