It is important to see regulators’ interventions in the funds industry as the key to progress on better investor experience and service-cost consciousness, but digital transformation will make the biggest breakthroughs by reshaping the market, says Olivier Portenseigne, managing director and chief commercial officer, Fundsquare.
Worries about fees and the challenge of passives are keeping European active asset managers under pressure. Costly processes and regulations mean asset managers can’t cut fees as much as they would like, and there is growing consumer interest in exchange-traded funds (ETFs) and trackers. If fund businesses had strong relationships with investors, it would help. However, this highly product-centred industry too often speaks in jargon that is ill-suited to building relationships with end investors. The industry is adapting too slowly to a new environment; meanwhile other industries are far more consumer-centric, and internet businesses are tailoring their services to each client. Digitalisation can help asset managers to change.
The world over, legislators and regulators intend to make the funds industry more investor-focused. This explains much of the motivation for Mifid II and Priips regulations in Europe, and to a large extent, Asian regulators are likely to follow the same path. Time will tell, but it is probable that these initiatives are merely increasing complexity and cost. Asset managers are in the best position to understand their clients with a view to improving long-term relationships and provide better value-for-money services.
Digitalisation will provide solutions to many industry challenges, including KYC, reporting, client communication, branding and streamlining the fund supply chain. We are only at the start of this journey: artificial intelligence, machine learning, distributed ledgers, data science and the rest are cutting-edge technologies that require investment of time and money to bring them into production. Unfortunately, the majority of the European fund industry’s technology investment has been focused on conforming to regulation in recent years. However, now most of these new rules are being digested and the industry is better able to take steps towards digital transformation.
An example is the distributed ledger technology (DLT) initiative which is being developed in Luxembourg with input from international players. At its heart is a blockchain technology to enhance investment fund distribution operational processes. Such technology enables information and processes to be shared by participants of the funds distribution supply chain without wasting effort duplicating a range of activities linked to ledger maintenance.
This technology has the potential to unlock significant efficiency gains, plus it will be an enabler for the burgeoning fintech ecosystem of players. These will support a range of value-adding services leveraging the transparency this technology brings, for the benefit of end investors. A user-owned/user-run infrastructure of reliable, standardised data is essential to the operation of many digital tools. DLT and related tools will help with marketing and product development activities too. Probing data for trends will allow asset managers to understand the subtle, changing needs of their clients and distribution partners.
We are at the early stage of understanding how transformative these technologies will be. Much more effort is needed to create greater understanding between the technical developers and practitioners, and Asia is active in implementing these technologies. Thus the industry in this region is well placed to accept the challenge of understanding where and how valuable advances can be made.
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