The world has changed a lot in the past couple of decades. When was the last time you cashed a cheque at a bank? Or went to a travel agent’s office to book a flight? And where did all the video rental shops go? Whole industries have been disrupted – or destroyed – by new technology. What lessons can the fund industry learn from other parts of the economy that have been turned on their heads?
The fund industry has certainly faced its own disruptive forces, but not necessarily on the scale of other industries. The rise of passive investment has put pressure on active management costs. Low-fee exchange-traded funds potentially reduce the cost of building a long-term investment portfolio. But they have hardly shifted the needle when it comes to closing Europe’s €2 trillion savings gap. While fintech firms are busy getting the unbanked around the world online, the asset management industry is a laggard in serving those struggling to save.
The basic fund industry product has hardly changed in its investor proposition: income, growth, a bit of both, or the occasional element of protection. Nor have the incentivised savings structures within which they operate, such as pension schemes, unit-linked insurance policies or tax-free savings plans like the UK’s Individual Savings Account. A far bigger shake-up awaits.
The world’s first discount airline is (or was) older than you might think. Pacific Southwest Airlines was launched in 1949, charging a $9.99 fare to fly the 300 miles from Burbank to Oakland in California.
But later ventures like Southwest in the US and easyJet and Ryanair in Europe would become true disruptors. First by phone, then over the internet, these airlines offer temptingly low fares – but only for a few alert passengers. For everyone else, dynamic pricing came into play – the later you book, the more you pay.
The fund industry already has multi-class funds, with different minimum investment thresholds and annual fees. Making those charges dynamic would not be easy, but perhaps fee structures could entice investors to save more. After all, the incremental cost of investing €100 or €1 million is not enormous, so passing on economies of scale to investors may be attractive. Could stepped charges, dressed up as ‘investment goals’, be the nudge message required, assuming it is well communicated?
If pricing isn’t a big enough lever, what about simplicity of the proposition and delivery?
Here’s a neat example that actually involves the financial industry, albeit on the other side of the world. When Alibaba noticed that its millions of users were building up balances on its transaction app, it offered a simple way to put that money to work. Since 2013, app users have swept some or all of that money into and out of Yu’e Bao (Chinese for ‘leftover treasure’), a money market fund that quickly became the world’s largest.
Chinese smartphone users are probably no more excited about regular savings plans or dollar-cost averaging (should that be yuan-cost averaging?) than Europeans. But thanks to the clever use of artificial intelligence and big data, Alibaba’s financial business Ant Financial has nudged more than 100 million users to direct small sums of excess cash to an expanding range of investments. Thanks to its lifestyle insights and actionable messaging, assets have risen 80-fold.
What’s more, the ease of investing in ‘sweeper’ funds has had a huge knock-on effect. Once hooked on simple savings, members of China’s generation born between 1990 and 1999 now start personal finance management 10 years earlier than their parents’ generation did.
Missing the open banking bus?
But the Yu’e Bao story is also a warning to a complacent fund industry. Just as Ant Financial’s Alipay mobile payments have rendered bank accounts and credit cards virtually redundant, any tech firm with a better handle on lifestyle and behavioural data science could easily take the industry further down the road toward disintermediation.
The EU’s revised Payment Services Directive could be a lifeline, if asset managers were to grab it with both hands. Challenger banks and neo-banks offering credit cards, with app-based bank account-like facilities, are leading the fintech revolution, using their platforms to add additional services, including personal finance tools, stockbroking and access to funds. But it is the fintech firms, not the fund managers, who are the gatekeepers and benefit most from the lifestyle data they scrape.
A quick search on the European Banking Authority’s register indicates that very few fund managers, financial advisers or fund supermarkets have applied for third-party provider status, enabling them to tap into banks’ client bases with account-holders’ permission. Could they yet rue an opportunity missed?
Process and delivery
Amazon launched its attack on the bookstore business model in 1994. The first book dispatched to a real customer was Fluid Concepts And Creative Analogies: Computer Models Of The Fundamental Mechanisms Of Thought, by Douglas Hofstadter. It was hardly a best-seller then and is currently ranked 168, 152nd on Amazon.com, but that sale launched a global titan.
Amazon has since become a multi-billion-dollar business. It’s not a great investment in terms of return on equity, having never paid a dividend; its ongoing expansion depends on constantly investing in more warehousing, staff and distribution networks.
But it is the Kindle devices and apps that are Amazon’s true masterstroke, rewriting the fixed and variable costs of delivering to customers. When books become digital, there are no warehousing requirements, no transport costs and no risk of the customer missing a delivery if they’re not home. Amazon Prime, along with Netflix, have done the same to the DVD box set, Spotify and Apple Music to the CD.
The fund industry has made great strides in bringing digital efficiency to its processes and procedures, but everywhere from KYC to fund accounting, there’s still too much paperwork involved. Unless digitalisation embraces everything from investment advice to customer subscription and redemption, along with reconciliation, rebalancing and aggregation, there’s a good chance that Google, Amazon, Facebook or Apple, or the Chinese giants, will get there first.