Doug Dannemiller, Investment Management research leader, Deloitte Services LP, June 8, 2016
If the Investment Company Institute General Membership Meeting (GMM) was named for the conversations and presentations happening in the halls and auditoria this year, it might have been called the “Innovation in Mutual Funds” conference.
The liveliest panel discussions and speakers focused on innovation. Product development, product positioning, and distribution approaches were all called out as areas of innovation for investment managers. The innovation in each area focused on connecting investment managers through intermediaries to end investors. Key themes for these connections at the GMM were investor goals and planned outcomes.
On the product development front, the innovation message was fairly clear. The world is no longer compartmentalized such that alternative investments, active portfolios, and passive investments exist without nuance and overlap among them. There is clearly a continuum in development that flows from true alternatives, to liquid alternatives, to active management, to smart beta, to alternative beta, to market-weighted beta. Many in the audience and on panels appeared to agree that portfolio construction methods, tailored to meet investor goals and portfolio sizes, are the way to translate the array of investment choices into portfolio building blocks. These building blocks can then be assembled to meet the specific investor goals and risk tolerances.
There was also talk of recent innovation in product positioning. Rather than focusing inwardly on the attributes of the fund as part of a product portfolio of the asset manager, there was discussion about product positioning from the investor’s perspective: What would this investment do to improve the opportunity for the investor’s portfolio to meet goals and risk tolerances? One firm representative spoke about how his firm executes against this approach. The firm uses chartered financial analyst (CFA)-level expertise to deliver portfolio analytics at the financial-adviser and customer-portfolio level. In such a session, the CFA performs scenario-planning exercises comparing the current portfolio to a modified portfolio. Undoubtedly a strong relationship between the adviser and the investment management firm exists before this meeting can happen, and perhaps the firm is able to use data mining and analytics to identify advisers that are good candidates for their approach. Doing so may just speed up the relationship-building process with new advisers. In this case, product positioning is evolving to the customer level.
For distribution, conference panelists noted that some of the innovation is driven by regulatory change, such as the new Department of Labor (DOL) rule, and that significant changes, based on demographics, were also coming. The DOL rule is driving some firms to change by adopting fiduciary practices in distribution. One noted demographic shift driving innovation has to do with the generational differences in finding solutions. A panelist spoke about their firm’s finding that Baby Boomers ask experts for solutions, Generation Xers ask themselves, and Generation Y asks other Gen Yers. This finding for Gen Y raises an important question about fintech innovation and crowdsourcing. Will investment-management-firm brands be eroded or displaced by ‘crowds,’ as Gen Y accumulates wealth? Another distinct possibility is that investment management firms will innovate and become the peer base that Gen Y seeks. Investment management firms are currently shifting from individual advisers to adviser teams, in a deliberate approach to match changing investor demographics. With the team approach, brokerage firms are employing Gen Y members, to gain their perspective and help the team as a whole to resonate with changing investor demographics.
Another shift in distribution is the shift toward self-service and automation. Investment managers are finding that the online experience is critical, even when a financial adviser relationship is in place. One panelist representing a large brokerage firm noted that 25 percent of their investors would change brokerage firms (and leave their adviser) if they had a poor online experience, representing a stark change from recent history, when the importance of the adviser relationship dwarfed the online experience. Online and high-touch are no longer either/or choices; investment managers must do both. The same will likely be the case with robo-advice. Many investors will want the benefits of both personally delivered professional advice and the convenience and automation of robo-advice. This will likely play out in ways analogous to using cruise control on a long car trip; on long stretches of highway with little interruption or traffic, some will use cruise control, but when entering cities, changing highways, or encountering heavy traffic, the automation is turned-off. This may turn out to be how robo-advice is used on the journey of life. As a result, investment managers may need to align distribution efforts using both an automated approach and the adviser-in-the-loop approach to stay connected with investors over time and including critical transitions.
What are your thoughts about innovation in investment management? Do you think the ICI and its members are correct to focus much of their energy on innovation?
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via Quick Look financial services blog