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REGULATORS WILL BE INCREASINGLY FOCUSED ON THE REVENUE, VALUE AND REWARDS ACROSS THE INDUSTRY, PARTICULARLY AS IT BECOMES CLEAR THAT THE CURRENT INDUSTRY MODEL WON’T BE SUFFICIENT FOR FUTURE ECONOMIC OR POLITICAL NEEDS.

Neil Curham

Executive Director, Alpha Financial Markets Consulting

An interview with Neil Curham, Executive Director, Alpha Financial Markets Consulting

Zara Amer, Head of Content, Clear Path Analysis: Which three trends would you rate as being the most important and how have they impacted the market so far?

Neil Curham: The investment management industry is undergoing unprecedented levels of stress and change at present, and you can only see it getting even more complex. In terms of trends, we’ve had lots of turbulence at the macro-level, that are well covered by the market and economy in general.

To name just a few of the obvious factors that will affect the industry, our clients are monitoring and developing strategies for some of the larger topics that are playing out globally. Brexit and European distribution, developing an industry proposition in a global low-return economy, and the increasing challenges of product development within the active vs. passive investment debate; there is a wide range of factors that the industry is faced with over the coming months and years.

Looking at the trends that emerge from these, I’ve selected three technology enabled business trends that we see as particularly significant in the face of these headwinds. The first is a hidden trend that’s already taken hold, namely the emergence of digital technology across the workplace. One such example is the adoption of ‘bots’ to automate processes and transform communications throughout organisations. Integration of these new digital solutions has the capacity to take significant costs out of the industry while increasing transparency and responsiveness. This should see the cost of financial services falling for customers and hopefully also an improved customer experience. ‘Bots’ also represent a small step on a path to much more sophisticated AI solutions – such as AI investing and dealing, which could see a big reduction in fees. This has to be the long-term strategic objective of any manager looking to survive over the next 5 – 10 years.

My second choice is one that will be largely driven by clients, who are becoming more demanding regarding the transparency and availability of investment information and data. Investors and distributors require a rapidly expanding set of information to be provided on ever more pressing timescales – sometimes going to the heart of the investment process and beyond the standard capability of funds and companies to support. Increasing demands for data are not easily serviced by legacy technology so we expect to see continued significant investment in streamlining data architecture and developing more sophisticated data reporting solutions.

Meanwhile, the appetite for timely content that provides clients with relevant, insightful commentary, while meeting the reporting and suitability requirements of the regulators that we see emerging through initiatives such as MIFID II, grows month by month. Increasingly, this requires firms to radically change the way they communicate with clients. Over the next few years, the need for investment managers to quickly and securely develop new ways to engage with clients will pose challenges that look more like they fit with a publishing house than an investment manager.

Finally, the trend that is much talked about but has yet to hit - in an industry that has basically stayed the same for the last 40 years - is the adoption of blockchain technology. Blockchain as a way of processing, storing and sharing information has the potential to make a clean sweep of the legacy of inflexible systems, inefficient data structures and lack of integration that exists across the custody, administration and investment operating models. There are so many potential uses for blockchain technology in financial services that it’s difficult to know which will break through first but I’m particularly excited about the transformation of the customer experience – both in terms of reduced cost and increased simplicity – for example if the technology can successfully negate the need for prolonged and duplicated KYC/AML checks.

Similar to the impact of open banking in the retail banking sector, the capacity of blockchain technology to allow for much greater sharing and integration of data and processes could be revolutionary for the way that firms manage investments, fund and client data and processes – to the significant benefit of clients and firms alike.

Zara Amer: What are the forces at work driving these trends?

Neil Curham: As I mentioned before, there are an unparalleled number of forces buffeting the industry and driving these trends. The traditional motivations of creating greater efficiency or effectiveness are ever-increasingly important as the pressure on fees and margin grows day by day. In the past few months, we’ve seen firms have their fees cut by 35 or 30% and consolidation in the market around distribution is only going to increase this downward pressure.

Also, in the industry at the moment, we are seeing a build-up of market forces that feel like they could erupt over the next few years. These address the fundamental structures that the industry has been built around over the past few decades. The challenge to the value of active management, the demands of an increasingly stressed pension’s structure, and the challenge of creating returns in a low-return economy are all putting the industry under real scrutiny. The effect on the status quo significantly increases the chances of real and transformational changes taking place. As we say this, we must always remember the Bill Gates’ comment that we over-estimate what happens in 2 years but underestimate what happens over 10. We’re several years in to these factors being real challenges to the industry now and the risk grows of underestimating their effect rather than the overestimation or hype that we’ve seen for a couple of years now.

At the coal face, these forces are seen as being financial, cultural and political pressures. Regulators will be increasingly focused on the revenue, value and rewards across the industry, particularly as it becomes clear that the current industry model won’t be sufficient for future economic or political needs. On a functional level, the millennial workforce and client base will increase the adoption of digital technology. You just need to think back a decade to the clamour of bank branches shutting and compare it to the hypothetical effects of online banking being withdrawn for an hour.

And the industry will need to adapt to a world where fees are cut by 30-50% across institutional and retail markets compared with today. This type of pressure – where the larger incumbents find their historical business models no longer generating the revenue or margin of last year or even last quarter – will only increase over the next few years.

Finally, the technology is advancing at a fantastic pace – solutions are increasingly cloud based, or can be configured with other systems via APIs. Big data, AI, blockchain, cloud – these are all technologies that are just beginning to find their footing in the industry. Furthermore, bespoke builds and lengthy developments are becoming a thing of the past as technology becomes cheaper and more flexible, this encourages more dynamic solutions to problems which have previously not been solvable.

Zara Amer: Thinking about 2016 and beyond, what are the evolving client needs and digital trends that you foresee disrupting the market?

Neil Curham: This involves what we call “the guessing game”. Guessing why the investment management industry has resisted the onslaught of digital business models while other industries have seen real transformation. There is a standard model that successfully describes the impact of digital technologies across a range of industries. Put simply, if there is an imbalance between the information available to both sides of a market (the suppliers and the consumers),

this leads to a monopoly of the markets, skewed against the consumer. But the internet and digital technologies have consistently disrupted this information monopoly, and at a speed that has caught out many market incumbents – often causing their demise.

Advertising, taxis, music, videos, hotels; the transformation of industries due to a new entrant addressing this information asymmetry has been breath-taking with Google, Uber, Apple, Netflix and AirBnB, all decimating existing players to establish a new business model, that’s entirely built around client needs and digital trends. The question is when will the investment management industry experience this level of change.

To predict where client needs and digital trends will disrupt the market in the same way is definitely a guessing game. However, as the spotlight is shone on ineffective aspects of the industry via market competition, new entrants and regulatory scrutiny, it feels like the asymmetric world that has seen other industries fall, might be taking shape. This can create real opportunities for new approaches either from new or existing industry participants. We expect this disruption to deliver greater transparency, improved efficiency and real-time support for clients trying to meet their increasingly challenging investment objectives.

Zara Amer: How have you managed the strategic challenges that come with implementing new trends?

Neil Curham: The biggest challenge to implementing these new approaches and trends is an issue that has long affected our industry – the inability of the industry to embrace long-lasting change. The fungibility of the products, processes and operating model (that is, the ability for them to shift shape before your very eyes), alongside the constant innovation and change within the markets, has meant that strategic change has floundered, as it constantly chases an ever-evolving industry and changing business models. At the same time, the tendency for programmes and projects to be measured in quarters and years rather than weeks and months has meant that strategic change has always been running to keep up.

However, new technology that enables more rapid change by not being so technically complex is changing this. We have worked with numerous clients where successful change projects have been reduced from years or months to just weeks. This has dramatically improved the take-up of new processes and approaches, whilst also allowing long-term strategic change to be achieved in incremental steps, aligning with the prevailing market or client wind.

The key factor to enable this is the presence of vision, allied with a robust approach to “being agile”. Hundreds of millions of pounds have been wasted in the industry, and will continue to be wasted on initiatives where “being agile” has been an excuse for a lack of sound strategy, design or planning. Instead, our clients’ (and our) success has been built around having a clear vision of what the future can look like, a detailed design for how the outcome should operate, and a proven approach to delivering alongside and to meet the business strategic objectives. This is the experience of more than a decade working with digital technologies coming to fruition in an industry that has yet to really take advantage of the competitive, operational and financial opportunities that they present.


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