How can digital ecosystems solve the innovator’s dilemma for asset managers?
, James King
What does 'going digital' really mean for pension funds?
There are plenty of high-brow, high-tech reports from management consultants telling businesses to go digital. But it is clear from speaking to our industry contacts that many people find them too abstract. They want to know what going digital looks like in practical, concrete business terms.
To help bridge that gap, here is our guide to how you can apply six key principles from Silicon Valley’s platform revolution to the world of investment operations. It all starts with looking at the smartphone in your pocket. Forget all the tech white papers and just look at the apps you use everyday in your personal and professional life.
Your smartphone has made you a digital expert and you utilise these key principles daily. When you fire-up a fitness app or upload a language app, you don’t read an instruction book, you just click and play. If you understand how to use such apps to make your life easier, you already understand how to apply digital technology in your investment business.
If you use any social media platforms, then you know how easy it is to network and build relationships in the digital world. The average person now uses about eight different apps to keep in touch with family, friends, business acquaintances and people who share their interests. These high-speed communications enable people to segment their audiences and focus on discussions that matter, at times that are convenient.
Yet email and phone remain the normal means of remote communication in the investment management world. Email is a particularly blunt tool because your inbox effectively becomes a dumping ground. It throws important information (things that need input or action) into a jumbled heap with FYI updates and irrelevant items of news and chatter.
A smart communications system, like those on your phone, should allow you to automatically sort information into relevant channels. These are broadly things you need to deal with now, things to read later and things you can just ignore (junk). This will not only help you make more efficient use of your time but also reduce the level of stress associated with overflowing inboxes.
When you buy something online, you trust that it will work – and you benefit from infrastructure with low administrative costs that enables transactions with multiple parties. You don’t have to conduct due diligence on suppliers because you trust the platforms you use to do that for you. You don’t have to set up special payment systems or contracts because the online stores provide a common infrastructure for all buyers and suppliers.
Despite its obsession with markets, the asset management industry lacks a similar common market infrastructure. Unlike capital markets, which have an established infrastructure, asset managers must still deal bilaterally with partners, which is expensive and inefficient. If you want to find a supplier, you must do all the discovery yourself, which is often labour and knowledge intensive, involving trade shows and tapping industry networks, as well as basic web searches.
Sometimes finding the right person is just a matter of ‘being in the know’. As such, there is a lot of market knowledge that is invisible to many participants, adding further to inefficiency in the industry. This is so unlike the online app stores where you simply search for what you need and receive hundreds of ranked and reviewed suggestions.
Technology should reduce barriers to doing business. Investment and asset managers need platforms that make it easy to find, easy to trust and easy to use a range of services.
We all tend to trust apps to work – but why do they work? The answer is that the platforms (Google, Apple, Microsoft and others) develop standards for every developer to use when creating apps for those platforms. Standards are a critical growth engine of the platform revolution that enables app developers and app consumers to produce and consume at scale.
The asset management industry lacks common infrastructure in part because it also lacks common standards. In fact, it is one of the few areas of finance not to have such standards. As a result, every company looks at and reports on data in its own way. There is even a lot of variation between teams within companies in the way they gather, share and view data.
This fragmented approach to data adds complexity, reduces transparency and increases costs. Even trying to solve this problem internally is expensive, while the cost of standardising information sharing between businesses is huge because so many companies have such bespoke systems. The people who ultimately carry the cost of harmonising data from multiple managers are the end clients who must bring it all together to get a clear picture of their funds.
A system built on common data sharing standards would reduce costs for all involved and drive efficiency gains throughout each business.
When your phone tells you, unprompted, how much time you have spent online, that’s an example of platforms using data to provide insights. They call it ‘surfacing relevant insights’ or in layman's terms 'useful data you didn't know you needed'. Platforms and other digital providers collect huge amounts of data about our behaviours online precisely because they are always looking for ways to add value and increase engagement. This is not something many asset managers do well, if at all.
The investment industry collects vast amounts of data but as we mentioned above this is highly fragmented. With companies typically focused on investing in harmonising their internal data, there is little capacity within businesses to analyse that data for deep insights. As a result, many firms fail to use data to make good decisions and consequently end up repeating mistakes.
Good data collection is not enough. To become more efficient and maximise opportunities, firms need to learn how to use that data more effectively. This is particularly the case on the investment side of the industry, where different users and end clients want different analytics - such as different ESG overlay requirements.
Do I focus on data warehousing or use the data I have to create insights? The answer is both, but when faced with limited resources it creates a dichotomy for many firms. One solution is to outsource data integration and reporting to a platform and in many cases this is far simpler than trying to break down internal silos. As an added benefit, modern platforms allow you to plug in new data, powerful reporting software or intelligent analytical tools giving you more time to use the data rather than wrestle with it.
You can give a three-year-old an iPad or similar tablet and they will quickly learn how to navigate to their favourite websites, simply using the swipe gestures. They don’t need to read a user manual or go on an expensive training course – it’s just click, swipe and play. You should expect the same level of ease when adopting new business technology.
Unfortunately, most tech providers build financial systems with highly sophisticated users in mind. Portfolio management systems, for instance, tend to require people to receive special training in their use. Sometimes these systems claim to offer wider access but all that changes is the login and home-screen – the rest of the user interface invariably remains the same.
As a result, many investment managers rarely exploit the full capabilities of their systems, with many users only knowing how to use about 30% of the functionality. This is not only inefficient but also leads to frustration as users fail to get the value they expect from the service. This is so unlike modern smartphones and platform providers that encourage users to test new services and design their systems so that even the least skilled users find them easy.
The lesson from Software as a Service (SaaS) providers is that if you want all users (employees and end clients) to embrace digital services, you need an interface that is intuitive to use. It also needs to ‘learn around the user’; in other words, the developers track user behaviours and constantly look for ways to make the interface easier to use. This focus on improving the user experience is a critical part of digital adoption and the democratisation of usability.
Many personal online bank accounts can now produce a report that shows you everyone with whom you have ever had a transaction (whether through card, cheque, DDM or mobile payment systems). This ability to organise data at scale from disparate sources is a critical success factor in modern digital services. Asset managers have similarly vibrant ecosystems of business partners but frequently struggle to get a single overview of the complex web of relationships and how it relates to specific clients.
That’s because they tend to build and manage those relationships manually and deliver services to clients bilaterally. Essentially, this means each new relationship is a completely new experience and you must create everything afresh. This is so unlike online shopping, for example, where through one platform you can easily deal with multiple sellers using a single basket, payment method, returns service and address book.
To understand what ‘going digital’ could mean for your business, just look at the way you use digital services every day in your personal life. Then think about how to manifest those capabilities in your organisation. In summary:
Photo credit: Luis Villasmil
How can digital ecosystems solve the innovator’s dilemma for asset managers?
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