In the media

The days of fund management as we know it are numbered 

investment week

07 August 2017


This article was published first in Investment Week.

Disruption among fund managers has already arrived and their success will be determined by how they embrace new technologies in decision making.

Some fund managers have made a good career for themselves by researching the performance of businesses around the world, and investing other people's money accordingly.

But they won't be advising their children to follow in their footsteps. The end of fund management as we know it is nigh.

Looking ahead, the feeling is that the best future careers in fund management will be in building robots to research markets, scan the chatter on social media and automatically optimise their portfolios.

The robots are already coming

Fund managers are already replacing portfolio managers with artificially intelligent stock trading algorithms, and hedge fund managers are looking for artificial intelligence solutions that imitate fund manager behaviour.

And what is more, the robots are good at it.

We recently worked to build a predictive model that analyses social media feeds (Twitter, Facebook, Instagram) to create an early warning system around portfolio-related events, such as company insolvency for example.

This meant that a European pension provider could identify and act on portfolio-relevant events about a week ahead of the public coverage.

And investment professionals should watch out for Google too. DeepMind, Google's Artificial Intelligence unit, beat the (human) world champion of a 3,000-year-old Chinese board game last year.

If it turns its attention to work rather than play, that capability could have real commercial applications.

The future could be part-human, part-algorithm

But while robo-advice has real potential for growth by reducing costs and meeting the Financial Advice Market Review (FAMR) recommendations, it does not have to mean the end of traditional face-to-face advice.

Personal connections will still remain essential for investors and many activities, but advisers can work alongside automated services, and use robo-advice as a stepping stone for customers to move to a more holistic service.

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Fund management will have to change

As competition intensifies and technology advances, robo-advice will disrupt the wealth management business model.

Investors who have access to low-cost, reasonably effective alternatives to traditional services will no longer be willing to pay premium prices without seeing real differentiation or value.

And when it comes to personal advisers, robo-advice won't necessarily drive them out of business but they will have to do more to justify their fees.

Robo-advice with a human touch is now being seen across the major UK banks who have already launched into automated services; a move which is widely acknowledged to have been encouraged by FAMR's recommendations around simplified advice.

Irrespective of any views on their re-entry into the advice market, one positive of this move by banks is that it should encourage more people to engage with their finances and therefore help plug at least part of the advice gap.

By having their own automated model in place, advisers can target this same pool of potential customers looking to take their first move into financial advice and use its existing offering to serve as an ideal stepping stone if and when the customer requires a holistic advice service.

The bandwagon is rolling

Smaller, wealth fintechs such as Nutmeg in the UK and Betterment in the US, have also grown rapidly, trading on fresh brands and positioning themselves against traditional wealth managers.

Like its rival Nutmeg, MoneyFarm offers portfolios comprised of exchange-traded funds selected according to investor risk appetite, and positions itself as a low-cost alternative to a traditional wealth manager.

Barclays, Royal Bank of Scotland, Lloyds and Santander UK are among the banks who have developed robo-advice platforms for their customers. BlackRock also has robo-advice capabilities, following its acquisition of the US-based FutureAdvisor.

As competition intensifies and technology advances, robo-advice is expected to significantly impact the wealth management business model.

Investors who have access to low-cost, reasonably effective alternatives to traditional wealth management services will no longer be willing to pay premium prices without real differentiation or value.

The future is part-human and part-algorithm but what is the magic ratio?

We are still working on this secret recipe, but it is clear that the future for fund managers will look very different to the present day.

Christopher O'Driscoll is head of disruption for financial services at PA Consulting Group

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