Money managers have been criticised for being too slow to adopt technology, putting them at risk of losing market share to digitally savvy businesses seeking to disrupt the investment industry.
According to a poll of 458 asset and wealth managers, shared exclusively with FTfm, only 27 per cent of wealth managers offer robo-advisers, and only 31 per cent use big data.
Asset managers have also been slow to embrace blockchain, the technology that underpins cryptocurrencies. It is used by just 6 per cent of respondents.
The asset management industry’s need to modernise comes as it is grappling with pressures ranging from tougher regulation to stronger competition. Passive investment vehicles such as index-trackers and exchange traded funds, which allow investors to invest more cheaply, have grown at record-breaking levels since the financial crisis, while customers increasingly expect slick online services.
Amin Rajan, chief executive of Create Research, the consultancy that conducted the poll, said investment companies that failed to modernise their technology systems risked losing business to more digitally clued-up competitors from other industries.
“There is no doubt that mega-indexers and large wealth managers will continue to attract the lion’s share of the new money in motion. Some are developing proprietary robo-platforms. Others are forming alliances with fledgling robo-advisers.
“Their competitors will need to respond in order to survive, at a time when the internet giants are beginning to show an interest in money management.”
Google has previously commissioned research on how it could enter the asset management industry while Facebook recently received regulatory approval from the Central Bank of Ireland allowing it to operate a payments service.
Almost three-quarters of asset and wealth managers said cost pressures would accelerate the pace of digitisation. Fifty-four per cent said differences between themselves and competitors in the fees they charge would prompt them to embrace technology more quickly.
Forty-eight per cent think the rise of passive products will spur them to embrace digital innovation, and the same number think increasing competition from fintech start-ups and internet companies will be a factor.
The slow rate of change is often attributed to the difficulty of grafting new technology on to existing IT systems.
“The social media and website piece is much easier to do,” said Tom Brown, global head of investment management at KPMG, the professional services firm. “It is much more difficult to get into digital solutions built off core infrastructure.”
Cultural factors also play a part. “Enthusiasm for digitisation is less than overwhelming — and will be negative for the businesses,” said the report. “Indeed, asset managers’ current hesitation about digitisation reflects a deeply ingrained scepticism about anything not tried and tested by time or events.”
The poll found that wealth managers are doing better on the implementation front than asset managers that concentrate on institutional investors and less-affluent retail investors. In part this is because they have been more proactive in targeting millennials, and also because they need to forge a closer relationship with individual clients.
The emergence of millennials — a marketing term used to describe those aged between 18 and 35 — is another reason companies need to go further and faster.
Amount of wealth millennials stand to inherit from their parents or grandparents over the next 15-20 years
They are digitally savvy and potentially very rich. Millennials will soon comprise the largest part of the workforce and stand to inherit a vast amount of wealth from their parents or grandparents. This could be around $15tn in the US and $12tn in Europe over the next 15-20 years, Create Research said. They are known for expecting slick online services, and 41 per cent of managers think the demographic will be an important factor in shaping the industry.
But digitisation also brings upheaval. Forty-six per cent of managers believe technology will cut profits as it lowers cost for investors, while 57 per cent believe it will erode staff numbers.
Perhaps more worryingly, there are also hazards for consumers. While digital services make it easier for individuals to manage their own investments, it places the onus on them to make more decisions and puts them at risk of buying unsuitable products if they only use digital services.
“Demand for blockbuster products remains unabated, while financial literacy receives low priority ranking,” the report said. “Technology can potentially offer too many choices and instantly relieve investors of the need to make them.”
There may be future instances of “mis-buying”, as opposed to “mis-selling”, Mr Brown added.