CALDEIRÃO DE BOLSA

Tech giants pose threat to fund houses

At a private dinner at the Financial Times headquarters in London earlier this month, senior executives from some of the world’s biggest asset management groups shared one major concern: the threat of competition from the technology sector.

Most individuals present at the dinner struggled to resolve the issue of how the fund industry can promote itself to the millions of people under the age of 40 who have little or no understanding of what a fund manager does.

But they agreed that the technology sector might succeed where they have failed if the likes of Google or Facebook put their minds to asset management.

One senior executive said they would “completely blow us out of the water”.

The likelihood of technology giants entering the fund market has increased as many of these groups have accessed the financial services arena through online payment businesses.

Nektarios Liolios, managing director of Startupbootcamp Fintech, a company that provides support to new financial technology-focused businesses, says: “Big technology companies moving into finance is not a theoretical exercise – it is happening.

“I really don’t think it takes a lot of imagination to figure out that [a shift towards asset management] is an imminent and natural evolution.”

Julie Meyer, chief executive of Ariadne Capital, a technology-focused venture capital firm, agrees that tech groups are likely to muscle in on asset managers’ business model.

She says: “There is one vision of the future where the Apple, Google, Amazon and Facebook brigade take over every industry. They will all go into [fund management] because if you control the source of funds or heavily influence and channel it as a way to enable commerce, then you are golden.”

This trend has already taken off in China. Several large internet companies that have hundreds of millions of users on their instant messaging platforms, including Alibaba and Tencent, have begun distributing asset management products.

Both groups raised billions of dollars from investors within weeks of launching funds in partnership with existing Chinese asset management companies.

Sebastian Dovey, managing partner at Scorpio Partnership, a wealth management consultancy, says that demand is also high in western markets for internet companies to offer wealth and asset management products.

“I would be a richer man today if I was paid a dollar for every one of the thousands of private clients we have interviewed that have said they wished Apple was a wealth manager,” he says.

Ms Meyer believes the asset management companies that are most likely to survive in the face of competition from internet groups with huge customer networks are those that adapt swiftly to technological change.

She says: “There will be asset management firms that die and others that are part of creating the next financial services industry. You cannot hope to have an exponential growth strategy unless you are leveraging both finance and technology.”

Nick Finegold, co-chairman of Espirito Santo bank, points out that most fund managers have struggled to keep up with basic technological changes. The majority, he believes, only know how to use 20 functions of the 25,000 available on Bloomberg terminals.

“The challenge of introducing new tools is significant and having a Twitter account does not [equate to] a social-media strategy,” he says. “Many asset managers [do not] understand the technology that is necessary to secure their future.”

Mr Finegold believes fund groups need to develop their own data and tools in order to fend off potential competition from the technology sector.

“The idea that asset managers can continue to rely on data and news that is sold to all of their competitors at the same time is slightly prehistoric. If they do not invest in some type of proprietary solution they will wither on the vine.”

Nick Hungerford, chief executive of Nutmeg, a new online wealth management company, believes tech groups are most likely to enter asset management by creating independent companies so that they will not have to apply financial regulation across their business.

They will succeed, he says, as the asset management industry has failed to innovate over the past 200 years.

He says: “Fund managers continue to believe that what clients want is a visit every six months and to remember the name of your Labrador. They don’t – they want smart analysis and the ability to move money in and out on a regular basis.

“Technology companies look at the world in a different way. [They believe] that if they make something that is beautiful for the consumer, then people will use their services. We can only learn from someone like Google.”

The good news for the fund management industry is that tech companies will face challenges entering the market, given the concerns investors are likely to have over data privacy.

Mr Hungerford says his company has polled retail investors a number of times about which types of companies they trust. “There are definitely some objections to sharing financial details with companies like Facebook,” he says.

A recent survey carried out by Ovum, an IT-focused technology consultancy, showed that only 1 per cent of respondents trusted social networks such as Facebook to deliver online payments, compared with 43 per cent who trusted banks.

Mr Liolios says: “[Asset management] is not their natural space – it requires someone to know the industry and understand what is happening there.”

He believes that fund managers are consequently more likely to encounter competition from ambitious start-ups.
He says: “Asset managers should be less worried about the big players coming into the space and more about the start-ups coming in and offering more transparency.”

The managing director adds: “No one knows when the next clever start-up will come along and take away a slice of the market.”

Fund managers fret as Facebook pushes into financial services

Facebook’s push into financial services has sparked fears among asset managers that major technology groups have the potential to destroy the livelihoods of investment companies if they decide to offer funds.

A senior executive speaking at a private meeting of fund professionals at the FT said her “biggest fear” was search engine giant Google deciding to enter asset management.

“That would completely blow us out of the water.”

An official at a large US fund house said the market was “ripe for takeover” by big technology groups.

The fears follow moves by several large technology companies to enter financial services.

Facebook’s plan to launch an online money transfer service in Europe by May comes after the launch of Google Wallet in 2009.

Tim Cook, Apple’s chief executive, hinted at similar plans during an earnings call in January, when he said that he was “intrigued” by the mobile payments industry.

Nick Finegold, co-chairman of Espirito Santo bank, believes it is only a matter of time before large internet groups expand into asset management as well.

“It is virtually impossible for me to think of an industry more vulnerable to Google’s search and data empire [than asset management],” he said.

“The asset management industry is in truly terrible shape and is perfect for disruption. There is enough data in Visa and Google to seriously threaten any business that has market activities. Let’s just hope Google doesn’t buy BlackRock.”

Large internet groups in China have successfully branched into asset management. Alibaba, China’s leading ecommerce company, started distributing a money-market fund last year that raised $65bn within its first 12 months.

China’s Tencent, the fourth-largest internet company in the world, began distributing a fund managed by China AMC, one of the country’s biggest asset management groups, in January. The fund reportedly raised $8bn within 40 days of launch.

Tencent is also seeking approval from the Chinese government to establish a private bank.

Stephen Jones, chief investment officer of Kames Capital, an Edinburgh-based fund house, agreed that new competitors from other sectors are likely to “aggressively try to take a slice” of fund industry market share.

There is widespread agreement, however, that internet companies would struggle to gain the trust of retail and institutional investors due to concerns over privacy.

Nonetheless a recent report by PwC, the consultancy, suggested that fund managers’ failure to keep up with technological change will create opportunities for groups including Apple, Twitter and Amazon to “combine their reach, knowledge and influence with banking alliances to provide compelling asset management propositions”.

The consultancy pointed out that more than a quarter of fund managers questioned the importance of mobile technology for their businesses.

Nick Hungerford, chief executive of wealth management start-up Nutmeg, believes big technology groups “will ultimately destroy the incumbent asset management companies”.

“This is not because they have an advantage – they are simply better at listening to their customers,” he said. “Asset managers could rule the investment world forever, but they won’t because of the way they treat and service clients.”

Mr Finegold, however, believes active asset managers that embrace technological change and build proprietary data systems have an “immense opportunity” to grow. “Those that continue to rely on being spoon-fed data by third party vendors will have a big issue,” he said.