The investment industry is changing. Long term returns expectations are reducing across many asset classes, meaning market-driven growth can no longer be relied upon to drive up assets under management. And yet retail fund flows go from strength to strength. Alongside this, customers are becoming more sophisticated. They are demanding greater transparency and control over their financial destinies, supported by a vastly greater depth of information at their disposal than ever before.
Fund managers are at last grasping that differentiating themselves with customers has long term value. This requires refocusing on the customer needs, likes and behaviours to create insights designed for life time value. To do this successfully, managers need to unencumber themselves from traditional operating models and look to successful, customer-focused business models outside the investment world – companies like Apple, Google and Tesco.
Customer Re-Intermediation
The investment industry is far older than the paragons of customer-focused business models and history is behind some of today’s investment industry issues.
Investment in collective schemes or retail funds originally dates back to 1868 when Foreign & Colonial set up the first investment trust. The first Unit Trust was established in the UK in 1931 to replicate the success of US mutual funds. Collectives started to be widely recognised as savings vehicles for the mass market in the 1980s and their growth was boosted with the rise of independent financial advice in the late 1990s, with the introduction of the polarisation regime in 1998. The rise of fund platforms over the last ten years has made buying collective schemes simpler and cheaper and helped 2009 and 2010 see by far the most retail sales on record[i].
But increasing intermediation – and we include IFAs as well as fund platforms in this category – has changed the dynamic of the relationship between the fund manager and the end customers. Fund managers now see the intermediaries themselves as their customers. It is the intermediaries that drive fund flows and investments are often held in their name, while the retail public as individuals are largely ignored.
Is it conceivable in today’s world that Apple would see at Carphone Warehouse as its customer? Clearly not! And yet this is the equivalent business model to today’s retail funds industry. In future, however, the biggest challenge that will face investment companies is seeing beyond the intermediary to truly understand and engage with their customers.
The Customer Profiling Challenge
The retail funds industry has a significant issue to overcome in engaging with its end customers fully – understanding who they are and what they own. This is driven by two main features of current and historic operating models.
The historic feature relates to the platforms and software that hold customer records. This role is carried out by transfer agents and, in the UK, the majority of the market is outsourced. Whether outsourced or not, retail customer data is not part of the DNA of an investment manager. The platforms tend to be physically and logically separated from “core” systems and other than net money into and out of the fund and the price of fund itself, little data flows between the transfer agent’s systems and the rest of the business.
The second issue is intermediation itself. Many intermediaries invest as a single entity or nominee on behalf of their customers, while leaving the beneficial ownership with the customer. Others – discretionary managers – have authority to manage the money on the investors’ behalf. Both of these present subtly different issues but the result is that even if the fund manager sees the client register, many thousands of investors’ names will not appear.
So how do you look through disparate systems with prima facie incomplete data to get to the real customer data? And is there real competitive advantage in the underlying information?
Shifting Sands
Regulations drive much of the change in the investment industry. We have had the era of “Know Your Customer” and remain in the midst of “Treating Customers Fairly”. We are now at the start of “Engage with Your Customer”.
In our recent paper a [ii]Customer-Centric Paradigm Shift in the UK Pensions & Investment Industry, we show how customers are becoming more sophisticated. In particular, one key demographic – pre- and early post-retirement customers who often have the largest investible assets – are demanding greater transparency and control over their financial destinies, supported by a vastly greater depth of information at their disposal than ever before.
This information, including the establishment of electronic trading platforms, new online financial planning tools, news feeds and social media, is changing the traditional “trusted advisor” relationship with IFAs. Clients are beginning to challenge their holdings, investigate new product options that IFAs may not have at the top of their lists, and redefine their risk tolerances as new instruments become available.
Regulatory changes such as the Retail Distribution Review are already leading to greater levels of dis-intermediated investments and customer demands are pushing this further. There is right now the greatest opportunity in a generation for fund managers to capture retail customers’ attention and assets directly.
The Way Forward
The first step is a change of mind-set. There is a pervasive, if unsubstantiated, reluctance by fund managers to interact directly with their end customers beyond that which is required by regulations. The feeling is that, particularly with an aging population who may not actively manage their investments, interacting with customers risks rousing them from their investment torpor and driving them to liquidate their holdings.
Would Apple or any company not steeped in the history of the investment world be reluctant to engage with customers? They would not.
The second step is to understand that what has historically driven asset flows is not necessarily what will drive them in future.
With the level of intermediation in the market at present, it is the IFAs themselves that largely define what a successful fund manager should be. Their due diligence and knowledge of the marketplace undoubtedly serves as an important benchmark, but it occasionally overlooks the key elements that are important to investors. Transparent, easily-accessible information, technological engagement and excellent service are three factors that intermediaries rely heavily on for the service they receive from the fund manager, but this does not necessarily hold true for their selection criteria and recommendations for the end customer. But it is precisely these things that customers look for in leading companies and these items genuinely differentiate an offering in a world where the underlying workings of many products are often beyond the understanding of the retail customer.
The third step is to tie together all the customer data that lies in different locations within the fund manager’s ecosystem – the TA records, the platform records and intermediaries’ data and look through all this to the real underlying customer. The rise of Cloud technologies makes this a realistic proposition today. Data aggregation and storage has become significantly cheaper and easier to manage in the Cloud, and with platforms now available that can consolidate and store huge amounts of customer data, the challenge is no longer insurmountable.
The fourth step is to truly understand this data – who your customers are, how are their preferences and priorities reflected in the assets you manage for them, how can you as a fund manager provide a differentiated service to them and how will their needs change in future? With a fundamental understanding of who your customers are, it is possible to profile these customers using advanced data enhancement tools – tools that are able to tell you the socio-economic profiles and predictive trends for each individual and group of investors.
The final step is sensing early and responding quickly to these emergent demands and opportunities. Drawing intelligent conclusions early and using adaptable processes internally to respond to these conclusions will give fund managers the basis for capturing significant additional assets from customers, delivering them superior experiences and enhancing profits across the organisation.
[i] Asset Management in the UK: 2010-2011 , The Investment Management Association Annual Survey
[ii] Customer-Centric Paradigm Shift in the UK Pensions & Investment Industry, Freddie McMahon, Head of Innovation & Strategy, FusionExperience, February 2011
