In this post I am going to look at some of the characteristics of asset management that make it difficult for digital technology to achieve the levels of disruption that have been achieved in other areas, as described in my previous post.
But first, let me start with an anecdote.
It’s all accounting isn’t it?
This is a true story.
Nearly 20 years ago I was working as an Operations Director in an investment management firm and was responsible for various back-office functions. The company appointed a new Global COO who came from an investment banking background.
In my first, and only, meeting with this person I was asked to explain what my teams did. I hadn’t got far into my explanation about what the Fund Accounting team did when I was interrupted.
“What system are you using in that team?”
I named the system, which was one of the widely used systems for portfolio accounting at that time.
“You need to get off that system and get onto SAP.”
I tried to explain that I was talking about portfolio accounting not financial accounting, but I was interrupted again.
“I don’t care what kind of accounting you’re talking about. SAP is the system we will be using for accounting from now on and you need to get that team onto it.”
Needless to say, I didn’t do anything about SAP and we had a new Global COO within several months.
The perils of PIE
This story is an illustration of the perils of PIE (Previous Irrelevant Experience), when someone uses knowledge or experience gained in one area and tries to apply it liberally in another area where it is actually irrelevant.
PIE is all around us, and I am pretty sure that all of you reading this have been at the receiving end of it at some point in your careers. PIE can be an irritating distraction to getting on with the job that needs to be done, but it doesn’t necessarily stop you from doing your job.
The real problem with PIE is when 1) it is actively injected into an area in the belief that ‘we need to shake things up’, at the same time as 2) regarding all previous relevant experience as worthless. This is PIE2.
In asset management we are particularly exposed to PIE2 because we have a reputation for being insular, conservative, slow to embrace change, and at the blunt end of technology. CEO frustration leads to PIE2 in asset management more often than in other industry sectors.
And PIE2 is going to hold us back from leveraging digital technology in the way that we should in asset management. Digital know-how and technology cannot just be imported from outside asset management without taking into account certain characteristics of our industry that set it apart from those sectors where it has been disruptive.
So let’s look at two of the special features of asset management that need to be factored into digital strategies but which in most cases aren’t.
The asset management product
Let’s start first with the ‘product’ that is delivered by the asset management industry.
Asset management organisations do not deliver physical products like books, CDs, and items of clothing; they deliver expectations (not guarantees) that investment objectives will be met. The asset management product is an expectation of a future financial outcome.
Investment objectives are expressed in different ways, such as to meet a future funding target, or to achieve an annual performance return, or to track an index. Different investors in the same fund can have different objectives. A single investor can have multiple investments with different objectives. Investment objectives can change over time as an investor’s needs evolve, and expectations of whether they will be met also change over time as markets move up and down.
Books may go in and out of fashion; their sales figures may go up and down over time; they may go out of print and then back into print. Their fundamentals, however, do not change. A physical product like a book has a permanence that the asset management product does not have.
The asset management product is, therefore, complex and sophisticated. It is not a material object that can be seen and touched before it is bought, like books, CDs and clothes. This complexity and sophistication makes it much harder to describe asset management products to potential customers. And those product descriptions are often subject to strict regulations.
If you are selling clothes via an online website then you need to maintain a small amount of the same type of information for each item such as images, colours, sizes, materials used, and stock levels. And the information you need to maintain within your manufacturing process is similarly small and consistent.
Compare that with the huge volume of information associated with a single, traditional asset management product. This is not an exhaustive list: all the assets held in the fund on each day going back in time; all the prices for those individual assets on each day going back in time; the unit prices for each share class on each day going back in time; performance returns for each share class for each reporting period going back in time; benchmark data (which is actually somebody else’s product); details of what assets were bought/sold and when they were bought/sold and at what prices.
The asset management product is not a more complex form of products found in other industry sectors where digital technology has been disruptive: it is a fundamentally different product.
The asset management buying process
The way that asset management products are bought is also fundamentally different.
The ‘buying’ process in asset management is not a transactional process. In a transactional buying process money is exchanged in return for products. A transactional buying process is completed at the point at which a product has been delivered and money has been handed over.
The asset management buying process continues for as long as an asset management organisation is investing a client’s money. It is therefore a relationship process rather than a transactional process, and it can extend over many years. Asset management organisations need to manage and service these relationships for as long as they exist, and over the lifetime of these relationships the needs of clients, and their perception of product quality, can change significantly.
Using digital channels to sell products like books, CDs and clothes via transactional buying processes is, therefore, a very different form of distribution process to those that are used to market asset management products and to manage client relationships.
Digital strategies for asset management
The differences between asset management products and physical products, and in their distribution processes, mean that digital strategies that have been successful in other industry sectors will not achieve the same degree of success in asset management unless they are adapted.
If we just import digital know-how and technology from other industries without also importing an open mind along with them, an open mind that is willing to accommodate the complexities of asset management, then we will just spend a lot of money making small improvements around the edges.
An industry that is suffering pressure on its profit margins and increased competition for business from challenger organisations can’t afford to make that mistake.
Integrated Publishing Solution's iPlus solution is the cornerstone for organisations serious about building a digital strategy that will work today, tomorrow and long into the future. Read this success story to learn how a global asset manager enhanced sales productivity, transitioned distribution to digital channels and reduced operating costs.
Graham Duncan, CEO and Founder of integrate, has significant practical experience in providing successful integrated digital solutions to the Asset Management industry, from the world's first online portfolio valuation portal for Killik & Co, in the 1990's, through to the current global deployments of iPlus 3.
Dr Peter Ellis brings a deep understanding of the Asset Management industry. Managing Director at Deutsche Asset Management and, subsequently, Investit. Chief Operating Officer and Strategic Advisor to BISAM. Peter brings a remarkable depth of knowledge to the integrate team.
When we met them they came across as very convincing that they could do the job. I looked them in the eye and I trusted them to deliver - which they did. They are very professional and I can't recommend them highly enough.
Mark Smith, Managing Director - Investment Information Service, BNY Mellon Investment Management EMEA