Accelerated digitisation and the Wealth and Asset Management industry

It is often said already that Covid19 has accelerated the acceptance of and engagement with technology, so much so that McKinsey called this phenomenon ‘the ‘quickening’. During a 90 day period at the beginning of the Covid-19 pandemic, an astonishing 10 years growth in the ecommerce sector took place.

Where the millennials and digital natives had already embraced everything digital, the majority of clients within the Investment Management industry are, or were, a few steps behind.

Covid-19 has laid bare the need for further digitisation in investor engagement as well as investor transacting, especially in the field of investment funds distribution. Distribution models are being turned upside down and the industry is looking for what direction to take. Multiple Robo-advisors have been launched, while others were closed at the same time, due to insufficient traction[1]. On that note, what can be the elements of digitisation in distribution?

Investor engagement

With the dust settling on the phase 1 of SFDR[2] regulation, the focus now moves to how to communicate with clients on ESG matters. Will you be calling for action, like Aviva Investors and Nordea having chosen to do, or will it be through direct dialogue with investors? Invesco for example has gone for the dialogue option ]WITH WHO ABOUT WHAT? THIS IS REALLY INTERESTING TO INCLUDE] whereas Degussa has launched a fund that will use an annual survey to identify their investors ESG preferences. We could imagine that this would need to be based on some digital solution, especially with regards to the dialogue approach, to ensure that different investors ideas on ESG thoughts can be  captured and therefore influence the ESG actions within portfolios.

Whether through dialogue or action, SFDR and ESG in general will demand new ways of digital interaction with clients, be it on proxy voting, engagement, specific ESG performance and attribution or levels of ESG integration. At the front end this might just be an addition of data to existing communication, however it will be a significant change to the set up of investment and operational system. Not least to say on governance and scrutiny and control over these new provided data. Even more challenging with an ESG taxonomy still to be tried and tested.

The changing investors’ needs however do not stop at ESG. Through the pandemic, investors have tasted a different way of engagement that is here to stay. Communication with the investor won’t be through regular statements only. The investors have come to appreciate the regular access to updates on their investment and engagement through webinars, investment views and dialogue. Digitisation and platforms could be the portals through which this can be achieved on an ongoing basis.

Investor transacting

Thinking further of investor transacting, the industry is still very much based on the push concept in which products are pushed onto the consumers. These products in the management industry have been mainly funds, or segregated mandates for institutional investors. The concept of solutions in which more holisticallythe finance needs of investors are the basis for creating and amending portfolios, has not made it to the forefront for the retail investor apart from high net worth individuals. It is a concept that is well known within the pension and institutional world as Asset and Liability Management (ALM). Would the smart use of data enable the Asset management and Wealth management industry to create this ALM philosophy on an individual (retail) investors basis?

Here are some examples which demonstrate we are heading that way; Blackrock acquired Aperio in 2020, a pioneer in customising tax-optimised index equity separately managed accounts (SMAs) to reflect each client’s unique risk, tax, and personal values preferences. The technology firm Just Invest provides financial advisors something similar by which it creates personalised index portfolios for investors that take account of their individual values and goals. All this so-called direct indexing, where the end investor owns a personalised portfolio of stocks rather than holding shares of units in an index fund, is clearly gaining momentum.

Data Intelligence

In general Wealth and Asset Managers have over the last 10-15 years collected an enormous amount of internal investor data. Combining this with increased availability of new and other external data sources and the use of AI technology, would be the next opportunity to create the customised investor portfolios in which funds or direct stocks could continue to be the fuel for the motor of customised investment outcomes.

Key in these developments would be an effective operating platform and digital client portal underpinned by the development of blockchain infrastructure. Companies such as FundDLT[3] streamline a range of fund distribution activities by using blockchain to automate and mutualize processes in a secure manner.

Digital client portals exist already in the form, for example, of robo-advisors, launched by multiple wealth and asset managers. However, the likes of Amazon, Alibaba, FB, Google, Apple could emerge as major competitors in the distribution area. Their scale at the moment can simply not be matched by any Wealth or Asset manager. As such they could disrupt the value chain of the Wealth and Asset management industry. Google has a toe in the water with Stanford and Citi retail banking already which indicates more than a passing interesting in the financial sector.

Digitisation is not new; the pandemic however has brought the topic to the forefront. No Wealth or Asset Manager can sit and wait to see what will happen, and must start considering these questions of investor engagement, investor transacting and dated engagement, at the risk otherwise of having to ask, like Spencer Johnson’s infamous character: “Who moved my cheese?”[4]