A new deep-dive study by SEI examines how the fund management industry’s business chains could become increasingly atomised into disparate networks of hubs and suppliers thanks to advances in tech, potentially mirroring Uber’s sweeping disruption of the cab-hire industry.
The in-depth paper, titled ‘Uberisation 2.0: The Exponential Pull of Innovation’, examines how the introduction and evolution of new technologies has reshaped business models in the taxi and hospitality sectors, and carries the potential to “reorganise, re-engineer and reinvent” the hedge fund and asset management industries.
‘Uberisation’ is one of several emerging trends driving innovation in the asset management industry – along with Watsonisation, Googlisation, Amazonisation and Twitterisation – which are being explored by SEI in an ongoing series of white papers.
While other innovation trends previously explored in the series – such as Twitterisation and Amazonisation – offer a relatively concrete outline of the role played by data, platforms and social media within financial services, Uberisation and business models tend to be more abstract concepts, SEI said.
The report conceded that Uberisation – which describes the process of atomisation of businesses and sectors, with specific tasks farmed out across a vast network of suppliers, hubs and customers, shaking up traditional value chains – remains the “least visible” of the five innovation themes tracked by SEI.
However, it pointed to the boom in sub-advisory arrangements and operational outsourcing in fund management, and suggested the logical next step would be further encroachment into distribution, research, IT, and data management, among other things.
It added that such networked business models could ultimately provide the basis for more consistent and sustainable growth among asset management firms.
The study observed how firms such as Uber, Lyft and Airbnb have “rethought and deconstructed” the traditional value chains within the taxi and hospitality sectors, respectively.
Despite the impact of Covid-19, and increased regulatory and tax scrutiny, both Uber and Airbnb still boast market capitalisations of more than USD100 billion, it noted. Those firms, along with likes of DiDi in China and and Ola in India, have created new technology-enabled business models centred around tapping into the knowledge, expertise and assets of others. This has brought about the potential to “obliterate established infrastructure”, leaving an “army of individuals ready and willing to take up the slack by offering their services.”
SEI’s deep-dive exploration weighed up how hedge funds and investment managers may be similarly disrupted. The paper acknowledged the sizable regulatory challenges and deep-rooted relationships within financial services, noting how portfolio management is an altogether more complex service than “a car ride or a roof over one’s head”.
“The necessary skill sets are also varied and probably less fungible,” SEI explained. “Talent has always played a central role in asset management, and despite growing automation and the success of index-tracking portfolios, it remains an open question to what extent humans can successfully be replaced by technology or untethered from larger corporate entities.”
However, the sweeping changes brought about the Covid-19 pandemic may yet set in motion a “wave of Uberisation”, with more flexible independent contractors taking the place of full-time employees, and a parallel investment industry built around platforms and peer-to-peer transactions cutting friction and costs.
“The financial services sector is already more fragmented than it used to be in the days of large, vertically integrated organisations spanning banking, brokerage, and investments,” SEI said, pointing to the proliferation of consultants, databases, advisors, and trading platforms.
“Open architecture empowered independent managers long ago, and most firms operate within a constellation of service providers and vendors of various kinds.”
For instance, AnalystHub provide analysts with compliance infrastructure and support necessary to offer their services as a standalone service, while Dataminr utilises AI technology to scour publicly available data to provide early detection of risk factors for a range of blue-chip clients. The report highlighted how Nasdaq’s acquisition spree, along with companies like Palico and Zanbato, reflect the increased demand among managers and investors for greater transparency, liquidity, data and verification services within private markets. BattleFin and Demyst meanwhile focus on sourcing, organising, evaluating, and vetting alternative data.
The report also touched on recent developments within the hedge fund sector – namely the GameStop saga, which rocked the industry earlier this year, and DeFi – or decentralised finance – a burgeoning corner of the blockchain market that has emerged as a key area of focus among certain crypto-focused hedge funds.
“The GameStop saga of early 2021 further illustrates the disruptive power of technology; this time by coordinating the actions of many otherwise unrelated individuals to create an outsized impact on the markets,” SEI said. “Dismissed by some as a simple pump-and-dump scheme, this incident nevertheless underscores the power of decentralised action in the service of an idea.”
Uberisation remains the least visible of the five innovation themes examined by SEI, with the paper indicating its presence thus far is most obvious in the wealth advisory sector, driven partly by investor dissatisfaction with proprietary investment products leading towards the open architecture trend.
“US independent RIAs and independent broker-dealers peeled away from wirehouses and regional brokerage firms and flourished as a constellation of technology vendors and service providers emerged to meet their needs.”
Elsewhere, while asset managers and hedge funds have contracted out some aspects of marketing, sales and compliance, they ultimately continue to handle most core business functions either internally or trust large-scale service providers.
“Nevertheless, the atomisation of work is already visible even in this relatively calcified industry,” SEI said. “We expect to see more of this not only in distribution and middle office functions, but also in investments.
“Asset management firms are quick to highlight investment acumen as their core competency – typically the main reason for their founding – and some are willing to rely on others to do virtually everything else.”
It warned: “This model may be tested as high-quality technology tools proliferate, data and analytics become more widely available, and transaction costs approach zero, empowering more outsourcing of the security selection and asset allocation functions.”
SEI maintains that portfolio management ultimately remains “a long way” from being fully automated, despite the success of indexing and computer-based trading.
“Active managers face challenges, but they continue to explore ways to generate alpha and attract new assets,” the report added. “This doesn’t mean that there is nothing to be learned from this next phase of innovation, which is likely to roil the asset and wealth management sectors.”
“Able to add demonstrable value to their clients and counterparts, many small firms and individuals will triumph. Larger organisations may find that some of their traditional strengths begin to fade, forcing them to divest control of certain activities or otherwise adapt to the new, networked reality. Big or small, anyone who can orchestrate the cost-effective delivery of an exceptional client experience to the next generation of investors should find themselves in pole position within a reimagined asset management industry.”
Click to read online or download the PDF – UK version or US version