The impact of regulation and technology on the asset management industry

By Nicole Miskelly | 30 November 2015

Despite initial reservations, the banking industry has embraced the digital revolution, meaning that it was only a matter of time before global technology companies, such as Facebook and Google, recognised the potential for disruption in the wealth and asset management space.

Asset managers have recently been accused of being too slow to adopt digital technology and although they realise the disruptive potential of technology, there are concerns that many companies are not making changes quickly enough to keep up with new competitors such as Chinese asset manager Yu’E Bao, the money-market arm of Alibaba which has gathered assets of over $90bn in two years.

Jay Mukhey, Global Solution Marketing Manager, Investment Management at Misys agrees with this statement, although he says that the asset managers that are utilising technology, such as those that are partnering with software developers and vendors to build digital capabilities into an existing platform, are gaining an advantage over those that are not. “Yes they (asset managers) are definitely behind the curve on this, especially when compared to other B2C service-based sectors– innovative AMs who do embrace digital technology are already using it as a competitive advantage to win market share.”

Alongside fintech companies entering the wealth and asset management space, on-line automated (robo) investment advisers and wealth managers are disrupting the sector, in an attempt, bobsguide reports, to provide computer-driven investment solutions using algorithmic risk assessments and automatic portfolio selection, according to the client recommendations.

According to a recent Deloitte report, companies such as WealthFront in the US, a start-up which uses software to automatically make investments and financial decisions for its clients, are already utilising robo-advisers and, “At the end of 2014 these firms grew to 19 billion AUM (assets under management), a 65% growth from the previous eight months. However, these new market entrants are still nascent and represent a trivial amount relative to the $25+ trillion retail investable assets in the United States,” the report said.

Just like the banking industry before them, asset managers are starting to embrace digitisation, however, this is not the only similar challenge facing the sector, regulation is proving to be just as big a challenge for the asset management sector, as it is for the banking industry.

The main regulations affecting the asset management sector according to Mukhey are: Solvency II (transparency requirement to win mandates, SCR restrictions), EMIR/Dodd-Frank (increased complexity and cost of trading derivatives) and MiFID II (uncertainty around enforcement).

According to Marc McCarthy, Associate Director of Business Consultancy, AutoRek the next few years are going to be tough for compliance managers. “The planned time scales for MiFID II, MiFIR, EMIR and STFR will undoubtedly cause planning headaches for any IT or compliance managers. While it might be tempting to breathe a sigh of relief at the proposed delay to MiFID II, it would be unwise to do so given the scale of the challenge.”

Alongside the Financial Conduct Authority’s (FCA) recent announcement that they will be conducting a market study in 2016 to access whether UK asset managers are delivering value and how they are servicing both retail and institutional investors, there are going to be other issues presented by international regulators, McCarthy adds. “As well as the FCA’s agenda there are the additional challenges presented by international regulators and tax authorities – not least FATCA/ CRS.”

Speaking about the effects of the FCA’s market study, which has been welcomed by many in the industry, McCarthy hopes that it may lead to more technology investments by asset managers. “Many firms have been cautious about investment in technology solutions because of cost and the uncertainty of future proofing any investment – the knock on effect is inevitable ie. that the cost will ultimately be borne by customers.”

McCarthy believes that regulatory intervention since the financial crisis has driven unprecedented change in both front and back office, which has affected the speed at which the asset management sector has adopted technology. “The industry at large has been relatively dormant in the use of new technology when compared with other industries. In the old world, investments were sticky and regulators were more passive so there was less appetite for firms to invest in technology and innovation. In the new world – the use of digital technology in the front office supported a by fit-for-purpose, transparency driven, back office will be increasingly essential for firms to survive.”

“The age of asset management is upon us,” said Andrew Haldane, chief economist of the Bank of England 18 months ago, and although the extent to which the disruptive forces will influence the asset management industry is still unknown, with the New Year approaching, McCarthy believes that traditional asset managers should be focusing on innovating to keep up with online competitors. “Companies like Nutmeg and the advent of technology brands entering the market place provide highly interactive, more transparent and low cost investment models for their clients.  In order to remain competitive asset managers will need to invest in technological innovation.”

McCarthy predicts that 2016 will be all about technology investment to ensure regulatory readiness, improving customer channels and creating operational efficiencies, a statement which Mukhey agrees with, alongside the need for asset managers to focus on “asset class diversification and greater agility to increase growth and system consolidation and more robust workflows and processes to reduce operational costs and risk.”

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