James considers the possibility of big consumer technology companies entering the asset and wealth management space, and finds that while the opportunity is certainly there, the math doesn’t quite add up—yet.
One of the more interesting stories I worked on this month was based on a piece of research by Moody’s Investors Service, in which a number of analysts posited that big technology companies such as Google, Apple and others may be in a plum position to enter the world of asset management.
It’s not entirely implausible as a concept, and it’s certainly something I’ve not only heard from industry folks in conversations on the sidelines of conferences, but also have observed happening outside of Europe and the US.
Alibaba is, of course, the prime example of tech moving into asset management through Y’ue Bao, its money-market fund (MMF) that accounted for just under a quarter of total MMF AUM in China earlier this year.
Tech firms in India, such as PayTM, have also eyed Y’ue Bao’s success and have sought to make their own moves into money management. These aren’t even the trailblazers—PayPal ran an MMF for a number of years through to 2011, before eventually disbanding it.
Where the game has changed now is via asset management’s first wave of disruption, which has had more to do with economics than technology. Outflows, withdrawals, fee compression, moves to passive investment and the under-performance of active management have all landed body blows to the asset management industry in recent years, leading to a number of developments that might previously have been thought unthinkable.
Take outsourced trading, for instance. The front office was relatively immune to the outsourcing trend that has devastated in-house middle- and back-office teams across the buy side of late, with hedge funds and asset managers preferring to focus on the “core competencies” of trading and investment strategy. Now it seems, there’s a growing willingness to focus only on the strategy.
The trouble is that the buy side, although it often moves quickly once it has adopted technology, is fairly slow to get to that point in the first place, with some notable exceptions in the form of quant funds, of course. Look at how long it took for cloud to become accepted, or for technologies such as artificial intelligence and machine learning to really permeate the sector. Smart beta is often heralded as a savior of the industry, but this largely revolves around data analytics.
For tech companies, this is their bread and butter. And they can do it far better than the financial industry ever could. As such, it’s possible that the confluence of relatively simple products like index trackers being as popular as they are among the investing public, and a need to employ advanced technology, coupled with the raw data that would be available from such a foray, could present an attractive prospect for tech firms.
There are, however, extraordinary hurdles that need to be negotiated before this can be accomplished. Finance is a heavily regulated industry, involving far more scrutiny and disclosure than tech companies are currently subjected to. These businesses are secretive by nature and design—necessarily so, in fact—even though many of them went public years ago.
While asset management doesn’t have anywhere near the same level of regulatory oversight as investment banking or consumer retail banking, the winds of change are blowing.
Likewise, while technology firms are extraordinarily good at knowing their customers, there is a vast gulf between being able to tailor a consumer device or a cloud platform to a large-scale audience, and customizing financial products for investors. Big technology firms are also unlikely to be interested in management fees, which amount to the equivalent of nickel-and-dime change relative to such behemoths. The data has to be of enormous value to counterbalance said risk—and is there really such enormous value in someone’s personal investments over, say, their personal finances, spending habits, location, interaction and everything else they already have?
Chances are we may well see one of the non-fintech technology firms branch into this sector in the future. But a wholesale revolution may well be unlikely.
Bill Murphy, CTO of Blackstone, once again joins the podcast to discuss the private equity firm's new offices, designed to house its innovations team.Subscribe to Weekly Wrap emails