The Impact of Fintech on Asset Management

Traditionally asset management has been about identifying unsystematic risks and aligning the risk profile of a portfolio with the risk tolerance of investors/ clients. This is achieved through appropriate asset allocation and suitable diversification within an asset class. As a portfolio manager, whatever management style is followed (active, passive, or discretionary portfolio management) the management strategy involves deep research and analysis, and advising clients based on that analysis; Portfolio Risk Analysis software that crunches big data, and Artificial Intelligence tools that use predictive and descriptive analysis along with a plethora of other fintech software solutions has changed that. Historically, fund managers have looked at the complex world through the lens of a few key variables that define historic behaviors of assets, however, these tools are no longer differentiators. Complex computational models are disrupting the world of asset management.

The advent of big data and advanced analytics has enabled the calculation and analysis of risk across different asset classes much more accurately and efficiently. An incumbent within the financial services industry must adapt or perish. Asset managers must strive to integrate advanced analytics and the latest technology across the asset management value chain and embed data analytics within the decision-making process. According to a McKinsey & Company report from 2015, 40% to 45% of investors, who had $25000 or more to invest, changed their investment firms, in order to migrate to those firms that offered the latest fintech solutions. Young investors are much more partial to wealth managers that utilize the latest technology to analyze data; they also desire greater accessibility to asset managers. If managers want to be successful, integrating big-data analytics, blockchain, machine learning and other technology-based solutions, to increase efficiency and enhance client experience, will be the key to thrive within this evolving ecosystem.

Developments in Natural Language process (NLP), Machine Learning (ML) and Artificial intelligence (AI) are disrupting the way information is processed, gathered and interpreted in every field of every industry. Technology is no longer a value addition; rather it is a bare minimum to compete within a highly evolved and digitized market. Regression is replaced by AI, which is now assisting fund managers to complete basic tasks in the back office. Traditional manual work is replaced by AI models that are assisting traders through algorithmic trading which occurs in split seconds and is presenting live data to fund managers on the go on any device. Now asset managers define the opportunity set in terms of asset classes and global regions where investments need to be made, everything else is done by a back end system that is using machine learning technology to interpret this in terms of the opportunity set. Technology is no longer just assisting fund managers; instead it is replacing repetitive manual tasks and conducting these same tasks at a higher efficiency and a lower error rate. This means clients now desire more from the fund manager. Clients are willing to pay more for time invested in relationships, and technological efficiency paired with superior returns.

Fintech entrepreneurs, developing blockchain applications and digital investment platforms are disrupting the wealth management sector as a whole. As a fund manager today, it is important to adopt a more responsive attitude to these disruptors and innovators, invest in new technology and develop a strategy to enable a seamless integration of fintech solutions within existing operating models. Robo advisors have been dismissed as less valuable than their human counterparts within wealth management, however as the technology behind robo advisors becomes more sophisticated, it creates an opportunity for asset managers to target a larger pool of affluent clients who are looking for inexpensive ways to manage their assets. A study of investment managers with $35 trillion in assets under management found that the leading investment managers who increased their median operating margins to 35 percent over 2014-2017, did so by investing in new technology, increasing their efficiency, garnering trust among investors, thereby enabling them to command a 19 percent premium in comparison to competitors. However, this does not render human advisors redundant. In fact, empirical evidence shows that “access to humans can make people less risk-averse [and make them] less likely to overreact to market downturns – pulling their money out of the stock market at the bottom.” Human financial advisers can have in depth conversations with clients to help them understand different investment products and the risks they entail in turn helping the clients make informed decisions. As a fund manager it is vital to seek out strategic partnerships with innovative fintech firms and utilize data analysis and technology to make cost and efficiency gains while resonating with the younger as well as the existing investor base. Thus, technology can be thought of as a tool that augments human capabilities, rather than something to be feared or dismissed.