In the financial sector, asset management refers to a sector of the financial services industry dealing with the management of special client accounts and investment funds. Traditionally, financial companies would employ experts to manage money and handle investment clients. The experts would study a client’s asset and possible investments and make recommendations to the client based on his financial health. However, the increased innovation in fintech has transformed asset management with robo-advisors competing with human experts.
The financial crisis revealed flaws in the way money was being managed. As a result, investor interest in the asset management space began to increase. Institutional investors have invested over $11.4 billion of capital in financial technology companies in the asset management space, mostly in venture capital, strategic acquisitions, private equity and initial public offerings(IPOs). The first quarter of 2016 witnessed the highest amount of investment in the sector with investors injecting $1.9 billion in fintech asset management companies.
The increased interest in fintech management is also contributed to by the high amount of fees charged by active managers who nevertheless are no match for robo-advisors. However, the industry has not been entirely disrupted as legacy players continue to leverage their massive scale and assets that give them the economies of scale. Secondly, the sensitivity of the sector makes many investors to prefer asset managers with extensive track records to inexperienced vendors, advisors, and counterparties. However, the millennials have fewer reservations about financial technology and as the older generation passes, legacy institutions will need to invest more in fintech asset management.
As venture capitalists have been making substantial investments in fintech asset management startup, legacy institutions have also rolled out their own offerings successfully. For example, Schwab and Vanguard ventured into robo-advising quite late but still each of their offerings attracted more AUM than all startups combined. The advantage arises from the shifting of client assets from already existing offerings. For instance, more than $10 billion of Vanguard personal’s came from transfers from its Vanguard asset management advisory. The company has great prospects of growth as it has a higher account minimum than other platforms. Vanguard is a classic case of how existing firms can use their financial resources and a long track record to outcompete startups on both fees and sometimes user experience. Additionally, they are better placed to access other asset classes like private markets through their existing institutional relationships.
A 2016 study by PwC revealed that 75% of asset managers view the impact of fintech in the perspective of the need to adapt to changing customer needs. On the other hand, 50% of them believe that fintech startups can help build trusted relationships and enhance interactions. The study also found out that companies rarely prioritise these types of investments, instead, they prefer focusing on investments around automated asset allocation and analytics, areas associated with robo- advisors.
Generally, asset managers are investing in fintech asset management believing that it has the potential to improve customer experience.