Asset & Wealth Management In A Post-COVID World

For Asset and Wealth Management, COVID-19 is acting as a powerful accelerator for the large structural transformation that was already underway, driven by technology, shifting customer expectations, regulatory forces and an unprecedented global macro backdrop with zero or negative rates as the norm.

Successfully operating Asset and Wealth Management businesses in a post COVID world will require nimble thinking, updated skills, bold action and new technology. Below is a summary of key points based on our experience and what we hear from senior leaders in the field whom we are fortunate to serve, or with whom we are connected.

1 — DIGITISATION ACCELERATION

COVID-19 has already accelerated and will continue to accelerate the digitisation of Asset and Wealth Management — this requires new technology, especially new platforms, which many firms do not have the time to build internally on a schedule that enables them to remain competitive. For example, salespeople and advisors are now engaging institutional and individual clients over video conferences rather than in person. A call with a follow up email containing pdf’s of factsheets and/or prospectuses is significantly less engaging than sharing a screen on which a portfolio’s past, present and potential future can be analysed, compared and stress -tested. These work practices, which are rapidly being adopted, are unlikely to be reversed, especially as they are part of a broader trend covered in the next point.

2 — FROM PRODUCT TO SERVICE AND BEYOND

The shift from product to service is well underway. Industry leaders have begun to take the next step, making the service into an experience, while the pioneers are even one step further ahead, leveraging the experience to achieve leadership. Of course, understanding and mastering this trend will result in winning business, but we see that it requires a complete rethink across entire business lines. Firm’s management must ask themselves where they are in the journey shown below, considering where their clients would like them to be and, critically, where their competition is.

3 — HYPER-CUSTOMISATION

Hyper customisation, already a reality in entertainment and retail, is taking hold in Asset and Wealth Management, leading to a profound transformation of the industry. McKinsey’s report from early 2020 which refers to the “Netflixing” of advice is part of this trend.

One specific example of this could be the building of bridges between different digital platforms, for example allowing investors to directly invest in the companies they most use. A digitally native investor will come to expect the following sort of interaction:

“The majority of your expenses in the last quarter were with: AAPL, Amazon, Ocado, Disney. Would you like to invest in these companies? Would you like us to optimise your portfolio for you considering just these four stocks or as part of your broader portfolio?”

Which, of course, evokes anecdotes from previous generations when the family purse holders invested in the companies that produced the products they and their friends bought at the supermarket.

Another example is that ESG considerations will become enmeshed in the design of personalised portfolios and solutions. We recently published a white paper on this topic, showing the ability for investors to design, for example, a portfolio of carbon-neutral technology providers with balanced gender and minority representation across the board. Soon, this will be done in a few clicks in a few seconds.

4 — BETTER PORTFOLIO CONSTRUCTION

Portfolio design and optimisation will improve as new techniques emerge that go far beyond traditional frameworks such as Markowitz’s Modern Portfolio Theory. While MPT will remain an important foundation, expect new techniques and allocation engines to refine the way portfolios are built, with different objective functions used depending on the problem being solved. One example we can see clearly using ALPIMA is that in a largely zero/negative interest rate world, allocating to US Treasuries over other government securities has been optimal for several years, but as Treasuries also appear to be heading for zero yields there may be the need for further refinement and use of other building blocks such as interest rate curve steepeners/flatteners, real rates and inflation break-evens. There have also been compelling arguments made for the systematic inclusion of gold, volatility and other alternatives in model and client portfolios.

5 — ETF DYNAMICS

The ramifications of points 3 and 4 above will be strongly felt by ETF issuers. Leading ETFs will continue to attract assets as they form the building blocks of model — especially multi-asset — portfolios. However hyper-customisation at a security level will impact ETFs, especially thematics, factor products and smart beta as it will be possible to do much more in digitally controlled managed accounts. ETFs unable to reach critical size will have to close while those above critical size, especially those being bought by central banks, will continue to significantly increase AuM.

6 — LINKING ASSETS AND LIABILITIES

Assets and liability management will be much better connected to unlock considerable value allowing households and smaller corporates to digitally access services that either did not exist before, or were previously available only to the largest corporations.

For corporates, dynamically changing liability schedules will automatically link to the pension investment portfolios so they can be seamlessly re-optimised and back-tested taking into account new market conditions.

For households, bank accounts, brokerage accounts, pension accounts will be viewed holistically along with mortgages, credit cards and other loans, and, importantly, functionally connected among themselves with ‘rules’ set in order to optimise for how different assets in different accounts and wrappers are taxed.

Linking these various parts together will create substantial value for providers and clients alike, unlocking untapped liquidity, reducing inefficiencies and making people’s financial lives considerably more integrated and streamlined, something to look forward to.

While many uncertainties remain as to the effects of the coronavirus outbreak on the global economy, one thing is certain: There will be a before, and an after, COVID.

The pandemic is accelerating a profound transformation as Asset and Wealth managers rethink their business models and prepare themselves to compete in a post COVID-19 world.

The shift from product to service and beyond will speed up as firms are required to adapt in order to continue to best serve clients.

How this is going to be done is reliant on the right technology, which must be scalable, adaptable, interoperable, programable and able to integrate with legacy systems.

Most boards we speak to are grappling with the complexity of the “how”, all of this under severe time and cost pressure. Vision and strategy alone will not be sufficient, and few have the luxury of time to build the necessary technology on their own.

The answer is a carefully calibrated equilibrium of “buy and build on top”, which requires bold action, disciplined execution, and, critically, the right technology and the right partners.

Please contact us at info@alpima.net for more information.