Asset management globally is becoming ferociously competitive with offerings in unit trusts, money and hedge fund management evolving at paces close to the speed of light. Product offerings are becoming more and more complex which with processing speeds at the center. Traders are now using algorithms to capture and detect pricing quick. Its as though there is a thin line between asset management and technology because after all pricing and risk data now resides in the cloud.
Artificial Intelligence
Artificial intelligence is said to be the way to go. AI will differentiate firms through the innovative speeds at which trading will occur. AI algorithms are able to detect price changes that would help with matching trades and seizing opportunities in a split second. Experiments in the recent past have shown that a task such as legal sorting of files can be done 20 times faster than what human beings can do. Due diligence, analysis, screening and trade matching will be done at very high speeds and more efficiently that using manual approaches. Those that tap into this curve will have isolated themselves from the rest in competitive edge.
Firms are constantly finding ways of differentiating themselves so as to lure investors in attractiveness to their offering when given the wider spectrum of alternatives from which to choose from?
This has become particularly significant in the low return world of the last few years. Together with the growth in index-tracking products, this has made investors far more aware of getting value for what they are paying.
Local asset managers are under increasing pressure to justify their fees.
The lack of returns from local markets over the last five years has led investors to be increasingly cognisant of costs and to demand greater transparency.
Shannon Pienaar, Middle East and Africa sales manager
Increasing efficiency
With fees in particular becoming a prominent issue for investors, asset managers are under pressure to bring their charges down. This requires them to concentrate on operational efficiency in order to maintain their margins.
“Staff and technology tend to be the two largest cost items for asset management industry players,” says Pienaar. “But having the right technology stack can significantly reduce the staff costs, make the firm more operationally efficient overall and thereby generate higher net-of-fees returns.”
Overall, the industry is becoming more aware of the role that technology can play in supporting business objectives. Temenos is seeing greater technology uptake in the industry for two main reasons.
“Firstly, there is a push to improve efficiency and reduce risk,” Pienaar says. “Secondly, technology is being used to try to gain new business by supporting new products such as exchange-traded funds (ETFs), expanding services or even entering new geographical markets.”
Additional advantages
Another significant advantage offered by technology is how it gives firms the ability to scale more quickly and efficiently. In an industry where margins increase exponentially as assets under management grow, this is an important consideration.
“Having the right solutions in place allows asset managers to seamlessly grow their businesses while continuing to offer the same levels of service to customers, and without increasing operational risk,” Pienaar says. “Many in the industry will admit that their current processes are sufficient to meet their current business needs but if they were to gain a few more mandates, they would be struggling.”
Technology also opens up the possibility for managers to focus on new areas of growth.
“This allows them to differentiate through niche products like smart beta funds or to broaden their overall offering by going global or offering additional asset classes or investment strategies,” Pienaar believes. “A number of managers are currently constrained in terms of their offering by the technology they have in place.”
The asset manager of the future
However, many asset managers still struggle to find the right solutions to meet their specialised needs.
“There are still a number of legacy systems, providers and processes in place,” Pienaar says. “Overall, you will struggle to find an asset manager who is completely happy with all their technology and service providers, and this could be for a variety of reasons from functional capabilities, system stability and support, through to a lack of investment or a vision for the future.”
Temenos believes that to meet many of these needs the asset manager of the future will increasingly turn to cloud-based solutions.
“In addition we will see a pay-per-use model where, instead of having to license enough processing power to meet peak usage, firms will only pay for the processing power that they use rather than sitting on excess capacity for 90% or more of the time,” Pienaar adds. “This has the potential to significantly reduce overheads as this type of offering becomes commoditised.”
He also sees significant potential in blockchain or distributed ledger technology.
“There could be meaningful benefits in areas such as instant settlement and transfer of securities and disintermediation – for example removing the need for execution brokers,” Pienaar says. “The benefits for the end investor in terms of removing layers of costs and risk, such as counterparty risk, are immense. In practice, however, this technology still seems some way off.”
This article was first published on the moneyweb on 14 February.
