The digital fund: four trends metamorphosing fund norms

in Audit, 29.03.2016

In the last decade we have seen companies like Uber, Airbnb, iTunes, and Facebook reach the top of their respective fields extraordinarily quickly after first hitting the scene. This demonstrates that, in this day and age, you can be the leader of your industry without having a long history or, even more surprisingly, owning any tangible assets. You don’t need to own a car or a house, or even to meet people physically, before you can make and maintain professional contacts and friendships.

The investment management industry is still resisting this trend, although we do see the industry being pushed now to rethink their strategies and operations. We have identified four main trends that are in the process of breaking through, some that are almost mature and others still in the early stages but with high potential to disrupt not just how business is done at the surface level but the professional roles and even the norms themselves within asset management.

1. Blockchain

Just as the invention of the elevator made people question how tall buildings could be, the invention of bitcoin is prompting questions about what ownership of a good really means. Blockchain, the technology invented to power bitcoin, allows asset ownership to be engraved permanently using a digital chain via millions of computers, instead of being kept on multiple registers owned by different reliable sources. This technology could spell the end of costly reconciliations between infinite custody systems, and also the end of Madoff-esque skulduggery, and even the end of accountants! But is it really safe? Can it really keep sensitive information restricted to authorised eyes only? It is in the testing stages by some banks who are trying to determine if it is. It may be hitting headlines sooner than we think. (Well, headlines it has already grabbed… check out this article about blockchain technology in Luxembourg).

2. Robo-advisors

They can make investment decisions extremely quickly, without emotional bias, at very low cost… and 24/7: robo-advisors are taking the investment world by storm. Private bankers have already started investing in and using this technology with some success stories, and as artificial intelligence keeps getting smarter there is no telling how effective such robo-products may become. In fact, we may have already been tipped into a world where robo-advisors are mainstream.

Then again, the subprime crisis highlights that sometimes decisions made by humans, i.e. decisions driven by psychology and against the market trend, prove more effective than any well-designed system built on past observations. In a traffic jam, do you use your GPS or your “sixth sense” to get out of it?

3. Social trading

The internet has removed barriers-to-entry in every sector—for example a house brokerage license is no longer a prerequisite to be in the house-renting business. With the emergence of social trading platforms like eToro, anyone can manage a portfolio online and benefit from [nearly] free advice from experienced and successful portfolio managers who, in some cases, have turned a hobby into a profession. No need to pay for a subscription, a redemption fee, or the famous 2/20 management and performance fee…

4. eDistribution

Selling funds on Amazon or iTunes has been the dream of many big asset managers. But, thus far, only online shopping giant Alibaba has succeeded in this area with its money market fund, which became China’s largest such fund in just three years—as well as the world’s fastest growing mutual fund.

There is a big appetite for online distribution in the retail market, especially in emerging countries where the infrastructure is insufficient to replicate the existing distribution model—plus, digital banking has already matured in many emerging countries to the point where smartphones are replacing bank reception desks.

However, investing your savings is different from buying a book. Building trust in this technology will take some time—not to mention the regulatory barriers to implementing robust KYC/AML and MIFID procedures.

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The KPMG Digital Fund is a vision of how an investment fund could be set up in 2020, and also of why asset managers should consider making alliances with FinTech start-ups now. Even Alibaba’s money market fund was made possible owing to a joint venture with Tianhong Asset Management.

During our Digital Fund series, you will hear from specialists about the basics of different new technologies and their potential application in (and disruption to) the investment fund industry—application and disruption which are already underway thanks to the start-ups active in this sector.


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