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Fintech Will Change ‘Every Familiar Aspect’ of ETFs: PwC

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A new report from PwC predicts major shakeups for the ETF industry due to technology over the next few years.

“Almost every familiar aspect of the ETF industry is likely to be made over by the unprecedented onslaught of automation in the future,” according to the report.

(Related: What the Studies About Robots Replacing Workers Get Wrong)

PwC surveyed executives from 60 global ETF and asset management firms in 2016 for the report. Participating firms account for more than 80% of global ETF assets.

Over a third of respondents said advances in data analytics and machine learning will affect ETFs’ investment operations in the next five years as managers’ access to data increases and decision making gets more precise.

“Transformational developments in areas like artificial intelligence and machine learning can enable asset managers to build systems that outperform humans by mining complex financial data in a faster and more insightful manner,” PwC wrote in the report.

Brokerage services are another area ripe for disruption. The report found 29% of respondents believe ETF brokers’ business model will be dismantled as automated advice gets more sophisticated and more appealing to mass affluent investors.

Respondents believe that in five years, automated platforms will account for between $10 billion and $25 billion of ETF assets under management. Almost a quarter believe automated platforms will manage over $100 billion in ETF assets for investors.

The advantage right now goes to large incumbent asset managers, according to the report. “New entrants into the automated advice market have strong visualization, apps and websites,” PwC acknowledged, “but there is little proprietary technology protecting the independent first movers that can’t be bettered or replicated by incumbent organizations who also have the ability to buy this technology.”

PwC believes incumbents can use technology to reverse the disintermediation trend that fintech startups have wrought by connecting directly with investors through a mobile app.

Using artificial intelligence, firms could help users identify their objectives and build a portfolio, addressing their personal situation and values, that is reallocated based on their changing circumstances rather than a fund glide path.

“If adopted by investors, this model would change industry dynamics. Investors would likely care little about the asset management organization providing the underlying ‘building blocks.’ Instead, the brand and market power would be resident with the app on their smartphone,” the report noted.

The firms at most risk are the ones that resist automation and other digital technologies, the report found. “Successful ETF firms will need to embrace the fast-paced technology advances and either invest in or partner with technology firms to respond to customer demands for low-cost investment products and innovative services.”

— Read A Walk Through Richard Thaler’s Mind on ThinkAdvisor. 


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