By Sarah Kocianski is Head of Analysis and Research Manager at 11:FS

The coronavirus pandemic has greatly increased volatility in the world’s stock markets, with sharp falls followed by some remarkable rallies. That volatility and uncertainty, and investor responses to it, have brought investment management firms to the point where they need to make wholesale changes to areas like business processes and product development if they want to survive. 

Global stock markets have been in turmoil as the Covid-19 crisis unfolds. Most of this volatility was the result of the economic disruption caused by efforts to stem the spread of Covid-19, although the ongoing battle over oil output between Saudi Arabia and Russia played a part. Overall, Q1 2020 was stock markets’ worst quarter since 2008 and while things have since picked up, there is no certainty that things will continue in that direction as recessions around the world bite.

The crisis has arrived during a boom in retail investing

Over recent years there’s been substantial growth in the number of individuals turning to investing driven by a combination of reduced opportunities to grow wealth in other areas such as deposit interest and property, and the emergence of new low-cost digital services and platforms. Specifically:

• Automated investment products simplified stock selection. First came the automated investment products from firms like MoneyFarm, Nutmeg, Scalable Capital and Wealthfront which built portfolios managed by algorithms for individuals with smaller sums than human advisors would take on.
• New digital platforms offer low cost, or free, trading. Then came the new brokerage platforms such as DeGiro, Freetrade and Robinhood, which enable fee-free purchasing and selling of shares, and fractions of shares, by individuals via apps and websites. These services are popular — Robinhood, the largest of these new brokerage platforms, claimed it had 10 million users in December 2019 a figure which has risen to 13 million since the beginning of 2020.
• Incumbents responded with their own digital propositions. In response, incumbent wealth managers such as Charles Schwab, JPMorgan Chase and Vanguard rolled out their own automated investment products and slashed or eradicated brokerage fees to avoid losing customers to the newcomers and get in on the boom.

The Impact Of The Coronavirus Has Been Widespread

The impact of the pandemic has been felt across the investment management industry, with some notable outcomes:

• Portfolio values are dropping. While some investors see the current situation as an opportunity, others are concerned as they watch the value of their portfolios swing wildly. Many have seen 10% or greater overall declines. That 10% figure is important, particularly in the EU where it triggers a requirement on the portfolio manager to alert the customer to the fact, which in turn can trigger panic.

• Investors are shifting to “safe-haven” investments. As investors seek to diversify their risk many are moving towards assets that are perceived as safer, such as US Treasuries and gold. Gold is often turned to in periods of economic instability, and amid the current crisis demand went  up to levels last seen in the months immediately following the financial crash of 2008.

• New account openings have surged. The number of customers opening accounts with brokerage services and automated platforms has increased amid the current crisis. That’s due to;
  • Bold new  investors wanting to capitalise on the market volatility
  • Some people having more disposable income as spending on travel and socialising is curtailed
  • Others suddenly having the time to explore investing when they have been meaning to do so for a while
  • And existing investors switching as they seek lower fees or express dissatisfaction with existing providers’ response to the crisis.
  • Both newcomers and incumbents have seen record volumes of new customer sign ups.

• Platforms are creaking. As new and existing investors look to make the most of volatile markets, they are trading at unprecedented rates. Some platforms have been unable to keep up with that demand. Robinhood, for example, suffered several days of outages in early March which saw furious customers demanding compensation as they missed out on making trades.

• Paper processes are causing problems. Some brokers still send paper order forms for share sales or purchases, while many fund and pension providers use paper forms to process fund transfers. As remote working becomes the norm, companies are unable to deal with these bits of paper. Security protocols don’t allow them to be sent to an employee’s house. Even if they did, employees are unlikely to want to handle large volumes of correspondence that others have touched.

• Advisors can’t keep up with demand for personal communication. Financial advisors, who often rely on strong personal connections with their customers, have been cut off from their clients in an environment where social distancing rules mean that they can no longer meet in person. Clients, clamouring for advice, will not be happy with a phone call unless it’s with their personal advisor, something that individual advisors’ lack of capacity makes highly unlikely to happen.

• New investing services are facing their first real test. In the past decade, dozens of new digital investment managers have launched with a wide variety of business models and investing strategies, including copying other investors’ trades, thematic investing and environmental, social and governance (ESG) strategies. The increased volatility of the past few weeks are putting those investment strategies to the test for the first time.

The implications: Falling revenues will accelerate consolidation and force customer-centric innovation

The impact of Covid-19 will be felt for months, and most likely years, with a global recession now inevitable. That’s going to result in declining assets under management (AUM), and hence fees, along with significant changes in investor behaviour. The investment management industry needs to reevaluate how it operates in order to accommodate those changes, along with the broader economic ramifications. Here’s what we expect to see over the next few months and years:

• People stop investing. Many people who have lost their livelihoods will simply no longer be able to afford to invest and be forced to liquidate their portfolios. Others, who have recently started investing, may realise it’s not for them or find their financial situation changes as the full impact of the virus on economies takes hold. Some cautious retail investors will decide investing in the stock market no longer fits with their risk appetite, and shift funds to assets like gold, property or, more likely, bank deposits. Fewer customers and lower fees will result in wealth managers culling many of the retail investment services they have rolled out in recent years, to focus only on the most profitable.

• People start investing. On the other hand we have seen an influx of new investors open accounts over the past couple of months.,. The services that attract and keep hold of these customers’ attention and funds will be those that have good brand reputations, offer low or no fees, and are as easy as possible for novices to use.

• Advisors will need digital platforms. Financial advisors will need secure digital platforms that enable them to serve their clients. Advisors will need tools like chat, co-browsing and video that enable them to collaborate in real time with customers on investment decisions and asset allocations through digital touchpoints. Some digital-only players such as Betterment already license proprietary technology which enables elements of this to other advisors, a factor that could be key to their own survival as demand for digital servicing grows across the industry.

• Digitalisation will accelerate. Movement towards truly digital services in investment management has been slow, especially in comparison with retail banking. That will now accelerate as firms realise it will help them better understand customers’ needs and what products would meet them. It will also aid businesses holistically move towards sustainability and success in the new economic environment.

• Regulators will tweak the rules, not throw out the rule book. The crash of 2008 resulted in some of the biggest upheavals to financial services regulation ever seen — because the crisis was caused by the financial services industry. This time, regulators will seek to alleviate harm and balance the protection of customers and firms in constantly changing circumstances. Some are already altering investment rules. For example, the UK’s FCA has said it will stop enforcing the Mifid rule that requires firms to inform customers every time their portfolio drops 10% or more. Both the FCA and FATF have recommended the use of digital identity technology to allow as many customer interactions to carry on as possible.

• Consolidation looks inevitable. The investment management industry has seen some big mergers in the past few years, such as the £11 billion deal between Standard Life and Aberdeen Asset Management and the £26 billion Charles Schwab and TD Ameritrade union. We will see more mergers over the next few years as inefficient firms seek survival through scale. Larger digital players like Betterment and Wealthfront, which have also diversified and are therefore better placed to survive, will acquire smaller firms that have customers, technologies or employees that larger firms value. Smaller digital-only players with no clear path to profitability will become acquisition targets for their larger peers of all breeds.

Recommendations: Make businesses wholly customer centric

Over the coming months and years the investment management industry is going to be forced to evolve by circumstances and regulation. To ensure they are on the front foot as this happens firms should:

• Be transparent with customers. Customers will already be on edge due to broader circumstances, so tone and content of communication is paramount. Firms should be the first to let customers know of any impact on, or changes they are making to, their business, and the implications of either on customers. Give customers information that could reassure them, such as explaining that markets do suffer volatility at times, and what they can reasonably expect to happen next.

• Look for where automation can help. When creating a digitalisation strategy, the first logical step is to evaluate which processes can be automated and where paper forms can be eradicated. That should lead to reduced costs and faster processing in some areas, freeing up valuable resources to be used elsewhere.

• Give customers as much control as possible. Widespread feelings of anxiety and unease result in people seeking to take control over whatever they can. Help customers to feel in control by enabling them to do as many operations as possible digitally. That means prioritising the quality and capacity of existing remote channels and the development of new ones like secure live chat services and chatbots that can answer FAQs.

• Evaluate innovation strategies. Do not put the brakes on innovation or digital initiatives. Instead use existing teams and adapt their focus to centre on how best to prepare the business for what lies ahead. Devote resources to understanding investors’ needs, such as using approaches like ethnographic research and Jobs To Be Done, and then seeking more efficient ways to meet those needs.