Automated investment advice

Cost considerations spur the adoption of robo advisers.
Some forecasts estimate that robo advisers could manage up to $2 trillion globally by 2020. Picture: Shutterstock

South Africa’s asset management industry manages more than R7.8 trillion of the nation’s savings and investments, according to the Association for Savings and Investment South Africa. Every cent belongs to someone who worked for it and will rely on it at some point in the future.

To ensure that people’s investments and savings are well taken care of, the health and continued development of the local asset management industry is vital.

“Changing needs of investors, far-reaching advances in technology and major regulatory changes are set to have a major effect on the South African asset management industry,” says Jo-Anne Bailey, sales director and country manager for Africa at Franklin Templeton Investments.

The regulatory changes include greater transparency and reporting requirements on the part of asset management firms, new and stricter fiduciary standards, as well as increased disclosures to investors. Asset managers are also facing an environment in which strategic and operational risks are increasing, which results in more onerous demands with regards to regulatory and compliance related issues. “The industry continues to face fee compression, which is a strong driver in favour of passive and smart beta products,” says Bailey.

Focus to reduce costs

As a result, many of the developments in the industry are driven by cost considerations. During the last few weeks, the oft-repeated phrase ‘Race to zero’ with regards to the fee structures of investment products has resurfaced.

An obvious way to reduce costs is to rely on technology more. Franklin Templeton Investments is one of the world’s largest asset managers – it manages investments for more than 24 million clients – and has developed leading technologies to improve all aspects of its operations.

Globally, the move is towards sophisticated technology that doesn’t just assure investors of safe and convenient access to accounts at the front end, but which includes products that utilise advanced digital algorithms to manage investments in a way that reduces risk and enhances returns.

This so-called robo-technology delivers automated investment advice, with robo advisers assisting both investors and investment managers. Some forecasts estimate that robo advisers could manage up to $2 trillion globally by 2020.

Technological advances raise new issues and present new operational risks that asset managers need to address. “Not only is an asset manager responsible for the protection of their clients’ investments, they also have to protect their clients’ personal information,” says Bailey. “At the same time, clients and other stakeholders expect and demand greater transparency.”

SA industry to grow

Franklin Templeton believes the South African investment industry has potential for healthy growth. Despite having experienced periods of consolidation, Bailey believes it has entered a new era. “Investors can take comfort in the fact that the SA investment industry is strong, healthy and growing,” she says.

“The asset management industry manages a large and growing asset base in terms of both the value of assets and the number of investors in savings and investment products. The number of players in the industry is set to increase further as more local and international asset managers enter the market, and more and more organisations in SA seek asset management services.”

Bailey adds that this growth will bring new products, new investment opportunities and changes in asset managers’ operating models. “For instance, we have already seen a blurring of the lines in the roles and focus of asset managers during the last few years. While asset managers could historically have being classified as adopting active or passive strategies, the move is now towards creative products which combine both to either take advantage of more opportunities or to retain market share.

“There is phenomenal pressure on asset managers to reduce management and transaction fees,” she continues. “The management fees on some previously expensive asset classes has been reduced to as low as 20 basis points, which puts asset managers and their businesses under tremendous pressure.”

In the last few weeks, debate around the issue of performance fees has again emerged in SA. When a fund performs well and the manager outperforms their benchmark, everybody is happy with a performance fee.

In contrast, opponents to performance fees argue that they are unfair during periods when markets perform poorly but the manager delivers a slightly better return than the fund’s benchmark. They can thus charge a large performance fee even when investors see the value of their investments declining.

Bailey urges asset management companies and investors to strive to fully understand how the available products and distribution of services have changed, both globally and in SA, adding that further change and innovation will follow.

Brought to you by Franklin Templeton Investments.


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