Every article you read on Fintech and Investment Management seems to suggest that Investment Management is lagging behind other financial sectors when it comes to their adoption of innovative technology. It’s true that the industry does not have a great reputation for partnering with Fintechs to use technology in a transformative way. But why is this? Investment firms are certainly spending money on technology, so why is it not making any noticeable impact? We know anecdotally that a lot of money is being spent on maintaining a robust and secure infrastructure with cybersecurity, data privacy, and cloud computing getting a lot of focus; regulatory compliance programmes continue to be a big drain on budget and resources, and programmes focusing on consolidation and operational efficiency are also in vogue.
The problem is that none of these areas are really about the Investment Management business itself, and while they are all important business enablers, none of these are game-changers or even attempt to alter the paradigm. There are some pockets of spending on data science & advanced analytics, digitalisation of the customer journey, robo-advisor, and asset allocation tools but these areas are still relatively immature.
Investment Managers are facing a very real challenge to their business models, in part due to margin pressures and a resulting imperative for greater operational efficiency, but also due to an industry shift to greater focus on sustainable investing, amongst other factors. Investment Managers also have to shift from being product-centric to be client-centric, and hence adapt to their client's needs much more than they have traditionally done. Covid has accelerated this shift as firms have had to adapt to different working practices and changes in behaviour, and there are already some clear winners and losers here. The Investment Management industry looks ripe for disruption, and if you look at the disruptors in other industries, the disruption won’t come from having marginally better processes; it will come from having radically different propositions.
“The first obstacle to successfully adopting innovative technologies is recognising the opportunity and risk.”
So are Investment Managers missing a trick? The first obstacle to successfully adopting innovative technologies is recognising the opportunity and risk. Opportunities are not being recognised: while there is a general understanding of many of the key technologies available, their true potential is still less well understood. The number and range of players within the FinTech Ecosystem for Investment Managers make navigation an additional and considerable challenge so that without a clear focus, the opportunities will be missed. Risks are not being taken seriously: many in the industry are sceptical about the threat of disruption, and it is true that there are significant barriers and regulatory hurdles for new entrants to clear, but the disruption could easily come from within.
Even where Investment Managers have recognised the opportunity offered by the innovative technologies to increase efficiency, productivity, and effectiveness, or change the business model, the success has been mixed. This lack of success can often be attributed to a number of factors such as clarity on the problem to be solved, the bureaucratic, process-heavy engagement model, and the lack of experience working in deep partnership. Other obstacles include: Firm culture, skills gaps, poor grasp on data management and ownership, complex operating models with varying levels of outsourcing, legacy technology platforms, and outdated working practices. Fintechs find it difficult to navigate firms, the procurement process is torturously slow, the budget is hard to find. Investment Managers need to recognise the strategic imperative of learning how to successfully partner and collaborate with Fintechs if the industry is to thrive.
But it is not all bad news; there are efforts underway to shift the mindset, many firms are actively recognising the need to change their culture and move to a growth mindset. Some budget is being set aside for “innovation” and some dedicated roles are being created to focus on innovation opportunities. The Covid situation has shown that firms can respond very quickly to technology challenges and bring in innovative technology successfully when there is an urgent business imperative. Industry bodies are starting to respond, with the Investment Association launching their “Engine Advisory Panel” to improve the industry collaboration with Fintechs and support industry transformation through the adoption of innovative solutions. The UK regulator was the first to offer sandbox programs to Fintechs to allow ideas to be tested out, and in 2019 the Bank of England set up a “Post-Trade Technology Market Practitioner Panel” which brought together industry experts to explore how market participants could leverage technological improvements to deliver a more efficient and resilient post-trade ecosystem. So the tide is starting to turn, and it will be interesting to see who are the winners and losers over the next few years.