The Next Level...

The Future of Finance

Successful Investing and Business Strategy Requires A Notion of The Future…

HINT: Cross Selling Financial Products is not the Future!

By Nathan Jaye, CFA

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 indemographics, 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.

CFA Institute Magazine: How are megatrends reshaping the investment industry?
Tom Brown: 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?
Nathan Jaye, CFA, is a speaker on intelligence and a member of CFA Society San Francisco. The preceding article originally appeared in the March/April edition of CFA Institute Magazine.