The Role of Technology in Asset Management Industry - Coursework Example

The role of technology in asset management industry Prepared by On Affiliation Introduction In the present epoch’s market-driven yet economically fragile world corporations and companies of all extents and hues have multifaceted stakes to take care of while focusing on their core objectives. Billions are spent by them every year to acquire, sustain, maintain, operate and later decommission assets not only physical but also non-physical assets. So asset management remains at the core of the mission of many corporations whose top management keeps its focus on the acquisition of profitable assets and for the optimally safe yet promising use of investments. The asset management industry has seen a boom also due to the increasingly unpredictable economic conditions of the world so in order to remain ahead of, or at least at par with their competitors, all businesses or corporations need to ensure maximum possible returns on their assets. It is projected that by 2020 the asset management industry would have $ 100 trillion global investable funds and would register an annual growth rate of as high as 6% (PwC 2014). This positive projection of growth of the asset management industry is due also to the inroads of technology in the domain of asset management industry as to many other new factors or game changers such as transformation of fee models, growing preeminence of asset management functions, changing shares of the regional and global asset management firms, and an ever-growing demand for cost-effective services. Ever since technology started spreading its tentacles into various industries their overall nature and modus operandi evolved manifold and the profits too expanded manifold. Likewise asset management industry evolved in the face of its being embraced by technology with the obvious consequence of replacing and even abolishing many traditional processes and mechanisms of asset management. This not only made the asset management industry all the more fast-paced but also far more comfortable and profitable for not only the businesses, whether small companies or big corporations, but also paved way towards the upward economic mobility of the asset managers obligated to manage the assets of their clients. This paper would present a review of the ways in which use of technology has somewhat altered and modernized the asset management industry from inside out. It will also bring to light possible contours of the future of technology use in the asset management industry and hence also hints towards the adaptations the whole industry and its practitioners would have to undergo in order to keep pace with the swiftly changing landscape of the industry’s clients themselves thus necessitating evolution on part of the constituents of the industry. Towards the end of this paper while summing up future prospects of further inroads of technology in the arena of asset management its consequential role would be discussed in particular context of the economic insecurity holding the world markets in throes since past few years. This will eventually conclude that businesses, either small companies or big conglomerates, employing strong technology in their asset management registered better growth in their corporate performance as against their competitors relying mainly on the traditional strategies of asset management as also showed by (Narin et al, 1987; Deng et al, 1999). Literature Review Among the many other aspects in which use of technology has altered the landscape of asset management industry the transformation it brought to the industry both in the domain of passive investments as well as the active management of assets is commendable. Although active management has remained ingrained in the asset management industry whereby the asset managers were personally responsible for choosing and making such investments as would ensure accruing of sizeable profits on the assets of the clients they are working for. The process of active management of assets consists of two fundamental processes: stock selection and market timing (Swedroe et al. 2010). Based on the theory of investment which presumes the market to be inefficient inherently and the consequent overvaluing or undervaluing of potential stocks, active management wants the asset managers to use their wit and market-related know-how to probe which stocks might have got overvalued and which stocks were mistakenly considered so by the market. This process is known as stock selection (Swedroe et al. 2010). The other related phenomenon forming an essential part of active strategies of asset management is known as market timing. Market timing is all about prognosticating future market trends and hence making investment decisions, both buying and selling of stocks, as per the forecasted changes in the financial market. Earlier the traditional models of stock pricing didn’t take into account the presently important and indispensable variable of use of technology. Excluding the variable of technology in the process of active management of assets, that is both in stock selection and market timing process, the erstwhile models attempted to predict future price movements of the market using financial information about company stocks. For example, O’ Shaughnessy (1997) differentiated between stocks having the potential for higher dividend yields and the ones better known to have lower dividend yields. He concluded that the former ones were capable of returning higher profits on them while the latter ones procured only lower stock market returns. Ever since the inculcation of technology in asset management industry practitioners of the industry have started realizing the role it plays in advancing the profits as also shown by research that there’s a close interrelation and commodity between rapid growth in economies and the extent to which those economies incorporated technology in various arenas of economic management including asset management (Rosenberg and Birdzell, 1990). Thus, there is ever-increasing realization that inclusion of technology in asset management industry is yielding positive dividends. According to Narin et al. (1987) “businesses, both small companies and big conglomerates, resorting to use of better technology registered higher profits and better corporate performance.” In the same way, Deng et al. (1999) explained in their research that use of strong technology was closely related to higher stock market valuations. Indicating the necessity of taking into account non-financial factors, e.g. a company’s intellectual capital, the type of technology it has incorporated in its mechanisms, while prognosticating company’s future performance, Lev and Zarowin (1998) showed that stock models taking into account financial aspects alone were not effective enough to forecast the future stock performance of the company. Apart from its consequential role in the domain of active management of funds it is also playing its role even more consequentially in the arena of passive management of assets. Ever since the publishing of A Random Walk Down Wall Street, a book authored by a Princeton economist now considered a classic in the domain of investment management, this realization proliferated among corporate asset managers that active stock picking alone could never guarantee sustainable investment growth (Malkiel 1973) and so the way was paved for the consideration of passive management of funds. Many passive funds are managed through such technology which maintains optimum levels of exposure and automatically trade funds. Use of technology in the domain of passive investment funds has broadened also because of the increasing use of Exchange-trade funds. Exchange-trade funds are “simple, low cost and flexible ways to access the potential rewards of market segments” (Hehn 2006) . Thus, owing to the rampant use of technology in the passive management of funds this has been rendered more cost-effective and tax-efficient than erstwhile-widely-relied-upon active management of assets. This is manifested by growing share of passive investments in the asset management industry which currently stand at 35% of the asset management industry as per the study “Asset Management 2020: Brave New World “published by PwC. According to an estimate passive investments will reach a benchmark of $22.7 million by the end of 2020 because of the increase in demands by both the institutional and retail investors (PwC 2014). Moreover a poll conducted by Ignites in 2013 among 1001 professionals of the asset management industry , who are otherwise themselves practitioners and apparent promoters of active management of funds, two third had themselves invested in passive funds. Pinedo (2013) hints towards another possible factor behind increasing tilt towards automated passive asset management strategies. According to his analysis economic meltdown that the global financial market suffered in its recent past led to a strong demand for passive products. He further substantiates his argument by citing the relevant figures, that is, “many institutional investors have over 50% of their assets in passive products” (Pinedo 2013). He also indicates the expansion of share of ETFs (Exchange traded funds) registering a dramatic increase in their volume from EUR 103 billion in 2008 to 241 billion in the third quarter of 2011 in Europe (Pinedo 2013). This rise in volume of exchange traded funds is also because they often rely on large computers designed to process enormous amounts of capital automatically without needing the presence of active asset managers. In addition to the role of technology in changing dynamics of the active management of funds and in expanding the share of passive management strategies in the asset management industry it has also diversified the available trading systems thus making the asset management industry all the more adapted to the fiercely competitive corporate world of today. Diverse trading systems prevalent in US off-exchange market can be cited as an example in this regard. Deans & Karwan (1994) while analyzing and commenting about the trends prevalent in U.S off-exchange markets note that technology has broadened the use of third and fourth market trading systems. While pointing out to various trading systems prevalent in US off-exchange markets they divide the trading systems into four categories. According to them the NYSE and AMEX refer to the first market while five regional exchanges (Boston, Philadelphia, Cincinnati, Chicago and San Francisco) are constitute what market professionals term as the second market. As regards the third and fourth markets in which, according to the afore-mentioned duo, “third market is made up of dealers trading over the telephone . . . while the fourth market is direct trading between institutional investors” (Deans & Karan 155). Another lens through which role of use of technology in the asset management industry can easily be ascertained is its role in transforming the fee-structures of asset management services. Erstwhile considered to be a very lucrative industry owing to high fee charged by active managers in the asset management industry their position has definitely got challenging owing to the growing popularity of technology-based solutions such as online portfolio management software’s and tools. In today’s world of financial insecurity and precariousness all people and businesses whether small-scale ones or big corporations vie for cost-effective alternatives. Same goes for their decisions as regards procurement of asset management services. Rob Berger (2014), in one of his articles in the Forbes magazine, enumerated the best online tools available for keeping a track of one’s investments without having to pay heavy fee for active asset managers. He provides a brief overview of some of these online portfolio management tools which are quite economical and some are even free to use. This overview though brief is enough to give a common man some idea about the variety of options available within the domain of online portfolio/asset management wherein simple tools are available to keep a record of one’s investment performance, asset allocation and budgeting. Berger (2014) enumerates five such tools: Personal Capital, Morning Star, Mint, Google Finance and Sighing. The first two of these are primarily investment trackers which can keep a record of and trace patterns of a portfolio’s asset allocation, investment performance as well returns on various investments and comparison with various other indexes. The latter three of the aforementioned five online asset management tools are basically budgeting tools or budgeting softwares. Mint, the most popular among these, is software owned by Intuit. It can serve as a linkage-building tool among the various accounts whether bank accounts, investment accounts or credit cards. The purpose behind its linking of all accounts in one place is that so that Mint be able to look into a portfolio’s investment performance as well as investment fees. Owing to its being free of cost it suits all those who want to keep a track of both their investments and spending simultaneously at one place. Google finance is another free portfolio tracker. It not only keeps a track of a portfolio’s investment performance on daily basis but also gives the option of comparing this with another major index. SigFig is free budgeting software keeping a track of one’s spending and investment performance and displaying it in form of charts and maps so as to give an insight into portfolio’s asset management performance. Owing to this availability of the technology-based alternatives to active asset management services the heavy fees erstwhile considered a matter of routine in the domain of asset management is losing its appeal and incidence. Rice et al. (2012) analyze that active investment managers often underperform the market indexes since active management is more like a zero-sum game in the context of market returns. Since the fee paid is definitely not zero most of the investment managers end up under-performing. Another new trend in the arena of asset management industry which is a manifestation of the consequential role played by technology in the industry is the continued rise of automation. Traditionally handled by financial advisors the asset management industry is now witnessing increasing incidence of its technology-based alternative: robo-advisors whom Marcinko et al. (2014) term as the doom for financial advisors. D Lawson et al. (2014) define robo-advisors as technology platforms expanding the reach of asset management services in a cost-effective manner. According to them, rise of robot-advisors necessitates this for the financial advisors to adapt to the changing dynamics. They also state that owing to the incorporation of technology in the asset management industry coupled with an ever-expanding reach of technology in today’s world prospective clients of the asset management firms now have direct access to information related to asset management. This means that financial advisors need to revert to other models to ensure more value for their clients. As regards the growing share of robo-advisors in asset management industry CNBC reported in October 2014 that the leading robo-advisor Wealth Front had reached $ 1.5 billion in assets under management (AuM). This is an achievement promising a brighter future for other automated financial advisors robo-advisors) such as Betterment and Future Advisor (Barret 2014). Future Possibilities Keeping in view the continued advancement and new developments in the arena of technology it can be logically presumed that the role of technology in the asset management industry would expand and diversify. This is going to pay way towards further popularity and increased usage of technology-based alternatives to traditional asset management strategies. In particular context of the financial insecurity prevalent since past few years all businesses, irrespective of their scale of operation, will search for cost-effective and tax efficient asset management strategies and hence their reliance on robo-advisors, cloud computing etc. would increase. Prognosticating an expanded and multifaceted use of technology in the domain of asset management industry PWC’s report “Asset Management 2020: A Brave New World” mentions that owing to the rise in demand for more tailored and investor-oriented asset management solutions use of technology is bound to increase so much so that by 2020 global asset management professionals or firms would need to hire a chief digital officer to take care of strategically complex applications of technology in the industry (PWC 2014). There remains another dimension too as regards the adoption of new sophisticated technology for optimum asset management by the active managers of assets. Any procurement of and use of advanced technology will add up to the cost of active management thus adding to the severity of the dilemma of absence of cost effectiveness in the arena of active asset management (Morgan 2010). Broadening of the role of technology in asset management industry in near future is also hinted at by an ever-growing reach of technology across the world in the form of mobile android phones and social media. Businesses in general and asset management firms in particular will need to analyze potential clients’ needs and behavior so as to come up with more efficient and tailored solutions. This data-mining would help them in designing their future products and strategies in accordance with the perceived needs and demands of the clients. Another important facet of the future possibilities of usage of technology in the asset management industry is that financial advisors all across the world would need to integrate latest technology-based asset management solutions with their work so as to keep their utility and relevance intact (PwC 2014). Conclusion This paper attempted to bring to the fore the immensely important role of technology in the asset management industry. It began with an introduction which contextualized the topic further. In the literature review section of the paper an exhaustive set of academic commentaries can be read which detailed different dynamics of the asset management industry with particular reference to the expanding role of technology in the industry and its immediate and long-term implications. Afterwards a general sketch of the future of asset management industry’s deeper links with technological innovations has been drawn. All in all, it seems that despite the fact that asset management industry is undergoing multifaceted changes and adaptations traditional means of asset management are not going to be fully replaced any time soon owing to the fact that technology too has its own set of limitations and that the technology is but an enabling factor, a means to an end not the end in itself so its utility varies from business to business. Therefore, a golden mean would have to be adopted that is a fusion between active and passive management of assets would have to be devised so as to ensure a smooth and stable yet sustainable level of growth in the asset management industry. Finally, the asset management industry would soon witness creation of hybrid platforms formed by a cross between technology-oriented alternatives and traditional strategies of asset management thus a possible merger of robo-advisors and traditional financial advisors must be around the corner. Works Cited Barret, J. 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Presented at the Conference on Intangibles and Capital Markets, New York University, May 13. Malkiel, B. (1973) A Random Walk Down Wall Street. New York: W.W Norton & Company , Inc. Marcinko, D.E. & Hetico, H.R. (2014) Selecting a Health Care Focused Financial Advisory Team: Providing Physician Centric- Not Advisor Centric Holistic- Financial Planning. In: Marcinko, D.E. & Hetico, H.P. (eds). Comprehensive Financial Management Strategy for Doctors and Advisors: Best Practices from Leading Consultants and Certified Medical Planners TM. New York: CRC Press. Morgan, J.P. (2010) The Future of Asset Management. New York: Worldwide Security Services. Narin, F., Noma, E., Perry, R. (1987) Patents as indicators of corporate technological strength. Research Policy, 16, 143-155. O’Shaughnessy, J.(1997).What works on Wall Street. New York: McGraw-Hill. Pinedo, M. (2013) Global Asset Management: Strategies, Risks, Processes, and Technologies. New York: Palgrave Macmillan PwC. (2014) Asset Management 2020: A Brave New World. New York: PwC. Rice, M., Dimeo, R.A. & Porter, M. (2012) Non-Profit Asset Management : Effective Asset-management Strategies and Oversight. Hoboken: John Wiley & Sons. Rosenberg, N.,Birdzell L, Jr. (1990). Science, Technology and the Western Miracle. Scientific American, 263 (5), 42-54. Swedroe, L.E. , Grogan, K., & Lim, T. (2010). Active Versus Passive Management. Hoboken: John Wiley & Sons. Read More