The next wave of disruption in the asset management industry following the explosion of index funds will be a lot like the disruption in the financial advisory space: It will be digital, according to Moody’s Investors Service.
It’s already happened on a large scale in China where Yu’e Bao, a spinoff from Alibaba, is operating the word’s largest money market fund, with over $200 billion in assets from 370 million accounts.
And there are indications that something similar could happen here because tech companies are already involved in financial services. Amazon, for example, has lent more than $3 billion to over 20,000 merchants that use its e-commerce platform, and Amazon Pay, Apple Pay, Android Pay (by Google) and Facebook Messenger are are used regularly by retail customers to buy goods and services electronically.
“Ultimately, we envision a future where technology companies increasingly enter financial services, and within asset management, offer an electronic store of value vehicle, be it money market, index or digital asset funds,” write Moody’s analysts in a new report.
The clientele is ripe for a bigger move of tech companies into finance, especially millennials, says Stephen Tu, senior analyst and co-author of the report. He cites a recent Capgemini survey of high-net-worth investors finding that 56% were open to using wealth management services provided by tech firms, noting their their transparency, efficiency and innovation.
If companies like Amazon and Facebook added asset management funds and services as a complementary service, they could increase their “client stickiness,” locking those consumers into their ecosystems, according to the Moody’s report.
The tech giants wouldn’t be doing it primarily for the added revenue. That would more likely be the case if PayPal, whose whose market cap is about 10% of Apple’s, got into the money managemnt business. There is little barrier to entry for any of them, says Rory Callagy, senior vice president at Moody’s, another co-author of the report.
If and when tech companies do expand into the asset management space, traditional asset management companies, already under pressure to lower fees and enhance their digital services, will experience even more stress.
Some, however, are better prepared for the coming competition because they have invested heavily in technology — namely Fidelity, Schwab, BlackRock and Vanguard, in that order, according to Moody’s. Using patent activity as a proxy for innovation, the report places Fidelity way ahead of all the others.
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