The speed of financial technology development could pose a huge headache to asset managers unable to keep step with the rapid pace of change, according to consultant and analyst Sony Kapoor.
Speaking at Citywire Milan 2016, Kapoor, who is founder of think-tank Re-Define, said the performance of asset managers is increasingly under scrutiny and the surge in algorithm-led investing cannot be ignored.
‘Financial technology is changing the entire model. It is dis-intermediary and also brings with it better, less emotional or biased decision-making, as well as more value for money when you take into account fees,’ he said.
‘The speed of development marks, more or less, a perfect financial storm for the industry, most notable the fund managers. We have had hundreds of billions of dollars of portfolios under-performing and this would challenge that model.’
Kapoor, whose keynote address focused on biases which are persistent throughout asset allocation, said the only way to embrace this is through embracing the change.
At present, he said 60% of financial services companies are investing capital into ‘short-term’ solutions to meet investment goals. Through the addition of longer-term technology, which would be numb to market noise, could provide a better return over an extended time horizon.
‘We are facing a structural change, which involves investors focusing largely on career risk and achieving 18 month returns rather than ‘real’ long-term returns. This means they need to adapt to the changing world and use this technology in combination with their existing methods.’
The main barriers to this being achieved, Kapoor said, other than traditional are concerns over loss of fiduciary responsibility if more technology is used, as well as fears of being closet index performance.
‘If we can marry the rationality of a machine with the existing role of asset managers, then the decision-making will become more rationale. It will be much easier for fund managers to explain decisions to an investment committee if there is this rationale behind it.’