Innovation in the Asset Management industry

While other sectors attract more mainstream press attention (payment, retail banking), the asset management industry is also deeply affected by “software eating the world”.

Asset Class Competition
Traditional asset management companies are increasingly facing competition on both sides of the performance scale. On the “Beta” end of the scale, ETFs are steadily becoming one of the most successful innovation in recent decades. By automatically tracking indexes, they offer investors the possibility to obtain market performance at a lower cost than a typical managed funds.

Additionally, more players are appearing making ETFs investment easier and more meaningful for private investors. Companies such as Betterment (disclosure, Anthemis is an investor & I am a customer) make investing in a diversified portfolio of ETFs easy and provide additional services such as automated rebalancing and tax optimisation.

On the other end of the scale (Alpha), access to alternative assets has become easier with the JOBS act. By lifting the ban on general solicitation and making crowdfunding easier, the JOBS act is opening access (for accredited investors for now) to the Venture Capital and Hedge Funds asset classes. Platforms such as Angelist, Seedinvest or Fundersclub (with differences in each models) are making startup investment easier to more people and are solving key pain points such as keeping cap table reasonable. In the hedge fund world, companies like Artivest are experimenting with opening up access to established funds to more accredited investors.

Other assets classes are also opening up and proving competitive. Lendingclub has provided attractive returns to individual investors who would never have had the possibility to directly invest in consumer lending with the necessary diversification. Realtymogul opens up direct access to large real estate investments.

Note: with companies seemingly taking longer to become listed and receiving more later stage investments (notably via secondary deals through platform such as SecondMarket), how much of their increase in value is extracted before they reach the listed markets? 

Scrutiny on Performance

Morningstar has played an important role in making the fund management industry more transparent and it is no surprise to see it as an active investors in the financial services transparency field. MorningStar recently acquired HelloWallet for $52.5M and previously acquired ByAllAccounts for $28M (all transactions in 2014!)

While generic performance comparison has been more open for some time, how it applies to each person’s investments universe is a more recent trends. Companies such as Billguard are already providing antivirus-like services for your personal accounts. FeeX aims to do the same with managed portfolio fees. Looking beyond fees, startups such as Riskalyze can help identify the risk profile of each client and rate their current investments accordingly. Platforms such as Blueleaf (an Anthemis investment) drill down to each funds underlying assets to verify detailed exposure across a customer’s multiple investments. Both Riskalyze and Blueleaf are advisors focused, empowering financial advisors to provide more transparent performance to their customers.

Broken distribution?

The distribution of financial services is facing a major shift over the next years. As showed by Brett King, the traditional brick and mortars infrastructure is fading away. 

Younger generation are less and less engaged with the physical distribution of financial services. In growing urban areas they are also less likely to engage in transactions that require branch interactions (mortgage etc). This leaves an opportunity for startups such as Betterment or Wealthfront to fill the void left by banks and traditional players. It is limiting to define these businesses as just online, their capacity to craft a digital experience in line with the expectations of the younger generations is unmatched by traditional financial services players.

Additionally we are seeing an evolution in investment behaviours of Millenials that potentially in conflict with traditional asset management: 

Affluent millennials hold 52 percent of their money in cash and 28 percent in stocks, compared with 23 percent and 46 percent for older people, a UBS survey released in the first quarter found. The study focused on 21- to 29-year-olds with $75,000 in income or $50,000 in investable cash, and 30- to 36-year-olds with $100,000 in income or assets.

as the Blooomberg article explains: 

“We call them Recession Babies,” said William Finnegan, a senior managing director at MFS Investment Management in Boston, drawing a parallel to “Depression Babies” who avoided banks and investing after the 1929 crash. “If the cumulative return of the past five years didn’t convince you that the stock market might be an OK place to be for a long-term investor, I’m not sure what else is going to. These folks have been scarred.”

I don’t think it is right to think Millenials are just risk averse. After all we are talking about people investing in crowdfunding platform such as Kickstarter and a generation expected to have shorter job tenures than previously. We may see an overall shift of having both a highly conservative and highly speculative risk profile, with little left in the middle. 

However the Financial Advisors industry seems to be mostly focused on the current high value client base, mainly retirement focused. How many financial services company will follow Merril Lynch and name a director of financial gerontology?

Commoditization of Analysis

One of less talked about fundamental change on the analyst industry is the influence of the XBRL format (I wrote a first post on this topic in 2010: still valid imv: http://tekfin.com/2010/08/02/will-financial-information-become-the-next-commodity-data/). With the SEC making it mandatory for companies to report their accounts in machine readable format (include notes), performing core financial analysis and building baseline models will become a commodity. Trefis is a good example of how machine readable financial information can make model building different.

Additionally, with the improvement in distributed computing and AI, new models appears that are removing the pain from complex analysis. Companies such as Kensho with Warren makes complex correlation analysis a breeze (one of the most impressive demos I have seen recently). Signals are also becoming “free” with companies such as Estimize providing unique insights into Buy Side analysts expectation of stock performance, beating Wall Street analysts 69.5% of the time (now extending to economic forecasts and M&A deals).

In this new environment, how will asset managers differentiate and create above average returns? When more and more data becomes available, is information asymmetry gone as a differentiator? Is AmPro competition a growing threat? “Older” companies such as Covestor have been created on that basis and new competitors such as Motif also offer the opportunity for anyone to pick stocks and pitch their investment ideas. One of the main drivers of the new coming competition is in my view the lower transactions costs, new players coming out of the Robinhood (a zero fee broker) trading API will be interesting to follow.