In a new thought-provoking white paper entitled The upside of disruption – why the future of asset management depends on innovation, SEI picks out five important trends that are re-shaping the way we live our lives, both socially and professionally. SEI refers to these five trends as: Watsonisation; Googlisation; Amazonisation; Twitterisation, and Uberisation.
There is no doubt that technology, which SEI places at the heart of its operating model, has the potential to transform (or render redundant) companies in all sectors of society. The funds industry is no exception. How key players across all parts of the service chain – from banks and custodians, to administrators and prime brokers – as well as fund managers themselves, embrace new, disruptive technologies will likely depend on their future success.
Perhaps the clearest example of how fast technology is moving is the rise of cognitive computing. CTAs such as London-based Piquant Technologies are using sophisticated machine learning algorithms that have the ability to think for themselves and respond to patterns and signals intelligently, learning the longer they trade.
"When IBM's Watson supercomputer competed on the TV quiz show Jeopardy!, back in 2011, and vanquished the two top-winning human contestants of all time, it signalled the start of something big. It took only two years for Watson's capabilities to be brought into commercial use.
"Now cognitive computing is transforming industries from health care, travel, and manufacturing to retailing and financial services. Companies are using predictive analytics to score credit applications, rank job applicants, and detect fraud," says Ross Ellis (pictured), Vice President and Managing Director of the Knowledge Partnership in the Investment Manager Services division at SEI.
Ellis believes that the investment industry is a fertile environment for such advances and thinks that robo-advisors may prove to be the harbingers "of a much more sweeping disruption – namely, the use of machine learning to make and implement investment decisions."
According to PwC's latest global CEO survey (PwC 2015 US CEO Survey – Top findings), 73% of US CEOs and 61% of those worldwide, expect new competitors to disrupt their industries in the next five years. Last year, in a letter to shareholders, JP Morgan CEO Jamie Dimon warned "Silicon Valley is coming", making reference to mobile payment technologies, peer-to-peer lending, and of course, Bitcoin. "There are hundreds of start-ups with a lot of brains and money working on various alternatives to traditional banking," wrote Dimon.
There are now an estimated 4,000 or more start-ups in the fast growing `Fintech' space, with more than a dozen valued at more than USD1 billion (The Economist Explains Blog – `Why Fintech won't kill banks'. 16th June 2015). Blockchain technology and the above mentioned robo-advisors, are two of the more prominent developments re-shaping the way that banks and wealth management companies think about transactions and asset management.
According to Ellis: "While no one is saying that portfolio managers and analysts will become obsolete – not yet, anyway –it's clear that cognitive systems hold an information advantage. While we believe that cognitive systems will complement rather than eliminate human insights, they can go beyond the most rigorous top-down and bottom-up analysis to weigh factors, probabilities, and "what if?" scenarios that might not even occur to a seasoned manager."
As we move increasingly towards a network-based society, with digital platforms and Big Data capabilities creating `The Internet of Things" (think driverless cars, self-replenishing refrigerators, smart lighting, intelligent highways), fund management CEOs and CIOs are becoming aware of the need to incorporate new technologies to keep up with the pace of change.
"The everyday world of using technology is seeping into the way that asset managers run their businesses. That's the thought process that led us to produce the Upside of Disruption white paper. Equally, it forms the basis of how we are building our knowledge platform and solutions to support asset managers," says Ellis.
Jim Warren, Head of Solutions, Strategy & Development at SEI, believes that people's perspective on what's important to them within the investment industry is really changing. "It's becoming more data-driven and less decision-driven. People realise that the more information they have, the decisions become easier to make; whether its artificial intelligence or just better analytics.
"We're seeing a big push in the asset management industry with respect to using data outside of the investment process. Portfolio managers have, for a long time, been able to perform analytics on the types of investments on which they want to make decisions. They realise there are technologies for doing that quicker, easier and more completely. But, more importantly, they can use those same technologies in other parts of the business, beyond merely the investment process. For example, understanding more deeply who their investors are and their key drivers, understanding how to better market themselves, and so on."
Another important driver that SEI identified relates to the size and growth of the asset management industry. Citing McKinsey's analysis, presented in a webinar on 18th June 2015 ("The Global Asset Management Industry in 2020"), during the five years following the financial crash (2009 to 2014) only 16% of the industry's global asset growth came from net new inflows; the rest came from the bull market tailwind. The Boston Consulting Group, in its Global Asset Management 2016 paper, said it well: "market-driven asset growth is in the rearview mirror." In other words, being unable to depend on rising financial markets for asset growth, asset managers cannot rest on their laurels.
"The good times may have gone but technology is such that there are just as many opportunities, you just have to find them and embrace them," says Ellis. As the white paper points out, `Googlisation' is helping companies become more data smart, but unlocking the potential of all that data is no easy task.
Equally, `Amazonisation' demonstrates the power of the platform; look at the rise in prominence of marketplace platforms such as Prosper and Lending Club.
Platforms are levelling the playing field, enabling them to compete with more established firms without the legacy issues of outdated infrastructure. China's e-commerce platform, Alibaba, has managed to build the world's 3rd largest money market fund (Alibaba Yue Bao). It took just 9 months to reach USD100 billion – by comparison, it took Vanguard more than 10 years to hit that same figure.
If that doesn't serve as a warning sign against complacency, nothing will.
Ellis concludes by stating that the use of technology to slice and dice data could allow asset managers to potentially create new strategies and learn new insights that they weren't previously able to gain.
"Ultimately, there are more tools available today to take advantage of the data being produced. It behooves asset managers to take an open architecture approach because it will enable them to gain new insights and make smarter business decisions. There's more data – structured and unstructured – it's faster and deeper than ever before, but if you can't capture it and organise it in such a way that you can mine it in a myriad of ways, then it really isn't going to be much use. It'd be a goldmine looking at you in the face but sitting there wasting away." n
To read the SEI white paper in full, please click on the following link: www.seic.com/DisruptToday
