Much has been written of late about the imminent disruption of the asset management industry. These predictions concern organisations from ‘outside’ the usual sphere (predominantly from the technology world) eating the lunch of the investment management ‘establishment’. The same Doomsday scenario could arguably be applied to the software firms that serve the same asset managers, writes Steve Young, Principal, Citisoft PLC.
These days, everyone is talking about disruption in the asset management business. Industry commentators have been predicting the market entrance of a major technology firm that will shake up the market and take a traditional, leviathan-like domain into a brave new world dominated by smart apps and investor-driven engagement models.
In terms of the asset management industry’s technology providers, the situation might also appear to be ripe for disruption. Currently, the asset management IT world is not particularly innovative; partly as a result of continued industry consolidation among the vendors, which has, to a certain extent, stifled the pioneering software spirit that we saw flourish in the 1990s; and partly due to the financial crisis, which left procurement in the box-seat when it came to choosing systems as long term financial stability became the primary consideration. As a consequence, one might reasonably draw the conclusion that there is an opportunity for new vendors to come in and start to set the agenda.
As far as the technology incumbents are concerned, they are predominantly large and slow moving. Whilst they pose a low financial risk and provide scale, they often present a high (and not always fully appreciated) cost of ownership to asset managers. Deeply embedded and hard to replace, these systems are usually characterised by low levels of innovation and infrequent software updates.
On the other hand, the software start-ups, despite their lack of scale and perceived financial stability, do provide the agility to deliver systems with a lower cost of ownership. They obviously have a higher level of key man risk than the incumbents and their product issues are unknown, but with more innovation, more releases and generally more deployment options, it is the start-up world that presents the greater opportunity for disruption and sustainable change.
Indeed, many of the software vendors that dominate the financial technology world today will not be around in ten years’ time. Firms that are currently considered as industry benchmarks or as market leaders will often not be the real competition in the future – it will be start-ups or other vendors from other vertical industries moving into the investment management arena. These firms will have a fresh approach, utilise more modern tools and will not be hindered by the conservatism that tends to hamper many of the current crop of technology businesses.
Established vendors are decreasing in number and it is, perhaps, too comfortable for them in a world of chaos. Many vendors find it relatively easy to retain clients because their systems are so hard to replace. They just need to keep making the occasional update and the asset management firm will stick with them; real innovation is lacking. There are actually few business areas within investment management where there is true competition, excellent systems to choose from and more than a handful of dominant players. In short, too many vendors are complacent; serving an asset management industry that is inherently risk-averse.
From the supplier perspective, therefore, the opportunities for market entrants has never been greater. The problem is that the new technology vendors are essentially relying on the new entrants, smaller firms or niche players within the asset management industry to be the early adopters of their software. The traditional asset managers are, well, too traditional.
Maybe a few of the established asset management players will attempt to make the ‘great leap forward’, but my expectation is that the shakedown in the software industry will be led by the smaller players.
Which leads me to the question: who is pushing forward the boundaries in today’s financial technology world? If it used to always be the vendors, this is most certainly not the case today. There is little true software innovation and there are even fewer early adopters – the lifeblood of the technology world. There are also a limited number of start-ups. In terms of technology vendors, it is therefore hard to see where the disruption will come from.
Where does this leave the asset managers? As buyers of software systems, I think asset managers need to be far more open-minded about their suppliers. They need to look at start-ups and smart firms in other sectors, especially in areas like distribution and client engagement. For example, in the client reporting space we are beginning to see reporting vendors from outside the financial world beginning to turn their attention toward the financial institutions.
As we move into the digital age, the opportunities for forward thinking asset managers is significant, as is the threat to those who fail to grasp these changing needs. Technology is a key aspect to most of these new challenges and very few of the established firms currently possess the capacity or culture to seize the day.
At present, the asset management industry has the supplier market that is has demanded, which mirrors the risk adverse approach of the last decade. It is now time for the asset managers to change and begin to set a new technology agenda that reflect today’s challenges and opportunities.