The last twenty years have been really good for asset managers. The industry, despite some turbulent market conditions, has grown and developed and many managers have done exceedingly well.
More investors have moved to funds as their primary way of accessing the market. Margins have been wide and allowed for considerable profits and even as regulations have tightened, it has been more than possible to be very successful. It has, in short, been a time of plenty.
During the same time, there have been significant developments in technology which have yet to have a real impact on the industry, often due to the complexity and cost of implementing them. But that is changing and the distribution model is an area that is going to be affected significantly over the next twenty years.
Currently, the distribution on the retail side is fragmented with IFAs, discretionary managers, retail banks, private banks, fund supermarkets, and other platforms giving access to the market. If an asset manager fails to make the cut with one distributor, they just move on to the next and so forth; it’s no big deal and there are lots of distribution channels out there.
Digital and consumer trends are changing this.
In a digital era, we think it will be more consolidated; the underlying client pays one hundred percent of the fees which are much lower due to digitization. Access to the channels which lead to the market will be consolidated and all can be connected to digitally rather than forming a relationship with each individually.
WealthKernel is of the strong opinion that this is the model which will expand and there is significant benefit in getting prepared early. Indeed, the large asset providing firms are already investing heavily into the market leading robo-advisors. Assets Under Management in the robo-advice market are predicted to be around $2.2trn (£1.6trn) and $3.7trn (£2.7trn) by 2020 and in the region of $16trn (£12trn) by 2025. Nutmeg, Money Farm, Scalable Capital etc all have minority interest from the big investment houses who all want a piece of the pie. In the last month, Aviva took a majority stake in Wealthify.
As they grow, their dominance in the marketplace will become more difficult to surmount. A fund might have great performance but if it can’t effectively distribute then no-one is going to buy the fund.
There are other options of course; as an asset manager you can continue to rely on distribution through the channels that are run by the large investment houses. However, as digitization progresses and information is more easily shared with clients, the risk that their products are given more emphasis over yours becomes greater. In addition, as the cost pressures of using the various methods of distribution grow, you could quickly end up in a situation where you are effectively financing your competitors. Because the large firms are investing in robo-advice and future distribution today, they are, in essence, buying you out in advance.
Asset managers need to be considering the long term. If robo-advisors disrupt your current distribution partners and they are part owned by your competitors, how are you going to distribute in the future? The question that you should be asking yourself is, in five years time, when digital wealth management has become mainstream, where do you want to be? Because that is not the time to start adopting; that time is now