Why we’re on the verge of revolution in asset management

He slapped the book down hard on my desk.

“Read this young man”, he ordered as he briskly strode past.

He then walked straight into the CEO’s office without a knock. The door slammed hard behind him. There was nothing unusually about this. But he seemed more agitated than usual.

So that weekend I read the book:

“They admired the enormous yachts of New York’s richest brokers. After gazing long and thoughtfully at the beautiful boats, the short seller asked wryly, ‘Where are the customers’ yachts?’”

“Yes, where are they?”, I muttered to myself as I flicked through the pages.

A few months later, the man who had been my mentor since the start of my career had left the company. This book – “Where Are the Customers’ Yachts?” – was his parting gift.

Written in the 1940s, this book covered a problem that has never really left banking. That was until the Financial Crisis, which put it sharply into focus.

Banker bashing has since become a popular political and tabloid past time. People were angry and needed to vent: “How dare those Bentley driving, cigar puffing, pinstriped crooks get away with it”.

The outrage was well placed. The economic destruction was catastrophic, even after we bailed out the banks. There was sense of betrayal: these banks were supposed to serve us, not serve themselves.

Yet, this industry had nothing to do with me. I’m not a banker. I work in asset management.

If I’m going to be honest though, this really is no excuse. Our industry also suffers from that same annoying problem.

In fact, that was the hint left by my mentor as his parting gift.

Fast-forward fifteen years later and the revolution has got off to a slow start.

The problem is that normal people don’t know what asset management is. While banks are conceptually easy to grasp, asset managers are not. And the reason is simply – the name asset management is a piece of jargon – it’s only understood by those that work for it.

Nonetheless, this industry is important. While banks are supposed to take care of our day-to-day lives, asset managers are supposed to take care of our financial future.

Even if you don’t know what an asset manager does, they’re probably already looking after your future wealth anyway. For instance, if you work and have a pension set up by your employer, a group of asset managers are probably investing it for you.

The success of an asset manager can make a real difference to your future. If they succeed, you might actually retire at a good age. If they invest wisely, it could allow you to send your kids to university. They might even give you a fighting chance of getting onto the housing ladder.

Of course, we are talking about “if”. In this debt saturated world these investment goals are becoming harder to achieve. In fact, ever since the 1970s, the industry has been scrutinised and criticised for its overall lack of deliverance.

Princeton University professor Burton Malkiel claimed in his bestselling book from the 1970s, A Random Walk Down Wall Street, that “a blindfolded monkey throwing darts at a newspaper’s financial pages” could select stocks just as well as a portfolio manager.

Then in 1988, the Wall Street Journal took up the challenge. Instead of using live monkeys, they blindfolded some journalists, which was a pretty good substitute.

Jokes aside, they continued this experiment until 2002.

The result was inconclusive: neither really won. The only difference was that fund managers charge far more for their services than monkeys and financial journalists.

This turned out to be a pretty big deal for investors after the Financial Crisis. Ultra-low interest rates saw equity markets soar. It made little sense to pay fees on a return so easy to earn. As a consequence, billions flowed into cheaper passive products and exchange traded funds.

However, this march to passive isn’t the end game. If there’s a crash in the market, active could make a comeback.

We are, however, on the verge of an asset management revolution as we enter the digital age. Fee competition, rising costs and the need to be greener have created never-before-seen pressures on the industry.

The disruptive threats to asset management are therefore very real.

Fintechs that could rapidly deploy their new approaches and technologies. Their leaner operations and nimble structures could add pressure to the margins already being squeezed. And, because they enjoy high levels of engagement on their digital platforms, they also have a huge customer acquisition cost advantage. They could, therefore, disrupt the whole asset management value chain, from back-end processes to customer-facing apps.

Then there’s the possibility of an invasion from Apple, Google or Amazon. These mega-techs have a vast reach, plus the technological prowess to comfortably handle the complexities of the digital age. They already control huge platforms, which could easily accommodate deep-learning robo-advisory services in the near future that could pose a serious threat to asset management’s value proposition.

The problem big profitable asset managers face is seeing these new threats emerge. This is especially true if these threats come from outside their traditional set of competitors. Vested economic interests and internal bureaucracies – which many large asset managers suffer from – could mean that they just can’t adapt quickly enough.

We’re on the verge of a revolution in asset management. This revolution will empower investors and deliver levels of transparency and accountability never experienced before. It will also create incredible opportunities for asset managers – but only if they adapt.