by Dermot Shortt, Co-Founder and Director at Finbourne
It’s challenging being an asset manager these days.
Although demographic change and rising markets continue to push total Assets Under Management ever higher (PWC predicts by 2025 it will be $145 trillion) they have been faced by severe headwinds. The low level of yields, the inexorable rise of passive investments, mounting regulatory pressures and increased demands for transparency have put pricing pressure on investment managers globally. Asset managers now need to compete on both performance and cost efficiency.
How is this to be done?
Mergers an incomplete answer
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Drastic cost cutting is an obvious recourse but obviously in conflict with the imperative to increase the quality of investment decisions. A reflex reaction by some has been to seek merger synergies but the resulting management distraction takes its toll: institutional clients may hold back investment monies, or worse, pull out – and have done so in some cases.
Cutting ongoing management fees in favour of performance fees was the solution adopted by one notable global manager: brave, of great appeal to investors, but clearly deferring profits to the future and giving scant relief to the need to cut overheads now. I am sure we will see more such pricing innovations in the future.
Rationalising costs and ending management contortions:
Cloud-hosting and computer power
Is there a more radical but (only now becoming possible) route to cutting admin costs without blunting the competitive edge, even making it sharper? Yes there is, a route made possible by what I have called the new FinTech: not so new technically perhaps, we have known the possibilities for some time, but only now are they starting to filter through to the BuySide. I refer to the combination of cloud-hosting and modern computing power and the revelation that asset managers spend a lot on digital infrastructure (more than $40bn globally, annually, I estimate). They face agonising management decisions about what sort of capacity is needed, whether to go on paying for the serial upgrades of old fintech, fancy analytical and compliance tools and worrying whether, in capital terms, there is server capacity to meet a spike in activity. Do they lock themselves in with an integrated system or do they run the risk of building their own data and analytics solutions? The message from the new FinTech is: the need for management contortions over that sort of IT is over.
Here’s a statistic from Investment Association research that I found revealing: in the average UK- based asset management firm 12% of personnel are involved in IT, fully one third of total staff are operations + tech. It’s a challenge for these teams to innovate when they are only allowed to spend 10% of IT budget on new build.
Non-differentiating v difference-making
So here’s the clue: nearly all the things that the old fintech provides for asset managers are non-differentiating. Yes, you have to do them, but to pay a fee based on a percentage of your AuM (the typical pricing model of today’s suppliers of asset management software) may make no sense at all. If you can rationalise your non-differentiating activities and costs and spend more time and energy on difference-making activities, you will save overhead and capital outlays – and perform better.
The new FinTech makes this common sense point: just as no business should instal its own water supply, nor should fund managers endure the risk and huge expense of installing, updating, and worrying about systems for delivery, recording and accessing investment and compliance data. These are non-differentiating, utility-like, activities. Their costs should be mutualised, hosted on the cloud and delivered through latest technology and security protocols. This frees your fund from the expense of forced system upgrades.
Mutualised? You ask. Is that like joining The Co-op because I can’t afford Harrods? Far from it; to keep the simile going: it’s like having Amazon Prime (with its huge diversity, keen pricing and innovative delivery) instead of the local department store (with reliable goods in all departments but often not the choice you would have made).
With mutualisation comes community. I note with interest that the buyside is learning from the sellside and coming together to cooperate in industry bodies and design councils to produce the utilities for tomorrow, for everyone.
Here’s what else this new BuySide, cloud-based FinTech offers –along with no worries:
- Open, Collaborative platforms. An Application Programming Interface (API) gives choice back to the customer to integrate only the features he needs – from best of breed suppliers.
- Real time valuations and analytics every time. Ignites opportunities for both portfolio managers and the asset owners
- Never forgetting: every transaction or data change immutably recorded. The effect of any change on holdings, then or now, instantly available
- Compliance enabling: regulatory future proofing is built-in, not bolt-on.
- State of the art security: best financial industry practice, built on top of physical security which is probably close to military grade.
Liberating competency to compete
FinTech is not just about retail banking or payments and nor should it be reserved for the investment banks. This new industrial revolution has a lot to offer the asset management industry too. I’m delighted to see this realisation start to pervade the buy-side community.
So, the new FinTech for the BuySide is more than just a cost saving utility model. It creates business opportunities for distribution heads, it frees the technology experts to actually use their expertise and it helps CFOs and COOs run a modern efficient and compliant firm. But above all, I think, what it will do is permit asset managers to concentrate on their core competency and compete their way out of an existential threat.