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The asset manager of the future

Technology will be a key differentiator.
Technology opens up the possibility for managers to focus on new areas of growth, among other things. Picture: Shutterstock

Asset management in South Africa has become a highly competitive industry. Over the last decade the number of unit trusts available to local investors has almost doubled from around 850 to close to 1 600.

In this environment, firms have to find a way to differentiate themselves. How do they attract investors to their offering when there are so many alternatives from which to choose?

This has become particularly significant in the low return world of the last few years. Together with the growth in index-tracking products, this has made investors far more aware of getting value for what they are paying.

“Local asset managers are under increasing pressure to justify their fees,” says Shannon Pienaar, Middle East and Africa sales manager at software solutions provider Temenos. “The lack of returns from local markets over the last five years has led investors to be increasingly cognisant of costs and to demand greater transparency.”

Increasing efficiency

With fees in particular becoming a prominent issue for investors, asset managers are under pressure to bring their charges down. This requires them to concentrate on operational efficiency in order to maintain their margins.

“Staff and technology tend to be the two largest cost items for asset management industry players,” says Pienaar. “But having the right technology stack can significantly reduce the staff costs, make the firm more operationally efficient overall and thereby generate higher net-of-fees returns.”

Overall, the industry is becoming more aware of the role that technology can play in supporting business objectives. Temenos is seeing greater technology uptake in the industry for two main reasons.

“Firstly, there is a push to improve efficiency and reduce risk,” Pienaar says. “Secondly, technology is being used to try to gain new business by supporting new products such as exchange-traded funds (ETFs), expanding services or even entering new geographical markets.”

Additional advantages

Another significant advantage offered by technology is how it gives firms the ability to scale more quickly and efficiently. In an industry where margins increase exponentially as assets under management grow, this is an important consideration.

“Having the right solutions in place allows asset managers to seamlessly grow their businesses while continuing to offer the same levels of service to customers, and without increasing operational risk,” Pienaar says. “Many in the industry will admit that their current processes are sufficient to meet their current business needs but if they were to gain a few more mandates, they would be struggling.”

Technology also opens up the possibility for managers to focus on new areas of growth.

“This allows them to differentiate through niche products like smart beta funds or to broaden their overall offering by going global or offering additional asset classes or investment strategies,” Pienaar believes. “A number of managers are currently constrained in terms of their offering by the technology they have in place.”

The asset manager of the future

However, many asset managers still struggle to find the right solutions to meet their specialised needs.

“There are still a number of legacy systems, providers and processes in place,” Pienaar says. “Overall, you will struggle to find an asset manager who is completely happy with all their technology and service providers, and this could be for a variety of reasons from functional capabilities, system stability and support, through to a lack of investment or a vision for the future.”

Temenos believes that to meet many of these needs the asset manager of the future will increasingly turn to cloud-based solutions.

“In addition we will see a pay-per-use model where, instead of having to license enough processing power to meet peak usage, firms will only pay for the processing power that they use rather than sitting on excess capacity for 90% or more of the time,” Pienaar adds. “This has the potential to significantly reduce overheads as this type of offering becomes commoditised.”

He also sees significant potential in blockchain or distributed ledger technology.

“There could be meaningful benefits in areas such as instant settlement and transfer of securities and disintermediation – for example removing the need for execution brokers,” Pienaar says. “The benefits for the end investor in terms of removing layers of costs and risk, such as counterparty risk, are immense. In practice, however, this technology still seems some way off.”

Brought to you by Temenos.

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“Technology will be a key differentiator”

Index funds already do a good job of matching the list of stocks represented in the benchmark index

So Temenos and Gang think tech will be the killer punch for them. No

US Fidelity offer index funds at zero fees

Vanguard & Spyder will follow

Hopefully the exaggerated performance of asset managers will be for suckers who believe their hype

Perhaps somebody will disrupt the space

What is wrong is fees based on AUM. There is no discernible skill difference between managing R1b for 10,000 members versus R50b for 500,000 members. But there is a 50x fee income difference.

So if a large, pure administrator offered a very low administrative function on pensions, retirement annuities etc based on scale and technology. Say R5 per member per month. That is apparently what a bank account costs, so a pension should work?

Then pay professional investment managers for their time and skill on the deployment side. The way professions like engineers, doctors, lawyers, accountants are rewarded…

End of comments.

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