Digital disruption to threaten bank sales model

Books, music, news – business models for these have been turned on their head by the digital revolution. Makers and distributors of investment products, it’s your turn.

While technology may pose a huge challenge for traditional distributors of investment product – in Asia, mainly consumer and private banks – it also reveals a need for advice. So argued Rodolphe Larque, Asia-Pacific head of funds and ETFs at Credit Suisse Private Banking.

Banks are acting to ensure they are in sync with the digital revolution. “We are building a digital private bank,” Larque said, adding it would roll out the new platform in Asia first in the next few months. “But investors need traditional banking too, not just for access [to product] but for personalised service and advice.”

But the sophistication of emerging online platforms will be a challenge for the funds industry, which in Asia has seen its penetration of households throughout the region fall to an average 5%, according to research house Cerulli Associates.

Your new competition
Roger Emms, a consultant on asset and wealth management at PwC in Hong Kong, pointed to digital disrupters such as Wealthfront, Betterment and Nutmeg.

These offer slick websites with basic advice, portfolio construction and rebalancing, at very low fees. They all start by asking core questions around an investor’s age, goals, time horizon and risk appetite, and build a portfolio around that.

Wealthfront, based in California, now manages $1.5 billion of client assets. Its backers include Burton “A Random Walk on Wall Street” Malkiel, a guru of index investing.

Betterment, out of New York, offers US clients strategies that include tax advice. It manages about $600 million.

London-based Nutmeg allows clients a range of DIY to advised portfolios; in June, Schroder Investment Management took a stake of undisclosed size in the company. That reflects the reality that most fund managers are lagging when it comes to using digital platforms to understand customer needs and behaviour.

Closer to home, Tianhong Asset Management has become the biggest fund house in China, with Rmb587 billion ($96 billion) of assets as of June, thanks to its Yu’e Bao money-market fund, sold via the Alipay e-platform. Although the money-market story is unique to China’s retail industry, it has shown the potential of digital platforms to win business.

“These are the disrupters,” noted Emms. Noting that other online platforms have failed, he said the current leaders are thriving thanks to a better understanding of the customer journey, delivered on both desktop and mobile platforms.

“It’s about ensuring a great customer experience,” he added, which requires a mix of creating buzz and creating loyalty. Word of mouth, often via social media, is now what can quickly build an investment brand.

Demographics are reinforcing this trend, as in the West investors are getting richer – and starting to plan their finances – at a younger age; and they are comfortable with digital environments, particularly mobile.

In this sort of world, the idea of a quarterly fund fact sheet is antiquated, said Emms, addressing his remarks to AsianInvestor's inaugural Fund Selectors Forum last week in Hong Kong.

Scrambling to respond
Fund managers are waking up to this challenge. Robert Prugue, senior managing director at Lazard Asset Management in Asia Pacific, said most industry executives agree that the next 10 years will be quite different from the previous decade. But they aren’t behaving as such. “So what are you doing differently?” he prodded, speaking on the same panel as Emms.

Prugue said the digital trend can dovetail in Asia with the desirability to shift the current model of fund sales (short-term product pushing, based on retail investors’ cashing out once a product hits its return target) to one based on advice, portfolio construction and a longer-term time horizon. In such a world, the industry can bring down fees and banks become less reliant upon churning products.

More immediately, he said fund managers are becoming more adept at engaging with customers online, including using LinkedIn and YouTube to provide research and profiles of portfolio managers. “The impact you can have on social media is huge,” Prugue said.

This suggests fund management companies need to become good at more than just producing performance.

“We spend money on trading, research, risk management and building investment models,” said Michael Nolan, head of long-only Asia fixed income at Morgan Stanley, speaking on the same panel. “But we need great people on marketing, delivery, product materials, and providing service on the customer’s iPad. Our industry must learn to treat both sides of the business as equally important.”

Prugue was critical of how many industry participants package investment products. He said it is inappropriate to sell a "retirement" product using a brochure portraying a 50-year-old man on a yacht with a girlfriend half his age, when in reality the product is being sold to a conservative 65-year-old. For him, product and packaging must pass a basic test: “Would I sell this to my grandmother?”

This raises the possible salvation of dinosaur financial institutions, however, because it means that advice and service still play a role. Just because lots of people can buy and sell funds on their phone, and exchange trading tips in chatrooms, doesn’t mean they’ll get smarter. Indeed, technology could just as easily facilitate herd behaviour into losing trades.

Prugue said digital platforms must be harnessed to provide not only timely information, but also timely advice, to provide a firebreak both in times of panic and of greed.