One of the clear benefits to the increased proliferation of platforms, which offer infrastructure-as-a-solution, is that it is helping start-up and emerging fund managers compete on a level playing field with larger entities.
In some ways this gives them a competitive advantage given that established institutions find it hard to pivot away from their existing infrastructure and embrace the multitude of disruptive technologies. Known as the Innovator’s Dilemma, the fear is that if they change tack they might end up failing or not realise the benefits for years hence but if they don’t embrace change, they might get left behind, leapfrogged by more nimble competitors.
The success story that one has witnessed with Amazon over the last 22 years, as it has morphed from the world’s largest online bookstore to one that allows retail customers to buy anything from electric goods to board shorts, is incredible. Amazonisation demonstrates the power of the platform.
In what is known as the ‘network effect’, the more people use them, the more platforms like Amazon and eBay learn about their customers. Netflix is another good example, offering suggestions as its algorithm learns about people’s viewing habits.
Taking a client-centric approach and building backwards has revolutionised the customer experience and with Amazon now offering cloud infrastructure – Amazon Web Services, cloud-as-a-service, as it were – it is putting power in the hands of the next generation of entrepreneurs (including fund managers) to build similar business models that meet the expectations of their clients.
“When you order something on Amazon and you look closely, you realise not everything is coming from Amazon’s own inventory at all but from another company whose inventory is linked to it. Amazon has built a networked platform that can get you the item you desire, and send it off to you carefully packaged in a day or two. They’ve built trust with the retail marketplace.
“We often shop online using e-commerce platforms because we have gotten used to the convenience, trustworthiness and customer-focussed experience. E-commerce has permanently altered the expectations for customer experience. This begs the question; why should that not also apply to the asset management industry? Why should it be any different?” asks Ross Ellis (pictured), Vice President and Managing Director of the Knowledge Partnership in the Investment Manager Services division at SEI.
This is something that asset managers are faced with thinking about. What ways can they innovate and build a more platform-like experience for their investors, and deliver an elevated retail-like level of customer experience?
The reality is, large e-commerce platforms are going to become natural competitors to the asset management community. China’s e-commerce platform, Alibaba, has managed to build the world’s 3rd largest money market fund (Alibaba Yue Bao) extraordinarily quickly. It took just 9 months to reach USD100 billion – by comparison, it took Vanguard more than 10 years to hit that same figure.
Alibaba’s financial services unit is expanding aggressively into banking, investment, insurance, and credit card services, as it steadily moves toward becoming one of China’s full-service banks.
With respect to transaction payments, Apple now has Apple Pay, Google has Android Pay, and recently PayPal stepped up their game with the acquisition of Venmo. These three technology giants, in tandem with Amazon and Intuit, have created a financial services lobbying group called Financial Innovation Now.
In short, the ‘Amazonisation’ effect means that consumers now expect retail-style transparency and complete technical information to support purchase decisions of all kinds.
Fund managers have to be a trustworthy partner and deliver results much faster. Investors don’t want to wait. If they want the marketing presentation they expect to receive it right away.
One route to achieving a more inclusive platform experience is for asset managers to build a knowledge platform.
Several years ago, SEI started thinking more seriously beyond the concept of big data about the components of a knowledge platform that an asset manager would need, going forward. They identified four main components, which include:
- Sophistication – A knowledge platform needs to be highly sophisticated in order to handle and analyse all types of data, while ensuring data integrity.
- Support Key Business Functions - The platform must meet the data, information, and knowledge requirements for all the organisation’s key functions. For example, what are the outcomes that your compliance function, risk function, or portfolio management team need?
- Flexibility - A logical progression of point 2, is how the platform must be flexible, adaptable and efficient. The information must be delivered in an clear and intuitive manner, but one size doesn’t fit all. The online dashboard shouldn’t look the same for the client relations’ team, compared to the compliance team or operations team.
- Expertise – This is probably where the asset management industry is farthest behind the curve. Does the platform have that deep, specialised expertise and analytical capability?
“At SEI we run a flexible, vehicle-agnostic platform. We will provide suggestions based on our experience and expertise, but we’re not going to tell a manager what vehicle they must use. We look at it as, you manage a certain strategy and we will make sure our platform can handle however and to whomever you want to distribute it. To become operationally excellent is not easy; again, look how long it has taken Amazon to become profitable. Investment managers face continuing fee pressures, and the operational requirements are such that the barriers to entry are getting higher.
“If you have a platform that is agnostic, then it allows you to create bespoke content. It’s not Ford’s line of ‘Pick any colour you want as long as it’s black’, it’s ‘pick any colour you want, period’. This can allow managers to be much more flexible and present data as and when clients want it,” says Ellis.
Understandably, the pace of change is not going to be light speed in the asset management industry. Alternative fund managers are not going to allow the investor to tell them what to invest in, but given they get instantaneous results in other areas of their lives, maybe their dashboards will become more real-time and customised than they were before.
“Instead of just giving them the standard monthly or quarterly analyses, managers are starting to give their investors analysis that is more customised to their specific portfolio. The more that the manager knows about their investors, the more their feedback and communications can be customised,” adds Ellis.
One of the clear benefits of ‘Amazonisation’ is that platforms are providing new injections of liquidity into what were once highly illiquid areas of the marketplace. Private equity secondaries is just one example where this is seeing increased investment and investor activity, helping institutions invest in and out of private equity funds without having to lock up their capital for multiple years.
Ten years ago, the PE secondary market was around USD10 billion in deal volume. It has now quadrupled.
Platforms that are fuelling the growth of markets for traditionally illiquid assets include
Melting Point, SecondMarket, a platform and Equity Zen, a marketplace for pre-IPO investments.
The ripple effect of Amazon is being felt elsewhere in finance. Platforms are popping up across the financial landscape like mushrooms offering investors wider opportunities as they look to invest in new areas for alternative yields.
“An example of a successful lending platform is SoFi (Social Finance),” says Ellis. “The original idea behind this peer-to-peer platform was for Stanford graduates to provide student loan financing to current Stanford students. The students could get it at a lower rate than what the banks offered, and those issuing the loans would receive a higher rate than they would get elsewhere. The non-traditional underwriting approach here has since morphed to mortgage and personal lending. ”
He points out that the platform is like being part of a club, where the borrowers are “members”, and proof that the intersection of people and finance is changing forever. SoFi has even started running wine tasting events, posting job placements and so on.
“For those running a platform such as SoFi’s, by melding sophisticated data analytics with a highly personalised approach to customer interaction, they are able to focus on attracting the right type of person, and the more they make them feel like they belong, the more they will learn about them and the more likely they will be able to offer them additional services,” concludes Ellis.
As SEI’s paper states: “Asset managers must accept that they, too, are part of the e-commerce competitive cauldron.” Only by addressing head on the threat and opportunities of non-traditional players can fund managers adequately and successfully reshape their businesses to accommodate the empowered online-savvy consumer