The rise of passive investing was the first wave of disruption facing the asset management industry, the emergence of digitally driven competition is shaping up as the next wave, Moody's Investors Service says in a new report.
The rating agency warns that a lack of innovation and long-term underperformance is leaving the asset management industry exposed to the threat of disruption by tech-focused firms.
"Technological disruption in asset management is most likely to stem from innovations in distribution through better client contact, relevance, identification, customization, and therefore, retention," Moody's says in a statement announcing the report's release. "As a low-capital, high margin business, it is an attractive target to new entrants."
Consumer technology giants, such as Apple, Amazon and Google, already have strong distribution channels and extensive data on their clients, which gives them a "clear advantage over traditional asset managers in establishing relevance with consumers of financial investment products," Moody's says. These companies have also been successful at locking their customers into their ecosystems, ensuring that they remain brand loyal for a long time, it says.
"Large U.S. technology firms are often cited as leading candidates to enter asset management. Amazon, Google, Apple and Facebook have an edge in distribution through their mindshare, lifeshare, datasets, advanced analytics and predictive modeling skills in combination with their ability to target users," says Stephen Tu, analyst at Moody's, in a statement.
A number of issues have prevented tech firms from entering the asset management business, including the lack of potential for growth compared to other industries. "Their entrance is more likely as a complementary service to their main business which can facilitate the collection of even more detailed and differentiated consumer behavior data and client stickiness in to their ecosystem," Moody's says.
Although the asset management industry has generally been slow to adapt to technological advances, U.S.-based Fidelity and BlackRock are notable exceptions, the report says.
"Fidelity has invested heavily in improving its digital interaction and customization of services to clients via its web interface and apps. BlackRock, which has invested heavily in technology, developing its Aladdin risk management platform and making its fundamental investing more quantitative, has made several recent acquisitions and investments in the financial technology space, highlighting the importance technology will have in enhancing the firm's value proposition to clients in the future," the report says.
"Traditional asset managers must adapt their businesses to reflect the technology-oriented preferences of their client base. Otherwise, technology firms will more easily be able to capitalize on their own strong distribution channels and begin expanding their existing ecosystems by cross-selling financial products to their clients," the report concludes.