Developments in financial technology over the coming decade should help revolutionise portfolio advice and creation for investors, as well as product distribution, believe fund managers and fintech experts.
Increasing proliferation of new big-data-crunching tools might particularly assist life insurers. Chief investment officers at these companies often face scenarios that resemble a Rubik’s Cube as they seek to balance good returns with their liability streams and capital requirements; shift one component and the other two can be adversely affected.
By using fintech solutions that account for these three factors, insurance teams may have an easier time maximising their portfolios. Advanced automatic fintech solutions could even execute trades after assessing optimal options, reducing the need of institutional investors to employ consultants and external fund managers.
Fintech could have big changes for portfolio construction in wealth management and retail investment too. The biggest private banks already offer clients discretionary portfolio management (DPM) for an annual fee, but still make most of their money through individual transactions. Adding more powerful DPM investment tools would help relationship managers raise more DPM revenues at a time when regulators are questioning whether relationship managers should be financially incentivised to sell products.
“All wealth managers want their RMs to have portfolio conversations with clients, but today most product sales are transaction- [rather] than recurring revenue-based, which won’t be sustainable if the regulators remove the [product selling] commission model,” said Damien Mooney, head of retail and wealth business for Asia Pacific at BlackRock. “The banks need to do it sustainably, and technology can be a driver for that.”
Fintech solutions would also help private banks to cut costs, which is another important factor when some are struggling with cost-to-income ratios in the 70s or even 80s.
BlackRock, the world’s largest asset manager, is already trying to get smaller fund houses, private banks and institutional investors to use its Aladdin system, which combines portfolio construction and risk analysis tools. It won’t be the only one looking to offer such fund platforms.
Eventually, the rollout of more sophisticated robo-adviser platforms should allow even retail investors to access diversified multi-asset investment portfolios, predicts Larry Cao, director of content at CFA Institute.
“We think fintech will be most successful not by taking over the existing business of fund houses necessarily, but by extending into lower margin clients who are not currently being served by financial institutions or financial advisers,” he told AsianInvestor.
“In Asia mutual funds aren’t that popular today, but in 10 years multi-asset investing will become more developed as more money moves from retail investors to institutions.”
Fintech is already changing the manner in which funds are sold to retail and mass affluent investors. This looks set to accelerate, potentially benefiting passive fund managers in particular.
Passive champions BlackRock, Vanguard, and State Street Global Advisors (SSGA) are the largest global fund houses, but none are strong in Asia, where most mutual funds are sold via banks. To do so, these banks charge distribution fees of 200 to 300 basis points plus subsequent annual fees (known as retrocessions and trailer fees), which active funds will pay but passive funds cannot support. However, distribution fees are a performance handicap, meaning net returns of mutual funds in Asia regularly disappoint.
The conditions are ripe for a marked rise in digital fund sales. Countries such as Korea and Taiwan recently launched state-supported online fund platforms that bypass bank distributors to offer funds to retail and institutional customers for a minimal distribution fee.
At the same time, at least some Asian financial regulators are making efforts to clarify the real cost of mutual funds. In November 2016, for example, the Securities and Futures Commission of Hong Kong launched a three-month consultation on proposals to enhance fee transparency. In April, Reuters reported that the Monetary Authority of Singapore was working on a proposal to require trailer fees to be disclosed in fund product descriptions.
The combination of a more digitally savvy populace, viable digital fund platforms and greater cost transparency could upend a sizeable chunk of fund distribution in the region, particularly into cheap passive funds (and cheap AI funds, as they are created). Any success rolling out defined contribution pension schemes would likely bolster this trend and, in turn, could encourage fund houses like BlackRock, Vanguard, and SSGA to roll out more products in the region.
Justin Ong, head of wealth and asset management for Asia Pacific at PWC, believes the growth potential exists, although it will take time to be realised.
“We are very focused on the distribution of funds that use technology for investing decisions, but to my mind we are still three to five years away from critical mass,” he told AsianInvestor.
This story is the final of a four-part series on financial technology and its potential impact on asset management in the coming decade. Click on the following links for an overview, focus on automated investing, and look at the changes to fund settlement. And look out for the entire feature in AsianInvestor's June/July edition.