The likelihood that a powerful tech innovator such as Google will enter the asset management space and upend the market has increasingly become a matter of concern and speculation within the financial industry.
Google denies having current designs for entering asset management, but industy experts see how an Internet giant could become a force in distribution, and prove difficult for even the biggest firms to counter.
"Apple and Google know better than most what investors are thinking," says Joel Shulman, a professor of entrepreneurship at Babson College in Boston. Shulman, also the CIO of asset manager EntrepreneurShares, says an innovative firm like Google or Apple could become attractive to retail investors by developing mechanisms for trades to be executed more easily. He adds that they would have built-in analytical advantages in terms of understanding the consumer audience through search data and downloaded investor-related apps.
"They would know the client well in terms of their holdings."
A new Cerulli Associates report outlines the risk fund companies face by keeping their distance from the end investor. Angelos Gousios, a Cerulli senior analyst, points to China as an example of how the disconnect between asset managers and the investor community can lead to increased competition from the digital space. The world's most populous country has recently seen e-commerce companies Alibala and Tencent jump into asset management and Gousios speculates that Google and Apple could do the same someday in the U.S.
"If [asset managers] fail to gain this understanding, there are potential rivals, ones that have already acquired a far greater knowledge of the global consumer, waiting in the wings," writes Gousios in a statement.
"In China, Alibaba and Tencent have already dipped their toes into the asset management industry with their valuable mix of social and e-commerce know-how. How long will it be before an Apple or a Google decides to join the fray?"
In early October, the Financial Times reported that Google asked a financial services research firm two years ago to assess opportunities for entering the asset management industry. The name of the research firm was not mentioned in the report, citing "confidentially reasons."
A Google spokesman would not confirm the search engine company had contracted any research into entering the market, adding that Google "has no interest in getting into the asset management business."
That should come as a relief to the asset manager clients of Alvi Abuaf, head of wealth and investment management consulting at Capco, who have raised concerns about a potential entry into the industry from a technology giant like Google. However, Abuaf says that even if that were to happen, he doubts Google would pose a threat to asset management firms since most consumers tend to deal with intermediaries.
"Google's strength is the connectivity they have with consumers," says Abuaf, who is head of wealth and investment management consulting at the global firm. "I don't see consumer-based companies being a threat to asset managers, but I do see it being a threat in wealth management."
Steven Miyao, CEO of asset manager consulting firm kasina, says some fund companies have also recently approached his firm about the possibility of Google entering the industry. He projects that should a Google or Apple ever enter the business, their platforms would likely be geared toward automation that would compete with traditional broker-dealers and robo advisors.
"These tech firms would most likely have a very automated solution, both on the servicing side as well as on the investment side," says Miyao. "It might force some of the big asset managers to also go direct."
Jerry Szilagyi, CEO of Huntington, N.Y.-based Catalyst Funds, says consumer-based technology companies could be effective with distribution strategies due to their large client bases and could target fund supermarkets like TD Ameritrade and Charles Schwab. However, he does not see any threat for investment management firms.
"I have not lost any sleep thinking about Google, Apple or Facebook getting into asset management," Szilagyi says. "I don't see where they take that information they have on consumers and make that into useful investment decisions."
Rusty Vanneman, chief investment officer at Omaha, Neb.-based CLS Investments, says if Google joined asset management circles it could attract younger investors who have grown up using the search engine and may trust the brand. He also projects that new technology initiatives spearheaded could lead to lower costs across the industry.
"If Google entered the investment management business, given their vision, talent, resources and the ability to get more talent, it's hard to imagine they wouldn't have some level of success, either through managing or more likely distributing assets," says Vanneman. "A potential plus for the industry is if an entry by Google would bring new investors into the market, as many 20- and 30-somethings who are not might trust the Google brand enough to either initiate or increase their investments."
Vanneman adds that with the current asset management industry already "highly competitive," it would likely take Google awhile to become a major force. He also expects smaller boutique firms to not be as impacted as larger asset managers Google may target.
"Google's brand is incredibly powerful, but will it fully translate into asset management?" asks Vanneman. "What if Coke, Disney, Amazon or Apple entered asset management? Great companies loaded with talent and resources, but would investors buy from them?"
REACHING END INVESTOR
In its forecast for what asset management would look like in 2020, PwC predicted that a company like Google either through partnerships or acquisitions would find a partner as a way into the industry.
A social media firm such as Google, Facebook or Twitter or product providers such as Apple (through iTunes) or Amazon could, for example, provide front-office services, and partner with, or even buy, a back-office servicing firm to create an integrated AM structure, the report says.
The Cerulli study notes that 60% of asset managers it surveyed indicated their companies would benefit from improving their knowledge of retail investors when it comes to financial goals, financial knowledge as well as use of technology and social media.
It also points out that with 80% of new retail money in investment funds deriving from online platforms, the asset management industry needs to shift more towards being in touch with the end investor. Consumer behavior has also been transformed by the Internet, the study adds, as general financial websites tied with word-of-mouth tips from colleagues, friends and relatives as the main source of investment information (44%).
Jerry Murphey, CEO of Omaha, Neb.-based FolioMetrix, says his five-year-old asset management firm has tried to proactively get insight into investor attitudes through advisors it distributes to by having them get feedback from their clients.
He adds if a Google or Apple entered the asset management market the increased competition would pressure fees, but new technology offerings could also improve efficiencies in addition to helping fund managers better connect with individual investors.
"Enhanced technology should provide us the opportunity to have better relationships with investors," says Murphey. "I think it's a good thing to bring more technology to the table."
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