Why FinTechs won’t be the giants of tomorrow
The financial sector is wary of Fintechs in the same way that booksellers and supermarkets probably should have taken notice of Amazon in 2007. However, this wariness doesn’t seem to be translating itself into decisive and effective digital responses.
Asset management is a particularly attractive sector for disruptors, with $74 Tn AuM in 2014 (25% of global financial assets) and forecast to grow to $100 Tn by 2020 according to PWC[1], it has major growth potential both in developed and emerging markets.
A recent LineData[2] study charted Asset Management CEOs’ main concerns over the last 4 years. MIFID II and regulation remain front of mind with 60% of CEOs stating this as their primary concern. What is surprising though, is that cost cutting ranks second with investment performance and client satisfaction ranking last with a meagre 20% of votes.
Against a backdrop of seeming indifference to investor needs and painfully slow adoption of digital solutions to meet client needs, it is not surprising that Fintechs are stepping in to close the gap. Fintechs focus on customer centricity, personalisation, transparency and frictionless services packaged in innovative and tax efficient product wrappers traditional managers can only dream of.
Asset managers’ immediate response has consisted of acquiring or buying into new entrants. BlackRock acquired FuturAdvisor for $150 millions, FuturAdvisor at the time had $600 millions AUM. Fidelity’s partnership with Betterment is equally expensive. Betterment raised $100 millions in March bringing total capital raised since 2010 to $205 millions against AUM of $4 billions. Amundi’s investment in Anatec illustrates the same point.
Fintechs with their agile new business models and green field technology, should be much more cost effective to run than traditional asset management models. Why do they need so much capital?
The capital is required to build brands, develop distribution networks and buy their place in the market. If these intensive capital needs continue, this has to lead us to question the viability of the underlying business model.
FinTechs have shown how to develop compelling, customer centric investment propositions, buying them or into them is not the only way. The asset management industry can learn from them and develop their own digital solutions alongside their more traditional business models. This has prompted Vanguard and Charles Schwab to launch in-house digital solutions in 2013. Three years later Vanguard Personal Advisor Services (VPAS) and Schwab Intelligent Portfolios (SIP) are respectively managing 31 and 5,1 billions dollars. That is 3 to 5 times the growth in AuM of the leading Fintechs. The investment case appears compelling.
In conclusion, traditional asset managers have a lot of advantages over the fintech disruptors, brand, distribution, trust to name but a few but this advantage will not last for ever.
The winners, those will capture the largest share of the $100 Tn on the 2020 horizon, will be the investment houses which begin to think like a disruptor and borrow some of their methodologies and philosophies. Change, underpinned by a clear digital strategy and a willingness to focus on the needs of end customers, is clearly possible, as shown by Schwab and Vanguard. In the long term, this is the way in which true value will be created for the investment house.
David Pillet
David Pillet is the CEO and Founder of Neptune C&S. Neptune C&S is a specialist consultancy focused on helping digitalize European wealth markets. Our clients are financial services businesses including asset managers, private banks, pension funds and insurers. We help these businesses understand what’s happening in the digitalization of their market and how they can build on emerging opportunities. Our services cover insight, strategy, business development and M&A support.
[1] PWC — Asset Management 2020 : A brave new world
[2] LineData — Global Asset Management & Administration Survey
