New technology adoption was always coming. Covid merely accelerated it
The world was already shifting towards many of the working practices that have become commonplace over the last year before the pandemic hit, including remote work and a widespread shift to cloud computing. But it was going a lot slower than what we’ve seen since. Of course, this rapid surge towards technologies that would enable “business as usual” to continue in at least a remote format came about not out of desire but of necessity. After all, it is the mother of invention and the alternative was to shut down altogether. It is thanks to remote work that asset management has been able to continue, something that perhaps we take for granted, given that even ten years previous, it would have been much more difficult to achieve.
The financial sector at large has responded to Covid with a strong sense of urgency. For instance, the British high street banking sector was quick to move financial services online and switch to digital communication channels for their customer base. In asset management, the pandemic has served to highlight the dangers of being reliant on traditional working practices, including an office-based workforce and on-premise technology systems. At QUO, we’ve seen a migration away from this older way of working towards an embracing of new working processes and adoption of the technology tools that facilitate this change. Saying this, there is still a long way to go for the sector at large.
Small hedge funds and family offices are leading the investment technology evolution
Particularly on the buy side, smaller, independent asset management firms are well land truly embracing new wealth technologies. A number of primary reasons are driving this interest.
- 1. Cost reduction
Adoption of the right tech can heavily reduce costs.
- 2. Productivity gains
New tech-led capabilities, including robotic process automation, machine learning, and data analytics can generate considerable efficiency improvements.
- 3. Regulatory compliance
Advanced technologies are now taking over many of the processes that firms must implement to comply with their regulatory obligations.
While some smaller firms may genuinely be committed to new technology adoption, the reality is that the space is under increasing pressure, financially, and to do both with regulation and competition. New technologies are helping them to weather these challenges and increase their competitiveness.
Private banks: the last bastion of the old guard in wealth management
On the other hand, private banks are at the other end of the innovation spectrum. Unlike smaller hedge funds and family offices, they are generally content, at least for the moment, to continue using legacy technology and merely updating it with patches as and when their IT departments deem it to be necessary.
What is happening now in asset management is similar to what we have seen in the financial sector in general over the last decade with regard to traditional banking and fintech. The retail banks are so big that they’ve struggled to adapt and innovate, whereas fintechs, thanks to their size and digital-native nature, have been able to develop financial products and go to market in a nimble, agile manner. The result has been that the fintechs have slowly but surely eaten into traditional banks’ market share.
We are now seeing smaller asset management firms do the same to the large private banks. They’re often cheaper and faster, and are now offering very attractive service offers to clients who would usually take their business to private banks. This is a trend that is very likely to continue to grow, particularly because of private banks’ reluctance to embrace digitalization.
The future of wealth management will be built on a solid technological foundation
Compared to the private investment banks, it is the independent firms that are embracing the technologies now that are driving change in wealth management. The private banks are standing in the way of expansive change across the space in the short term, but they won’t be able to in the long term, the main reason being that clients will become increasingly expectant of specific services and outcomes, which can only be realized with the use of certain technologies. It is this client demand that will force the hand of private banks, but by then we will likely have seen smaller firms become much more prominent in the market.
The future of asset management will likely resemble what we are now seeing in the payments space: massive disintermediation of the traditionally dominant group - banks - by smaller firms. The private banks will be the losing party in this generational seachange, while opportunity will be plentiful for the savvy independent wealth manager. But the real winner in this shift will be the customer. Private banks will eventually be forced into adopting new technologies while smaller wealth managers will continue to integrate new and improved tools to give them a competitive edge. The result will be a whole new world in investment choice for the customer, and likely faster, cheaper, and highly tailored service.