Fintech on Friday: Asset managers must innovate to thrive in digital age
Innovation in asset management is not just about creating new products but about fostering an innovation culture, argues Michael Reinhard
Just imagine IT giants Google, Meta or Apple launching an asset management business.
In theory they could. These companies are extraordinarily innovative and have access to incredible technology that could automate back-office functions, manage risk or power newly developed investment strategies.
One of the reasons why these Silicon Valley firms have not entered the asset management industry is most likely due to regulation, often defined at a national level and always complex. This regulatory burden puts them off. And this is where established industry players have the advantage, thanks to long-lasting experience and ability to deal with the challenging backdrop. The trick is to create the right environment for asset managers and institutional investors so they can innovate like fintech companies, while remaining in compliance with regulatory requirements.
Thriving, not surviving
We are moving into a new technological and digital age, where asset managers need to adapt along with investors and service providers like management companies and fund administrators. All of them need innovation and change to thrive in this new paradigm shift.
Innovation in asset management is therefore not just about creating new products but it is also about creating an innovation culture, developing next generation business models and new ecosystems. This can help enable clients to reap the benefits from the plethora of data available with the help of disruptive technologies such as artificial intelligence (AI), machine learning algorithms (ML) and blockchain technology.
For instance, AI and ML could help keep costs down and reduce human error in areas such as administration, compliance and regulation. It can also be used to understand risk better in portfolio management.
We need to completely rethink how future asset managers will function in a new technology-driven world. There will be AI-based intelligent automated workflows carrying out tasks at breathtaking speed. Natural learning processing will also play a strong role in this new automated and highly efficient world. Most forward-thinking asset managers are currently road-testing these technologies.
Start me up and never stop
There are two very powerful examples of innovation, which could become a major area of focus in the industry. As already mentioned, one of the biggest challenges we face in this digital world is the phenomenal amount of information that saturates markets. It makes it very challenging for portfolio managers and investors to see through the noise.
Therefore, the potential to co-operate with start-ups should not be underestimated. These collaborations can use advanced techniques such as augmented language intelligence and context-based sentiment analysis to sift through vast amounts of information. These AI and ML-based models can quickly detect trends in media publications and provide reliable analysis and risk signals to investors to help them make better decisions and enhance risk monitoring.
Where this technology can really help is understanding environmental, social and governance (ESG) risks better. Up until now, investors have mostly relied on ESG ratings, which are very useful but always ex-post.
The difference is that it is now possible to refine techniques which can analyse hundreds of thousands of articles taken from a plethora of media outlets worldwide in real time. This means the provision of useful ESG scores – that are constantly up to date, which is invaluable for asset managers and investors – is now becoming a reality.
Digital embraces
Another area where boundaries are being pushed in asset management is in the sphere of digital assets, where there is a need for end-to-end investment platforms. The challenge here is transferring the entire investment process into the digital world. This can be facilitated through a comprehensive white-label offering, by covering all main phases of the investment process, which is completely digital, and located on a single platform.
Such an initiative needs to cover everything from client onboarding, the issuance of digital assets, to administration and reporting. Blockchain-based platforms must meet the quality requirements of institutional investors that invest in digital assets. Moreover, asset managers and fund promoters need to issue, manage and distribute digital assets in a regulatory compliant environment.
There is a huge opportunity here for innovative asset management groups to utilise the same highly regulated management companies and fund administration services they use for traditional asset classes, while leveraging this infrastructure to take investors on the complete customer journey, embracing the digital menu.
If you can innovate, then you can see where the opportunities lie and understand the pain points that asset managers feel, enabling development of new service offerings. The key is to devise strategies that have the potential to not only completely change the way portfolio managers invest, but also deliver more sustainable returns in the future.
This is why innovation is important and why the investment firms rather than the big techs currently hold the initiative.
Michael Reinhard is CEO of Universal Investment
