A change of scenery
22 June 2016
After an apt relocation to Berlin, Fund Forum was focused on the many changes, and new pressures, facing the financial services industry
Image: Shutterstock
Despite a new location, Fund Forum International 2016 was still dominated by talk of technology, regulation and disruption.
The conference’s opening speaker, Tom Brown, global head of investment management at KPMG, suggested that these are still the forces that determine success in the asset management industry, adding that those firms that can adapt to change will ultimately come out on top.
Drawing attention to low interest rates, political instability, the upcoming EU referendum in the UK and elections in the US, Brown said: “We are living in a rapidly changing and unpredictable world.”
“All of this uncertainty is making investors nervous and making it harder than ever to manage money and harder than ever to run asset management businesses.”
Brown segmented the issue of technology and digital disruption into three main areas: customer experience, operational efficiency and the way in which technology affects the actual management of money.
Many customers are using robo-advisory as “it’s user-friendly, accessible 24/7 and delivered at a much lower cost”, he said. However, the majority of asset managers are at a “relatively early stage” of development in this area, and are not necessarily focusing on becoming leaders in this space.
With regards to operational efficiency, Brown said: “The industry is under huge margin pressure. Anything to transform the cost model will make a dramatic difference.”
He also noted that blockchain technology has the potential to transform the business in “all aspects of back-office functions”.
Brown went on to discuss use of data analytics, machine learning and artificial intelligence in money management. Citing a KPMG survey, he suggested that 30 percent of hedge funds globally are already using advanced and predictive data analytics, while 60 percent say machine learning and artificial intelligence will become significant in the way they approach management.
The second major transformative force will be that of regulatory change, Brown said. The “political backlash” following the global financial crisis is easing and “regulators and policymakers are becoming more constructive”. However, the industry is still in the spotlight and undergoing significant regulatory change. Specifically, ‘closet trackers’ and cost models are under investigation in several jurisdictions.
Brown said: “Unless the industry really gets on top of product governance, I think the industry will suffer some damage to reputation.”
The pressures of technological and regulatory change in the industry are still very much present, and the industry is likely to see “a tremendous amount of change over the next few years”.
Brown concluded: “In this rapidly changing world, perhaps it is agility that will become the critical success factor for businesses in our sector.”
A later panel discussion also addressed the difficult market environment and the challenges that it raises for fund managers, particularly with regards to cross-border distribution and new ‘next-generation’ technologies.
One panellist, Thomas Albert of Oppenheim Asset Management, argued that while robo-advisors can improve efficiencies in theory, and could be helpful in the business-to-business space, helping investment managers and portfolio managers, in the business-to-consumer (B2C) space any advisor has to be able to take responsibility for its advice.
He said: “There are some good initiatives and good ideas, but it will be a long time [before] this changes in the B2C space.”
SWIFT’s Valérie Letellier laid out three main reasons for fund managers to strive towards more efficiency, noting that there are already initiatives paving the way and saying: “Even if it’s not yet there, those organisations, practices and cost reduction initiatives are geared towards that direction.”
First, efficiency is required for meeting regulatory requirements, she said. Second, it allows fund managers to concentrate on areas that create value for their clients.
Finally, Letellier noted that fund managers are operating in a changing environment where there are new entrants and potential game-changers emerging.
She told attendees: “You need to adapt to that simply for the reason that if you do not do so, somebody else will.”
Letellier stressed that through cost control and risk control, managers will have to adapt to the revolution, finding new ways to improve efficiency and returns.
Optimisation is: “Finding an alternative way [with] the best cost-effectiveness, or with the highest achievable performance, under the current constraint,” she said.
Another panel looked in detail at the potential efficiencies that blockchain could bring to the asset management industry.
Although the particular use cases of distributed ledgers are still up for discussion, speakers agreed that widespread use of the technology is likely to come about through industry collaboration.
Philippe Denis, chief digital officer at BNP Paribas Securities Services, suggested that the distributed ledger technology could have a place in the post-trade environment, however he pointed out that blockchain itself is “not a financial product”.
Currently, Denis said, it is being used in niche markets where it will have a limited impact, and scalability is still a potential issue.
Stephen Bayly of HSBC Securities Services argued that, in the asset management space specifically, the main use case of blockchain will be about creating a common data source which will close the gaps between custodians and service providers.
Another speaker, State Street’s Akbar Sheriff, suggested that the focus should be around collateral management and liquidity management, a point that he said has become more and more important.
The panellists also highlighted security and clarity around identity as a potentially strong use case of blockchain technology, especially regarding regulatory reporting and know-your-client (KYC) and anti-money laundering (AML) rules.
Lawrence Wintermeyer, CEO of Innovate Finance and moderator of the panel, said that if the industry can find a more efficient way of handling KYC and AMLdata, it could “free up trillions of capital”.
However, the group agreed that adoption of blockchain technology would be driven mainly by collaboration and consortia in the industry.
Michael Mainelli, chair of commercial think-tank Z/Yen, suggested that take-up of the technology will emerge in highly regulated areas such as banking and insurance, which will have to work together or risk a third party coming into the space and taking control.
He said: “I think it’s going to emerge from large groups of people who have hitherto found it difficult to work together without people trying to take advantage of them.”
Bayly agreed that the ecosystem will have to adapt, pointing out that consortia are already developing in the asset management industry, saying: “Today we are more in the collaborative space.”
Ann Doherty, managing director at J.P. Morgan, added to this, arguing that although collaboration is important, both asset managers and service providers have historically had a large “propensity for customisation”, and they are not likely to move to a completely standard platform, retaining instead their own private blockchain systems.
In addition, this will be on top of legacy systems, she said—banks are not starting with a “clean sheet … and neither are many people in the industry”.
She said: “Unless there is significant, wholesale cultural change within big parts of the industry there is always going to be the need for consolidators because people will want to have their own set-up. The private side of things will, I think, continue for a very long time.”
Another much-discussed topic was data management, with the out-of-industry keynote speaker urging fund managers to embrace data management as one of their core competencies.
Andreas Weigend, former chief science officer at Amazon, a lecturer at the University of Berkeley and director of Social Data Lab, focused on data and client decision-making, pointing out that with the huge amount of information that smartphones provide, fund managers can assume the majority of client data they’re interested in is already available, somewhere.
Using the example of Uber, which may not consider itself to be a data-centric company, Weigend argued that it is in fact just that. Uber changed the way that data is used in the taxi industry. Instead of consumers using data to find a cab, the data is used for bringing cabs to them. The same can be true of the fund industry, he said.
Weigend also noted that social data is important, and that many people still base their decisions on recommendations from friends and family, even regarding something such as finance that should, in theory, be objective.
“We move from a data set to a tool set to a skill set … but the most important one is a mind set,” he said, adding that this mindset “is what needs to be brought into organisations”.
With this in mind, Weigend outlined a ‘digital bill of rights’ that should be available to investors.
First, investors should have a “right to access data”, without institutions charging for access to historic data. They should also have the right to inspect the data refineries, and particularly to access their security audits. Clients should know how rigorously their data is protected, and what they get in return for providing data.
The other rights are based around “increasing user agency, because just getting insights isn’t enough”, Weigend said.
Investors should have the right to: amend any data, and to view data on the fund manager that has been amended; the right to ‘blur’, or choose how specific particular data is; the right to play, or experiment with different scenarios to discover their own risk tolerance; and the right to port, or move, data from one place to another.
Finally, Weigend questioned whether clients are aware of the value that they can get from providing their data in the first place, noting that “the balance of power is shifting from companies to individuals”.
In fund management, he said, this is the direction that consumers should be moving in. He said: “Your core competency should be data, and those applications go towards sources for alpha.”
The conference’s opening speaker, Tom Brown, global head of investment management at KPMG, suggested that these are still the forces that determine success in the asset management industry, adding that those firms that can adapt to change will ultimately come out on top.
Drawing attention to low interest rates, political instability, the upcoming EU referendum in the UK and elections in the US, Brown said: “We are living in a rapidly changing and unpredictable world.”
“All of this uncertainty is making investors nervous and making it harder than ever to manage money and harder than ever to run asset management businesses.”
Brown segmented the issue of technology and digital disruption into three main areas: customer experience, operational efficiency and the way in which technology affects the actual management of money.
Many customers are using robo-advisory as “it’s user-friendly, accessible 24/7 and delivered at a much lower cost”, he said. However, the majority of asset managers are at a “relatively early stage” of development in this area, and are not necessarily focusing on becoming leaders in this space.
With regards to operational efficiency, Brown said: “The industry is under huge margin pressure. Anything to transform the cost model will make a dramatic difference.”
He also noted that blockchain technology has the potential to transform the business in “all aspects of back-office functions”.
Brown went on to discuss use of data analytics, machine learning and artificial intelligence in money management. Citing a KPMG survey, he suggested that 30 percent of hedge funds globally are already using advanced and predictive data analytics, while 60 percent say machine learning and artificial intelligence will become significant in the way they approach management.
The second major transformative force will be that of regulatory change, Brown said. The “political backlash” following the global financial crisis is easing and “regulators and policymakers are becoming more constructive”. However, the industry is still in the spotlight and undergoing significant regulatory change. Specifically, ‘closet trackers’ and cost models are under investigation in several jurisdictions.
Brown said: “Unless the industry really gets on top of product governance, I think the industry will suffer some damage to reputation.”
The pressures of technological and regulatory change in the industry are still very much present, and the industry is likely to see “a tremendous amount of change over the next few years”.
Brown concluded: “In this rapidly changing world, perhaps it is agility that will become the critical success factor for businesses in our sector.”
A later panel discussion also addressed the difficult market environment and the challenges that it raises for fund managers, particularly with regards to cross-border distribution and new ‘next-generation’ technologies.
One panellist, Thomas Albert of Oppenheim Asset Management, argued that while robo-advisors can improve efficiencies in theory, and could be helpful in the business-to-business space, helping investment managers and portfolio managers, in the business-to-consumer (B2C) space any advisor has to be able to take responsibility for its advice.
He said: “There are some good initiatives and good ideas, but it will be a long time [before] this changes in the B2C space.”
SWIFT’s Valérie Letellier laid out three main reasons for fund managers to strive towards more efficiency, noting that there are already initiatives paving the way and saying: “Even if it’s not yet there, those organisations, practices and cost reduction initiatives are geared towards that direction.”
First, efficiency is required for meeting regulatory requirements, she said. Second, it allows fund managers to concentrate on areas that create value for their clients.
Finally, Letellier noted that fund managers are operating in a changing environment where there are new entrants and potential game-changers emerging.
She told attendees: “You need to adapt to that simply for the reason that if you do not do so, somebody else will.”
Letellier stressed that through cost control and risk control, managers will have to adapt to the revolution, finding new ways to improve efficiency and returns.
Optimisation is: “Finding an alternative way [with] the best cost-effectiveness, or with the highest achievable performance, under the current constraint,” she said.
Another panel looked in detail at the potential efficiencies that blockchain could bring to the asset management industry.
Although the particular use cases of distributed ledgers are still up for discussion, speakers agreed that widespread use of the technology is likely to come about through industry collaboration.
Philippe Denis, chief digital officer at BNP Paribas Securities Services, suggested that the distributed ledger technology could have a place in the post-trade environment, however he pointed out that blockchain itself is “not a financial product”.
Currently, Denis said, it is being used in niche markets where it will have a limited impact, and scalability is still a potential issue.
Stephen Bayly of HSBC Securities Services argued that, in the asset management space specifically, the main use case of blockchain will be about creating a common data source which will close the gaps between custodians and service providers.
Another speaker, State Street’s Akbar Sheriff, suggested that the focus should be around collateral management and liquidity management, a point that he said has become more and more important.
The panellists also highlighted security and clarity around identity as a potentially strong use case of blockchain technology, especially regarding regulatory reporting and know-your-client (KYC) and anti-money laundering (AML) rules.
Lawrence Wintermeyer, CEO of Innovate Finance and moderator of the panel, said that if the industry can find a more efficient way of handling KYC and AMLdata, it could “free up trillions of capital”.
However, the group agreed that adoption of blockchain technology would be driven mainly by collaboration and consortia in the industry.
Michael Mainelli, chair of commercial think-tank Z/Yen, suggested that take-up of the technology will emerge in highly regulated areas such as banking and insurance, which will have to work together or risk a third party coming into the space and taking control.
He said: “I think it’s going to emerge from large groups of people who have hitherto found it difficult to work together without people trying to take advantage of them.”
Bayly agreed that the ecosystem will have to adapt, pointing out that consortia are already developing in the asset management industry, saying: “Today we are more in the collaborative space.”
Ann Doherty, managing director at J.P. Morgan, added to this, arguing that although collaboration is important, both asset managers and service providers have historically had a large “propensity for customisation”, and they are not likely to move to a completely standard platform, retaining instead their own private blockchain systems.
In addition, this will be on top of legacy systems, she said—banks are not starting with a “clean sheet … and neither are many people in the industry”.
She said: “Unless there is significant, wholesale cultural change within big parts of the industry there is always going to be the need for consolidators because people will want to have their own set-up. The private side of things will, I think, continue for a very long time.”
Another much-discussed topic was data management, with the out-of-industry keynote speaker urging fund managers to embrace data management as one of their core competencies.
Andreas Weigend, former chief science officer at Amazon, a lecturer at the University of Berkeley and director of Social Data Lab, focused on data and client decision-making, pointing out that with the huge amount of information that smartphones provide, fund managers can assume the majority of client data they’re interested in is already available, somewhere.
Using the example of Uber, which may not consider itself to be a data-centric company, Weigend argued that it is in fact just that. Uber changed the way that data is used in the taxi industry. Instead of consumers using data to find a cab, the data is used for bringing cabs to them. The same can be true of the fund industry, he said.
Weigend also noted that social data is important, and that many people still base their decisions on recommendations from friends and family, even regarding something such as finance that should, in theory, be objective.
“We move from a data set to a tool set to a skill set … but the most important one is a mind set,” he said, adding that this mindset “is what needs to be brought into organisations”.
With this in mind, Weigend outlined a ‘digital bill of rights’ that should be available to investors.
First, investors should have a “right to access data”, without institutions charging for access to historic data. They should also have the right to inspect the data refineries, and particularly to access their security audits. Clients should know how rigorously their data is protected, and what they get in return for providing data.
The other rights are based around “increasing user agency, because just getting insights isn’t enough”, Weigend said.
Investors should have the right to: amend any data, and to view data on the fund manager that has been amended; the right to ‘blur’, or choose how specific particular data is; the right to play, or experiment with different scenarios to discover their own risk tolerance; and the right to port, or move, data from one place to another.
Finally, Weigend questioned whether clients are aware of the value that they can get from providing their data in the first place, noting that “the balance of power is shifting from companies to individuals”.
In fund management, he said, this is the direction that consumers should be moving in. He said: “Your core competency should be data, and those applications go towards sources for alpha.”
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