Asset Management 3.0 — A brave new wealth
Why asset management is at the edge of fundamental shifts and how to profit from that.
Everyone can feel that we are standing directly in front of a tipping point worldwide. Huge signs of change seem to be forming on the horizon: Robots replacing humans, recession panic, political instability, climate catastrophes to name just a few. Every single day I read the news, it feels like the world ends tomorrow — latest the day after tomorrow! But when is it actually happening? Does it happen at all?
In this article, I will demystify the arising signs on the horizon for the asset management industry and will show you how you can profit from environmental, political and technological change. You will finally be able to listen to the daily doom news not with fear and confusion anymore, but with a self-confident sophisticated smile.
„The asset management industry stands on the edge of a number of fundamental shifts that will shape the future of the industry. […] Most asset managers have afforded themselves little time to bring the future into focus and the way in which many of them will operate in 2020, will be significantly different compared with today.„ (PWC, Asset Management 2020, A brave new world, 2014)
A brief history of asset and wealth management
Every generation faces its own challenges when it comes to wealth generation and asset protection. While in the past decade's natural resources, land property, people and machines were at the center of wealth generation, nowadays wealth accumulation shifts increasingly from physical assets to digital assets. This happens in particular in the form of structured financial products based on equity, fixed income, and alternative investment strategies. Crypto investments are the most recent addition to existing investment strategies. This is an entirely new asset class that is not just on the horizon anymore but already directly in front of your face.
The classic strategic asset allocation has its origins in the safekeeping of money and commodities and the wealth management of entire families and later enterprises. Institutional asset management by pension funds, insurance companies, investment banks, commercial trusts, endowment funds, hedge funds, and family offices is still of huge importance, but the rise of further financial products like mutual funds has given individual investors access to global financial markets.
The primary goal has for decades been the maximization of investment return, irrespective of environmental, social or governance-related criteria. Traditional alpha generation has been grounded on active stock picking by profiting from information asymmetries in the market. But this active asset management is coming at a high price that many investors are not willing to pay anymore. This is due to the fact that we live in times of full information transparency where active stock picking has become very difficult and where low-cost passive products, such as ETFs which replicate all areas of global markets, have risen significantly. Moody’s expects passive investments to surpass active investments already by 2021.
The pressure on the asset management industry will further increase not just due to rising costs, but also due to tighter regulation, higher fee transparency, demand for higher data security and data management and adoption to technological developments. The latter will threaten legacy asset management firms the most. Investors are shifting more and more away from traditional financial advisors towards automated robo advisors and financial influencers on social media also called finfluencers.
Global assets under management fell in 2018 by 4% to USD 77.3 trillion. This was the very first year-over-year decline since the global financial crisis in 2008. With regards to the continued low-interest-rate environment, expected low equity market returns, the technological shifts, and change in the mindset of new generations, classic investment advice, established distribution channels and traditional fund products begin to lose importance. In turn, crypto as a new asset class increases in significance and sees growing demand. To the new generation, crypto is not just compelling with regards to better portfolio diversification, new source of return, high growth potential and interesting alpha opportunities, but especially due to its technological aspect and decentralized nature.
Born to swipe: from digital natives to decentralized natives
The investment industry is seeing a strong shift in the investor base and a significant change in the mindset of the new generations according to a report about “Millennials and Wealth Management” by Deloitte:
“The upcoming generation of millennials are expected to control over USD 20 trillion of assets globally by 2030. The baby boomers (those born between 1946 and 1965) are about to enter retirement age. That means that, by 2050, we will live what they’re calling the Great Wealth Transfer. Millennials parents are expected to pass down another USD 30 trillion.”
While former generations of analog investors or digital adopter had a pure return focus, digital natives (millennials) and especially the latest generation of decentralized natives (generation Z) require from their investment more than just an attractive return:
- They’re tech-savvy and focus on decentralization:
Technology is taken for granted in every aspect of their lives. While personalization and humanity still count, they want to gather information from their own trusted and diverse sources and do not want to rely on one or few central organizations that they do not have a connection with or any proof of trust.
- They expect companies to be responsible:
They care about Environmental, Social and Governance (ESG), and want to work with companies that respect the interest of all stakeholders (from employee to supplier). They want to personally identify with the companies’ core values.
- They value relationships and trust:
After experiencing the global financial crisis, they have less trust in big institutions and prefer to have own control over their investments. They highly value transparency and like to rely on referrals, recommendations, social media influencers, friends or family.
- They want to engage and have a say:
They want to discuss, engage and intervene if they do not agree with consensus view. Via social media, they can quickly go viral with their messages and leapfrog levels of hierarchy.
- They appreciate gamification and learning:
Gamification is a means of staying engaged with their investments and a tool for learning new things about financial decision making in an easy manner. It enables peer comparisons and interaction with friends, families, and influencers.
The picture above shows what millennials want in their digital mix. An investment offering that fits into that required spectrum and incorporates the above-mentioned aspects is for example eToro that is promoting itself since 2007 as a leading social trading platform. Investors can follow other traders on that platform and copy-trade successful portfolios. Additionally, individuals can use the active community to exchange their thoughts and analysis and have a high level of transparency with regards to the fee model. Cryptocurrencies are also integrated on the platform and can be equally incorporated in the tactical or strategic asset allocation. Hence individuals can easily become portfolio managers with just a few clicks by today, get exposure to almost any asset class, including crypto, and clearly show whether they are able to outperform the market.
Active is attractive, passive is massive, but crypto is key
If asset managers don’t start to keep up with technological change, initiate own proof of concept testing, embrace partnerships with innovation leaders, begin to insource knowledge, talk to governments and regulators, engage in the community, train their internal staff and hire new people with the right mindset, they will massively lose market share. Asset management firms will not just fail to meet the needs of their existing client base, but won’t be able to offer solutions for this new investor demand.
Not just retail clients, but increasingly institutional investors around the world start to allocate towards crypto assets. A very prominent example is Yale University, which invested last year in the crypto fund “Paradigm” that raised USD 400 million. With its nearly USD 30 billion assets, Yale is considered to be the second-largest endowment fund after Harvard’s USD 40 billion endowments. A report published in 2018 indicated that besides the first two Ivy League universities also Stanford, MIT and the University of Carolina have invested in the crypto space. This shows that the shift of capital towards crypto assets is not just speculation driven, but increasingly a long-term investment decision and a strategic pillar in the asset allocation of big institutions.
Some asset managers of the “legacy universe” have observed this trend at an early stage and started to position themselves in this field. The big US asset manager “Fidelity Investments” has launched a new digital currency subsidiary called “Fidelity Digital Assets” in October 2018 to on-ramp its over 27 million customers to digital asset investing. Abigail Johnson, Chairman, and CEO of “Fidelity Investments” said in a press release:
“Our goal is to make digitally-native assets, such as bitcoin, more accessible to investors. We expect to continue investing and experimenting, over the long-term, with ways to make this emerging asset class easier for our clients to understand and use.”
But there are many new players from the “cryptoverse” that constantly appear on the horizon and want to have a seat at the table as well. Decentralized finance (also known as “defi”) is quickly being established beside the traditional financial systems. It leverages open source software and decentralized networks to transform traditional financial products into trustless and transparent protocols that operate with unnecessary intermediaries.
It will remain to be seen whether the bridge that is being built between the old world and the new world can be built quickly enough or whether the emerging new ecosystem “defi” will gradually replace the old one.
The detachment from big centralized institutions towards decentralized investment advice, open-source communities and focus on decentralized assets is the future of investing and the core of asset management 3.0.
How can you become part of asset management 3.0?
While in the legacy world access to industry experts and dedicated information has been fairly limited, the big advantage of the new digital world is its open-source, open access and open-minded approach of knowledge transfer. It has never been easier to follow experts’ views and discussions in real-time around the globe for little cost. Personal engagement has been massively facilitated and is becoming increasingly important. Here is how you can actively engage in this field and increase your knowledge and network:
Follow the leaders:
Follow both the transformation leaders (old world) and innovation leaders (new world)
Information Gathering:
Stay up-to-date via different sources of information to get a 360-degree view on new developments
Social Media:
Use social media offerings like Twitter, Youtube, Medium, Instagram, LinkedIn, Podcasts and Webinars
Engage with the community:
Attend conferences or local meetups and expand your network
Working out loud concept:
Use this approach to build relationships and make your voice heard
Take an active part:
Form own associations, meet-ups or webinars to spread your knowledge and enable people
It has never been easier to get access to quality information from industry experts without any time delay, almost independent of your place of residence for almost no costs. Engage from home, from your favorite coffee place, while waiting for the train or on your way to work. Start today, the future is now!
Have you already started to engage in this field? Do you know inspiring leaders or enthusiasts as yourself with further insightful advice? Please share your thoughts and experience in the comments below.
