Active asset managers, whose fees and business models have already been hard-hit by competition from cheaper index funds, are unprepared for a coming assault from technology firms, according to a report from Moody’s Investors Service that will be released this week.
Technology firms have a lot to win by entering the asset management business — and they are well-situated to pose “the second wave of disruption” to the industry, the report’s authors say.
“Investing is about optimizing and making some predictive forecasts, as well as collecting a lot of data. And who are the best people doing that right now? Tech firms,” said Stephen Tu, a vice president and senior analyst at Moody’s and one of the report’s authors, in an interview.
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Moody’s thinks that technology companies such as Amazon, Apple, or Google wouldn’t solely get into the business for the fee revenues. After all, asset management doesn’t have the same growth prospects as health care, autos, and other sectors for which tech firms have been developing products.
But tech firms could benefit significantly from new data sources in investment management, which also could help them to keep current clients, the report’s authors say. Already, an affiliate of Chinese technology company Alibaba has transformed the industry with its 2013 launch of a money market fund for its digital payment system.
The fund has become the largest of its kind in the world and keeps Alibaba customers from having to use outside banks or credit cards, according to Moody’s. U.S. firms may use the Chinese company’s approach as a model for their own entry into the business.
Amazon, Google, Apple, and Facebook also could have an edge with advanced analytics and predictive modeling. Many funds could be easily copied, with improved performance and reduced management costs, by using quantitative methods including machine learning and big data, according to the report. Amazon, Square and PayPal already offer direct-lending services, which could be a stepping stone into more sophisticated funds.
Tu says he envisions a future where tech companies offer a so-called store-of-value product, like a money market fund, that could hold customers’ direct deposits and a portion of their longer-term savings. The companies could then potentially develop different vehicles, such as index funds, over time.
“Money markets are the opening salvo,” he says. “Then you tie in funds and a social media component.”
Firms like Fidelity Investments and BlackRock are better prepared than most to deal with digital competitors, according to Moody’s. But the industry overall has failed to offer innovations, the report’s authors contend, noting that the invention of the index fund in 1976 and the exchange-traded fund in 1993 were the last meaningful changes introduced by asset managers.
“As we think about the evolution of asset management, future clients will be more digitally native. You would expect tech companies to launch products,” added Robert Callagy, a senior vice president and manager at Moody’s, who is also one of the report’s authors.
The ratings agency analyzed how frequently people searched Google for asset managers over the past 15 years. While there has been a decline in search activity for asset managers, searches for large technology companies have risen.
“The increase in search relevance among technology companies is even more compelling because we restricted our study to web searches related to finance, which shows how far these firms have ingrained themselves into the daily lives of an increasingly technology-savvy consumer base,” according to the report.
If consumer-focused tech firms enter the investment management business, Moody’s thinks asset managers will see reduced flows, a credit-negative event, the authors wrote.