Financial Planning

Rebecca Stropoli

February 5, 2019


Asset managers are looking toward AI, blockchain and cloud computing — among other technological advances — as key drivers of change in the industry.

Tech-savvy firms are establishing a competitive advantage and are prepping for disruption in online fund distribution, digital advice and micro investing, according to Deloitte’s 2019 Investment Management Outlook.

“Artificial intelligence has graduated from a buzzword to an enabler that offers differentiated capabilities across the investment value chain,” notes the report, using as an example Morgan Stanley’s predictive analysis program that helps its advisors offer more-customized advice.

BlackRock’s ETF suite, launched last year under its iShares Evolved brand, uses natural language processing technology to scan regulatory filings and create a proprietary index, notes the report. BlackRock, the world’s largest asset manager, now uses AI capability in place of its index provider, which allows it to offer funds at a relatively lower cost.

AI also influences trade execution.

“A majority of the trades, which take place today on equity exchanges, are based on algorithms rather than on human decisions,” says Blockforce Capital CEO Eric Ervin. “Several hedge funds, smart index funds and investment firms use AI as the basis for their investment strategies.”

Ervin is one of several industry execs Money Management Executive reached out to for insights on how technology is disrupting back office operations, distribution, marketing strategies and regulatory processes.

George Marootian, EVP and head of technology for U.S. Distribution at Natixis Investment Managers, says blockchain “has the ability to become the cornerstone method of funds and transaction transfer between agencies, at a low cost to both parties involved,” adding that “the cost-benefit is quite compelling.”

The Deloitte report discusses the influence of technology on compliance processes, noting how cloud technologies may help asset managers meet MiFID II requirements. The regulation largely affects financial services firms in the EU, although U.S. firms EU ties must also meet some of its regulatory requirements.

Nottingham CEO Kip Meadows discusses how Form N-PORT and Form N-CEN reporting requirements will depend on technology advancements to properly function.

“New regulatory reporting requirements will likely be the focus of technology budgets,” he notes, particularly considering the challenge of pulling data from multiple sources to compile into a compliance-acceptable format.

Here is what Ervin, Marootian, Meadows and others have to say about the disruptive effects of technology on asset management.

The blockchain effect
Eric Ervin, CEO, Blockforce Capital
Blockchain is a transformational technology that has the potential to disrupt the way business is conducted around the world. With blockchain, records are stored over a network of computers in a distributed manner, and each transaction is recorded after authentication by the participants.

Attributes including immutability, transparency and speed make the technology especially applicable for the financial industry. In the asset management industry, blockchain technology can impact the entire spectrum of companies. For investment firms, cryptocurrencies such as bitcoin offer a new asset class and help expand their businesses. ICOs offer a means to invest in conceptual stage firms.

Because financial assets can be tokenized, blockchain offers a way to trade assets without a centralized exchange. The blockchain can be used to make know-your-customer, anti-money-laundering and client profile data robust, resulting in faster onboarding and regulatory checks, lower costs and better financial planning.

In regard to stock exchanges, the blockchain has been proposed to speed up reconciliation of trades and ownership records between the exchange and other participants, such as brokers. This in turn is expected to result in reduced errors, and faster settlement and payments, thus freeing up capital for investors.

For listed companies, blockchain technology can make the shareholder voting process faster, more cost-effective and less complex. Exchanges such as the Australian Securities Exchange and Nasdaq have already started adopting blockchain technology in their various platforms. Smart contracts based on blockchain can be used for trading derivatives. With preset conditions, a smart contract allows automatic execution of agreements and transactions.

AI, the cloud power back office
George Marootian, EVP and head of technology, Natixis Investment Managers
There are a number of ways in which new technologies are disrupting the asset management industry. In order to hone down the discussion, we’ll focus here on two of them: AI and cloud computing.

AI is more of a paradigm than a single technology, as it applies to anything ranging from intelligent data querying capability to full machine-based learning algorithms to collect data and create actionable elements for business. The elements of AI can easily find their way into improving the back office, including through early detection of errors, broken processes and compliance violations, as well and marketing, which includes “know your customer,” market segmentation and dynamic content delivery.

Cloud computing is more of a paradigm, as it applies to a range of items, from grouping of virtualized computing resources to leveraging public cloud computing.

The cloud computing paradigm provides a number of radical changes mainly to back office operations and distribution, as it can support any type of processing, automation or workflow within its platform. Some scale-out processing examples would be:

  • Performing on-demand processing of portfolio analytics within an embedded workflow to trade execution, all within a public cloud provider
  • Analyzing securities universes within a factor-based model to drive security selection in the investment process
  • Processing a securities master data infrastructure that can span the globe, and servicing a distributed user base with minimal infrastructure spend

The key benefit of cloud computing is the ability to harness expansive computing power, on demand, with minimal marginal cost to the business, and allow service-level agreements to drive modernization of the service infrastructure.

The secondary benefits of the paradigm are quite compelling, and should, over time, result in staff efficiencies, cost containment/improvement and enhanced transparency in the processing of back-office operations. AI and cloud computing will likely be top of mind for CIOs over the coming years, and they should support key initiatives including driving growth and managing cost.

Tech challenges in regulation
Kip Meadows, CEO, Nottingham
Enhancements to automated processing in recent years have made mutual fund and ETF operations more seamless, with automated feeds of data.

The market-making activity of ETFs would likely not be possible without the super-fast pricing updates that have only been possible in recent years. Spreads on ETF bid and ask prices would have to be kept larger if the data were not as robust as it now is.

New regulatory reporting requirements will likely be the focus of tech budgets, including new requirements phasing in over the next few years. Filing on Form N-PORT, Form N-CEN and reporting rules on liquidity generate technology and database challenges. N-PORT is, in essence, a very detailed reporting of a mutual fund or ETF’s portfolio, risk metrics and other fund info.

To generate the report, fund administrators must pull portfolio security and financial data on those securities from multiple databases, then compile into a complying N-PORT format. N-CEN is replacing the N-SAR annual and semi-annual reports, with slightly different information requested in a new format.

N-CEN generates similar challenges to N-PORT — pulling data from multiple sources and compiling into a complying format. Regulators also want to see data on liquidity (and potential illiquidity) of fund portfolio securities at both the individual security and portfolio level. Monitoring of these metrics on a daily basis requires substantial automation to pull data. Fund boards of trustees are asked to review this data as a control for shareholder safety, especially in times of market stress.

Partnering with tech firms
Craig Ramsey, chief operating officer, AdvisorEngine
For asset managers to drive growth, product performance is a necessary condition -but is not sufficient to disrupt the industry. Providing solutions is required to achieve sustainable inflows.

Asset management CEOs have a simple choice: move aggressively into solutions to grow or remain product-focused and face stagnant growth. Executing this pivot successfully is not a part-time job. It requires courage and risk-taking – setting a top-down agenda; promoting solutions experts to your leadership team; hiring people outside of the industry who bring new skill-sets; retraining and incentivizing your sales team; moving on from employees who cannot adapt; and investing money now to set the foundation for future growth.

Technology is increasingly becoming a central driver of successful solutions programs in the industry. Although it is possible for asset management organizations to develop technology internally, doing so is often difficult and slow. Partnering with technology-first companies is one way to accelerate change. When evaluating potential technology partners, consider:

  • Team: Does the team bring a combination of industry experience and forward-thinking vision?
  • Offering: Are the solutions differentiated and do advisors see the solution as a must-have?
  • Pricing: Are the solutions competitively priced and resilient to future pricing pressure?
  • Data: Is the company creating an actionable data-set for clients?
  • Market coverage: Is the company serving the wealth management market at scale, and across channels?
  • Appetite for partnership: Is the company oriented towards a true strategic relationship, or would your firm be one of many asset management providers?

A “solutions-style” distribution strategy is not a new concept. But the stakes have never been higher, and the barriers to success have never been more difficult. To win, asset managers must see solutions as an identity — not simply a means to access shelf space or secure meetings. Firms that think creatively and act decisively will thrive, becoming true partners for wealth managers and achieving sustainable growth going forward.

Third-party provider relations
Casey Dylan, director of investment communications, Symmetry Partners
New technologies are disrupting several areas of the asset management industry. Some will displace humans, while other technologies will be leveraged by humans to deliver a better client experience.

In the broader consumer market, transactions of many types are getting easier. User experience has become a key metric for customer service. The fintech revolution is forcing the financial services industry, and everything it touches, to evolve quickly.

Historically, financial institutions have leveraged third parties to provide human and technology services for the investor. That period is clearly behind us. Now, custodians are investing millions of dollars to insource the development of services to reduce the friction in the processes for opening and servicing accounts at their institutions. These efforts are producing significant benefits to consumers, and are forcing advisors and third-party service providers to think carefully about their roles in the process.

Electronic signatures on documents have made it easier to validate signatures, while reducing instances of applications “not in good order.” Soon, paperwork will go away entirely, as it is replaced with digital account-opening processes. This infrastructure will also enable the rapid improvement of existing offerings, and more significantly, the ability to move downstream into functional areas previously provided by third parties. More and more, these services are being offered at low or no cost to custody clients, creating a difficult competitive environment for all the players in this space, especially the smaller, niche providers.


See the original article complete with pictures in  FianancialPlanning.