The year 2030 might seem like a far-off future of spaceships and
robots, but keep in mind that it’s only 15 years away.
A recent report by KPMG titled “Investing in the Future”
explores the potential changes of the next decade and a half and
their likely impact on the investment industry. The analysis
concludes that a major transformation will be driven by megatrends
in demographics, technology, the environment, and society at
large.
In an interview with CFA Institute Magazine, Tom Brown, global
head of investment management at KPMG, discusses the coming
cultural and technological disruptions facing investment managers,
the implications for new hires and career management, the search
for the “Apple factor” in financial services firms, and even the
possibility of tech giants (such as Amazon and Google) entering the
investment business.
How are megatrends reshaping the investment industry?
We focused on four categories of megatrends. The first is around
changing demographics. The second is around technology. The third
is around resource shortages, and the fourth is around changing
social behavior.
These are the key trends that we believe have been reshaping the
industry. But at the heart of all this, it’s about the industry
focusing on the changing needs of the client, which will look very
different in 2030.
One of the big questions is how the industry will shift as the
players look to get closer and closer to their customers. The
business and operating models will need to be reshaped and
restructured to be successful.
How are the rules of the game changing?
New business models are emerging that play into the evolving
needs of customers, and as such, traditional investment management
products are becoming more innovative. Client service models will
need to do a better job of explaining the proposition and providing
more aggregation of information — a more holistic view of people’s
investments, in other words. Then, the real big game changer is
financial technology, or “fin-tech,” and so-called fun-tech, and
the combination of that is emerging as a very interesting
trend.
What is fun-tech?
Fun-tech is similar to gaming technology and is often associated
with the term “gamification.” It’s a different mindset of how
people like to engage digitally. The gaming industry has been
successful in engaging with people and encouraging people to play
these games, time after time. Some of these approaches can
translate across into the investment management industry, and by
combining these with fin-tech, investment management firms can
better serve their customers.
You say that an investor of 2030 looks quite different. How
so?
He or she is much more mobile — and global. They are
encompassing many more life events. In particular, employment
trends tell us that the idea that someone starts to work for a
corporation and works there for 40 years and then retires just
doesn’t happen anymore. The 2030 investor will be much more
connected to many different communities, through social media and
other networks. They are a far more diverse demographic than
today’s customer of investment managers.
If you look at the success of the industry over the past 20–30
years, it’s largely been built on the back of the baby boomer
generation. It’s predominantly a male-dominated middle-class
demographic.
As we move from one generation to another, it is clear that the
industry’s client base will be much more diverse in the future. The
investor of the future is likely to come much more from the
developing economies than from the developed world.
How will this affect the investment industry?
This creates a much wider set of options for the industry —
across a much broader demographic. I think the aging population and
the scenarios we are seeing present a great deal more opportunity
for long-term saving and investment propositions. The increasing
wealth and growing population of developing and emerging economies
represent a significant pool of capital and source of revenue for
the industry.
Which metrics are tracking these shifts?
Clearly, there are lots of metrics around trends — you can look
at savings rates, employment, changing employment patterns, and
data in terms of how frequently people are changing jobs and how
long they are staying in the work force, to name a few.
There are a number of different data points one can use for
tracking. Through technology, such as big data analytics, firms can
make sense of these data points and create models to help them
develop products that are profitable and relevant to their
clients.
What can financial firms do to reposition themselves for the
future?
It’s about starting to think through what the customers of the
future want and expect from investment managers in terms of the
customer experience. I think a big part of it is thinking through
the digital revolution. What is a company’s digital proposition to
their customers and potential customers?
Certainly a lot of the conversation within organizations has
been around trying to move away from spending time and effort on
fixing legacy issues with their technology platforms of the past
and starting to think to the future. How do they start to embrace
the potential of digital big data, data analytics, and so on? How
do they change?
How do organizations need to start thinking if they’re currently
operating in a world where they’re too far removed from their end
customers, because they distribute their product through
third-party distributors? How do they start getting closer to
understanding the needs and the requirements of the end
consumers?
If they don’t go all the way to the direct consumer, how do they
get much better at working with their distribution partners? Those
are some of the things I would say to start doing now to anticipate
the future.
What can you say about the new “trust paradigm”?
Trust is absolutely key, and that needs to be earned. The ways
that the industry can start earning that trust revolve around a
focus on simplicity and transparency, as well as actually
delivering on the customer service promise.
That takes time to build. I think the challenge to the industry
is that, increasingly, non-financial services brands are gaining
trust. If you look at the Amazons and Googles of the world, who are
serving so many young people, younger generations have trusted
these technology firms more than they have financial services
firms.
Should investment companies adopt the methods of technology
companies in terms of earning trust?
I think a big part of it is delivering on the service promise.
The customer experience of big technology companies is very
positive for people who use them.
I think the financial industry and investment managers have a
long way to go in terms of getting to that level of customer
experience. A big question is, What is the Apple factor, if you
like, in terms of a customer experience for a financial services
company? That’s a big question and a big challenge.
Are established players in the investment industry doing
this?
I don’t think there’s a standout firm in the sector that’s
really standing head and shoulders above the rest. I think a lot of
them are making some serious moves to try and develop their
strategy, but I don’t think any of them have really made a
significant step to position themselves ahead of the
competition.
And that’s a big opportunity. A lot of firms are spending a lot
of time and money and effort in trying to achieve this. The one or
ones that manage to do it will be at a significant competitive
advantage.
What kind of new investment management value chain might
emerge?
There are two key trends. First, investment managers are going
to have to get much closer to their end clients. I think some of
them who previously haven’t had a direct proposition will go down
that path. Others who operate with intermediaries will seek to get
closer to their intermediaries to understand their end clients
better — ensuring that their propositions and service delivery are
meeting the new expectations.
The other big trend is around the appetite for investors to have
outcome-oriented solutions as opposed to how the industry has
operated in the past — which was more about products than
consumers.
So the two factors are being closer to the investors and having
more solutions-oriented propositions rather than a simple
“product-push” model that gets distributed through third-party
intermediaries.
When you speak of outcome-oriented solutions, what do you
mean?
This is an area where I think we’ll see a lot of evolution.
We’ve started to see some of it already, particularly in the United
States. In the long-term savings environment, what is the customer
actually looking to save for?
Maybe if customers were clear about what they are saving for
(the end product that the customers actually want, whether that’s a
health care solution or whether that’s a retirement home or a car),
you could imagine some non-investment solutions beginning to
appear. Perhaps retailers or health care providers will make a
play, which would be a big disadvantage to the industry in its
current model.
That’s quite different from the “product-push” model, as you
say.
It does require a very different mindset and culture and way of
thinking. To actually deliver on that different type of business
will require quite a different business model to support it.
Where does that culture change begin?
I have had a lot of conversations with investment managers over
the last few months with this research that we have done. Employers
are going to start thinking differently about the demographics,
about whom they are hiring in the organization, about how they can
leverage a younger and different generation. This becomes the
internal source of cultural change and innovation.
I think probably a big part of it — from an investment
management point of view — is thinking about how to re-create an
organization in terms of the work force. Managers can take some of
the cultural differences and innovations and new ways of thinking
about the world into their organization and use that as a driver of
further change.
Could that include hiring people who may not even be targeting
a career in investment?
Yes, exactly. Breaking out of the traditional thought process
and of what sort of people they want to hire.
What kind of career skills might be attractive to the
investment community under that scenario?
I think it all links to technology. If you think about an
investment manager, there are two really important characteristics.
One is how good they are at investing. In other words, the
front-office investment engine. One aspect of that is how the use
of technology, big data, data analytics, and sheer computing power
can enhance the investment engine being used by investment
managers.
I think that investment management will increasingly be looking
at data scientists and technologists, working on how the investment
proposition can be enhanced and can be developed to such a degree
using technology and computing power to get an investment
advantage. That’s on the investment side, which will require a
different sort of person than they’ve historically employed.
The other side of it, I think, is all around the customer and
service delivery side of it. I think as the clients, whether
private clients or institutional clients, raise the bar on what
they expect for the customer experience — how they interact, what
sort of information, and how it’s presented to them by their
investment manager — they’re going to need people who come from a
much more consumer-centric background.
Why will flexibility and agility be important?
The context for that is not just in the investment world — but
in life and the world in general. We’re experiencing a much greater
pace of change in everything that we do. A lot of that is driven by
new technology that enables us to do things more differently, more
quickly, more efficiently, and so on. I think what that means is
that all organizations, including investment management, live in a
rapidly changing world, and to be successful in that world,
organizations need to be far more agile to respond to changes more
quickly than they ever have before.
[The report we’ve put out is] a view of the future. It is only a
view. The reality is that no one can really predict the future.
Things can change and develop very, very quickly. I think a really
good path to success for investment managers and other
organizations is their ability to think quickly on their feet, and
that requires a degree of agility as new opportunities and
challenges are presented to them.
How did you come to that idea of technology companies — Amazon,
Google, Apple — disrupting the investment industry?
The general thought came from the fact that in a relatively
short span of time, we have seen technology companies develop very
quickly and develop broad propositions to the people who use them.
Apple, for example, has moved into the music business. Amazon has
moved into the online video-streaming business. They’re adapting
and moving very quickly and disrupting all sorts of industries that
previously they hadn’t touched. That’s one aspect.
The other aspect is that in China, Alibaba launched a money
market fund. Alibaba is effectively the Chinese equivalent of
Amazon. They launched a money market fund [in June 2013] on their
platform and very quickly attracted significant amounts of
investors’ money into those funds (nearly US$90 billion in the
first nine months, making it the fastest-growing mutual fund in
history), which was essentially distributed on their platform.
So we are seeing evidence that these organizations can disrupt
existing investment industries. For its back end, Alibaba’s money
market fund has a partnership with a Chinese asset management
company. The whole front end of the experience is all through
Alibaba.
How quickly could these changes happen?
I think over the next five years, we’ll see a significant amount
of change. We’re just on the cusp of many, many changes coming into
the industry, particularly as companies start to embrace technology
in a much more innovative way than they have in the past.
What are some of the initial shifts we’ll see, the first wave,
so to speak?
I think it will be something around the digital experience. I
think the first wave will be around how investment managers will
really take a step up in the digital experience of their customers,
whether institutional or retail.
Are megatrends affecting institutional investors in the same
way?
It is different, but on the other hand, there is an element that
is similar. Institutional investors still have human beings who
work for them and are fundamentally the people who will be engaging
with investment managers. Let’s say you are a large pension fund or
a sovereign wealth fund. You still have expectations about your
interactions with investment managers. You will still expect to
have a different digital experience, you’ll expect to see more
transparency, you will expect more tailoring using digital
technology in how you interface with your investment manager.
Some of the same principles around the customer experience will
apply. I think in terms of the investment proposition, the interest
of institutional investors is around adopting more technology and
enhancing computer-power-generated investing. Institutional
investors may be the early or first adopters of some new investment
techniques using a much higher degree of computer power.
You argue the industry hasn’t levered its inherent skill in
analytics, in terms of optimizing big data to deliver more to its
clients. Why not?
That gets back to the theme that firms — to a large extent —
haven’t invested in their data management capability and,
therefore, they have been unable to exploit the sheer volume of
data they collect every single day on their activities and
interactions in the market and with their customers.
The reason they haven’t embraced it is because they haven’t
invested in leading-edge data architecture and data management
functionality, and neither have they invested in the data
scientists and the data analytics capabilities to really exploit
the data. They’re playing catch-up.
Are there third-party data management firms specifically
oriented toward the financial industry, or is this happening
in-house?
What I’ve seen more is that firms are investing in their own
capability rather than going outside. They’re hiring people and
then building their own capability.
What’s a best- and worst-case scenario for the industry going
forward?
The worst-case scenario for the industry is that there is too
much complacency and conservatism — a view that things aren’t
changing dramatically in their marketplace — and that the business
models and approaches of the past will continue to work on into the
future. So the worst-case scenario is around complacency and, then,
ultimately getting left behind.
The best-case scenario is embracing change, embracing technology
— in a very broad sense — and embracing that customer needs are
significantly changing. The best-case scenario is that the industry
does wake up and embrace that change — because there is,
fundamentally, a huge opportunity around the growing need for
essentially funding longer lives and populations.
It’s clear there is a job to be done. The big winner could be
the investment management industry if it does embrace change. If it
doesn’t, then another industry will step in and do the job for
them.
Does it take a tiger at the doorstep for change to happen?
Maybe. Maybe there could be an outlier that comes in and takes
everyone by surprise and creates a big wake-up call.
What questions can investment professionals ask themselves to
prepare for the next 15 years?
If I was a CEO of an investment management company, the first
questions I would be asking are, What is our unique proposition as
we are today? What are we really good at? How do we exploit what we
are really good at today? And how do we need to evolve it?
Next, how well do we really know our clients and what their real
needs are and what their needs of the future will be? What is the
real value that we bring to those clients? How are we placed to
really create value for our clients as their needs evolve? What are
we doing to embrace the digital revolution in all its forms?
This article originally appeared at CFA Institute.
Source:
http://www.businessinsider.com/