Asset managers should be wary of rapid tech advances

Asset managers must not underestimate the rapid technological changes currently underway in their industry, according to panellists at Fund Forum Asia 2016 in Hong Kong.

Interest in robo-advice, which is effectively algorithmic driven investment advice, has grown much to the concern of some client facing professionals at fund managers. The growth has coincided at a time when cost pressures at asset managers are high and investor demographics are rapidly changing.

A study by Legg Mason of 1,000 investors in the UK aged between 18 and 39 found 85% were comfortable with robo-advice and 80% confirmed they would trust such advice. A study by Z-Ben Advisors found nearly half of money market fund sales in China are now done online, an astronomical increase from 5% in 2012.

“Customer preferences are changing with investors increasingly using apps to connect to the end products. We have also seen a rise of robo-advisers. Managers should be alert to these changes,” said Yoon Ng, director for Asia-Pacific at Spence Johnson.

However, some believe that robo-advice could be a useful tool to deploy for lower value accountholders, particularly if they have generic questions about the products. This would enable resource constrained firms to scale down costs at a time when their operational and regulatory overheads are high.

Nonetheless, older investors tend to prefer using a financial advisor rather than an online tool. The Legg Mason survey found just one third of investors aged between 40 and 75 trusted online investment management sites. As such, there will obviously remain a requirement to continue servicing this investor segment through “human” advisors.

There are a number of regulatory issues around robo-advisors. Know-Your-Client (KYC) processes must be rigorous, particularly to adhere with tax requirements under the Foreign Account Tax Compliance Act (FATCA) and the Organisation of Economic Co-Operation and Development’s (OECD) Common Reporting Standards (CRS) package.

Furthermore, there would have to be harmonisation of the rules governing robo-advisors to ensure standards are maintained. This would be particularly pressing under the Markets in Financial Instruments Directive II (MiFID II), which focuses on product governance among other issues. Rob Taylor, head of investment management at the UK Financial Conduct Authority (FCA), said firms would be responsible for the nature of the advice which robo-advisors offered.

Non-financial institutions including Snapchat, the disappearing photo-sharing tool, is reported to be exploring establishing a robo-advice service offering investors exposure to exchange traded funds (ETFs).

Others have gone further. Yu E Bao, a unit of Chinese technology giant Alibaba, has raised $90 billion in assets under management (AuM) after just two years. In 2014, Google hinted it might launch an asset management business having already developed a successful venture capital division. “We could see the likes of Google and Alibaba changing asset management,” said Ng.

This alarmed a number of active managers, and several have gone public warning the industry not to be complacent about the threats posed by new disruptive market entrants. Indeed, a study by State Street in 2015 confirmed 79% of asset managers feared a technology giant could upset their core investment management businesses.

Nonetheless, most believe that technology players would be better suited to assist with distribution rather than competing with traditional fund managers