The heat is on the investment fund industry to keep pace with a changing market. Along with growing client awareness of fund fees, asset managers increasingly see the need to know their end investors better in order to create additional value. The funds distribution supply chain is fragmented and opaque, but digitalisation offers a way forward. Digital collaboration with wealth managers and client advisors will be an important feature of this new world.
Pressure on fees is being felt across the industry. Passive managers are forcing active managers to cut costs and margins, just at a time when the industry is trying to digest diverse regulatory changes.
Asset managers also need to work on how they interact with end investors, and comparison with other industries may help. The online travel industry has replaced high street agencies by bringing together a complex ecosystem of players using sophisticated digital tools. Meanwhile, asset management operates on an almost exclusively business-to-business level, with little connection to the multiple, subtly different needs of clients and their advisors. Many in the fund industry understand that they must focus more on meeting the individual needs of each investor, but it is challenging to make the industrialised fund production and distribution process respond accordingly.
Digitalisation is Key
Digitalisation offers a way forward with all these challenges. Until now progress has been slow, not least because most recent investment in change has been focused on regulation. But now there is a pressing need to digitise to become more efficient and replace mutually incompatible legacy systems and costly processes. The potential gains are in view. Deloitte have highlighted the potential for around €1 billion savings per year to be made in Luxembourg’s cross-border fund hub alone. Areas such as cash management errors and reconciliation, know-your-customer, due diligence processes and more need to be rethought and operating models redesigned.
Not only will a new generation of technical solutions be more efficient and less error prone, but they will lead to a clean pool of data from which value can be extracted using artificial intelligence. Thus, digital transformation will cut operating costs and boost margins, and it will enable an improved customer experience and strategic marketing and product planning. This will open the way to on-going, iterative interaction with existing and potential investors, and also independent financial advisors, wealth managers and other distributors who understand local markets best. Indeed, every participant in the fund administration and distribution supply chain will be able to contribute to adding value.
Big Data, AI and Blockchain
These are some of the reasons why a blockchain-powered approach to digitalisation is so exciting. The potential of distributed ledger technologies to handle the investor register is clear. It will enable every player in the fund production and distribution chain to contribute and share processes, then learn from this sum of data. Such a decentralised, shared-economy approach offers substantial promise for value creation.
Artificial intelligence tools can then be brought to bear on this wealth of data to produce valuable marketing insights. This will enable the industry to have a dialogue with investors and advisors in the culture/language they understand. So rather than marketing a ‘US equity’ or a ‘European sovereign debt’ branded fund, asset managers will offer asset preservation and growth solutions that suit the risk appetites of each investor. This is the essence of building a brand which will help the asset manager differentiate themselves from the competition, and demonstrate their value in the face of the challenge from passive investment products. Only digitalisation can achieve this agility on a large scale.
The Luxembourg-based initiative FundsDLT is tackling these challenges. This infrastructure will enable the whole ecosystem of specialised actors to work directly with each other, so boosting efficiency. This blockchain-based system will also host a range of transactions, making it a repository for a mass of valuable data.
The beta version of the system is being tested with the help of a range of fund administrators, asset managers and fund distribution service providers. A prototype has been already developed, with fund shares having been exchanged for cash following an order received from a mobile app.
Digital transformation will be an evolutionary process that will touch every part of the fund industry. It is unlikely that new technologies will disrupt the industry, but these solutions will be used by market players to help them manage inefficiencies in a practical fashion. But the main effect will be an industry that better understands the needs of different investors, and how products can be designed and marketed accordingly. This will put the investor at the centre of the process. Already, globally focused fund centres like Luxembourg are world leaders in serving wealth management clients. Digitalisation will take this to next level.
Olivier Portenseigne was appointed CEO of FundsDLT in May 2020, when the company was incorporated. Prior to this Olivier led the development of FundsDLT project from its start in 2016, as a ground-breaking blockchain project initiated by the Luxembourg Stock Exchange and its subsidiary Fundsquare. From 2013 to 2020, he was also the Chief Commercial Officer and Managing Director of Fundsquare, the fund market infrastructure leader in data management and exchange. During his leadership, the company experienced high levels of growth and the launch of numerous new products and services. Olivier has more than 25 years of experience in the fund industry and he previously held various senior management positions related to shareholder services and distribution support activities at RBC Investor & Treasury Services.