“People today are in danger of drowning in information; but, because they have been taught that information is useful, they are more willing to drown than they need be. If they could handle information, they would not have to drown at all.”
- Idries Shah, Reflections
The above quote summarizes today’s day and age where information available is more than any party can even begin to use. Experts believe those who do not start using this data to improve their offering may be swept under the wave. Technology companies have started disrupting all business models. From consumer marketing to client interactions, everything is changing. In all this disruption there’s one recurrent theme, customization or giving the customer what they need. The ease of access to insurmountable information doesn’t come without a cost. Studies have shown that individuals have lost their ability to concentrate due to the internet, in addition, being spoilt for choices has also resulted in making every day decisions difficult, or at least made us heavily reliant on bots in making these decisions for us.
From selecting credit cards and bank accounts, to apparel shopping, everything has been made simple. Digitalization has not only reduced cost of operations, but has also reduced the “time to market” and lowered the barriers to entry. Let’s face it, the world as we know is changing, and the status quo is not an option. It’s only a matter of time when the next Facebook or Google of the investment management industry emerges. While it’s true that the plethora of regulations may create difficulties for entrants, technology groups are more likely to enter investment management by creating independent companies so that they will not have to apply financial regulation across their business. The foray of Alibaba Group and Tencent Holdings into the investment management industry being examples of the case.
The asset management industry has evolved over time. Financial Engineering has led to the introduction of investment products that cater to different segments of the markets. From hedge funds and high frequency traders that make gains in milliseconds to passive index trackers in the form of Exchange Traded Funds (ETF). The antecedent for this advancement has been technological innovation. Ever increasing processing capabilities and speed of connectivity have resulted in split second decisions causing billions in gains and losses. An investment house no longer requires multi storey complexes with swarms of executives, but rather may even be based out of a one room managed service office.
While broader technological innovations may have improved how the business is conducted, the investment management process has largely remained the same. The process for making the Investment Policy Statement (IPS) continues to be the starting point for any successful investment process. Gathering client’s current financial standing and future goals is the foundation of any investment process, and traditional fund houses continue to rely on situational data gathered from face to face interviews. The importance of getting this data cannot be ignored, but there might be alternatives as to how this information is collected. Social media players believe that how users behave online, what they like, read or watch is information that can be used in devising investment strategies for these users. Observing a client’s attitude from such information may yield more than what the client details in an arranged setting in a face to face interview. Once the investment goals have been identified, robo-advisors can come in and design the optimal portfolio, an activity that financial advisors used to perform for their clients.
Individual investors are getting smarter by the day, online investment discussion forums and other financial analysis oriented websites have made the collaboration amongst savvy investors easier. Just a few clicks on the internet can generate more information than a fifteen-minute call with a sell-side broker. Investors are looking for smart analysis and the ability to move money in and out on a regular basis. Websites such as Motif Investing which focuses on thematic investment, letting investors find opportunities based on insights or trends and ThinkNum that enables investors with a quantitative bent to collaborate on making financial models of listed companies are gaining traction. These websites have taken away the complexity in investing or analysis by making the process simple and more collaborative.
Post IPS, not much has changed in how money is managed in conventional fund houses. Fund managers continue to use financial reports and management interviews as the primary (if not the only) source of information for their analysis, augmenting this analysis with data and news that is sold to all of their competitors at the same time. While a host of financial products exist, that provide historical market data, it is time that these fund houses start looking past this information. No one can ignore the importance of reading the annual report from cover to cover, but that is where the investment management process just begins. Finding the next big idea is all about uncovering relations, or finding information that no one has (material public information), as fund managers look for the elusive alpha. Simply looking for this information in piles of financial reports may not get an analyst anywhere.
Information online might be scattered, and the hardest part of analysing such information may be aggregation. Products such as the PermID from Thomson Reuters is an example of one such tool that can be used in combining all the information. The idea behind PermID being a unique number representing any entity, transaction or individual which lets you tag all the information available to that number. Not only does it let you consolidate all the information under one permanent ID, the ability to create cross linkages and determine relations between different entities adds to the mix. As data tagged to the Knowledge Graph grows, correlations that need to be ascertained from heavy statistical packages may be just a click away.
“There is nothing permanent except change.” - Heraclitus of Ephesus
These innovations albeit promising, are mostly from independent non-financial companies or from third party vendors. Buy-side needs to step up and incorporate technology in the investment process, much beyond the good old Bloomberg.
Companies like Alibaba and Google have access to unthinkable amount of personal data on their users. It’s not hard to imagine the likes on Facebook or searches on Google partnering up with a fund provider and disrupting the status quo with an inbuilt platform available for investments. Alibaba already has one for distribution.
As a starting point, asset managers need to stop relying only on artefacts by third party vendors in order to survive the creative disruption. Though there might be resistance to change, technological advancement and changing consumer behaviour are forcing executives to assess their strategies. The ultimate winners of the industry will be investment managers that embrace technological change, think of technology as a strategic tool, and build teams to take advantage of innovative products and technology available in the market.