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The Change Horizon: Thriving amid disruption in the value chain

The below article is a session write-up from a presentation delivered by Shundrawn Thomas at FundForum NextGen Distribution in Boston, October 2016. Join in the conversation on Twitter via #FFNextGenDist.

As the world of investing continues to evolve, numerous forces both inside and outside of finance are now shaping the landscape dramatically. The choices made now will influence the further growth of the fund world in the decades to come. In this talk, Shundrawn Thomas, Executive Vice President and Head of Funds and the Managed Accounts Group at Northern Trust Asset Management offered seven insights in the state of the investor and the industry today. Thomas began with an overview of the key themes in wealth management.

The Three Gs: Generational, Geographical and Group

First, in surveying the investment world today, we find the generational issue: in the next few decades very substantial amounts of wealth will be passed on to generations that have much different capabilities with technology and data, on one hand, while having much greater expectations of what an advisory relationship could or should be on the other. This does pave the way to robo-advisors, but those are not the only solution for Gen Y and the Millennials.

Second, we find geographical dispersion in wealth; far wider than it has ever been before.  The rise of the middle class in parts of the third world creates new opportunities for investment managers. Cultures too, vary widely, and between geography and the existence and formation of groups, there is no easy one-size-fits-all solution to the questions of client education, expectations management and asset allocation for the long term.

The key takeaway, concludes Thomas, is that demographic shifts are changing the composition of investment decision-makers requiring new distribution strategies and models.

The Retirement Savings Gap

Turning to one of the core issues facing the most developed nations, Thomas observes that there is, indeed, a retirement saving gap.  Simply put, over the years, investors have set aside too little to fund their retirement goals, resulting in rising demand for investment advice and solutions.

Thomas’s point is that the rising tide of regulation in fund management demands proactive and innovative change to be exerted on existing business and distribution models.

Regulatory Responsiveness

Regulatory activity tends to focus on four key areas with varying degrees of scrutiny and effectiveness: consumer protection, conflicts of Interest, complexity and cybersecurity.  There will always be bad actors, says Thomas, and taking on consumer protection creates an affirmative role and mindset for regulators. Thomas worked to dispel the notion that the rapid growth of self-directed investment in the last decades and digital advisors more recently necessarily means that the days for active and discretionary fund management are drawing to a close. On the contrary, in fact; Thomas sees that in a world of too many choices, people will rely on skilled professionals more than ever.  This is particularly true with respect to the genuine threats inherent in complexity and cybersecurity.  Thomas’s point is that the rising tide of regulation in fund management demands proactive and innovative change to be exerted on existing business and distribution models.

Problems Need Solutions

Giving advice is a risky business in and of itself, add to this a mandate for accountability, transparency, fairness, and rightful or wrongfully taking complexity into account. People are wary of the sales pitch these days (in some industry segments, consumer confidence has never been lower). Within this skeptical, complicated and occasionally hostile environment investment advisors must shift from the traditional format of offering advice and selling products to delivering outcome-oriented solutions.

ETFs at the Center

Since their inception, ETFs have been a highly disruptive force in the investment world. Clearly they offer advantages on the cost front, as well as simplicity, tradability and access to far greater asset choices than was the case in previous eras. Investor preferences for transparency, efficiency and accessibility will accelerate even broader acceptance of ETFs and will continue to alter portfolio construction theories and methodologies in the years to come.

Man Plus Machine

Taking a look at intelligence, Thomas asserted that this story is about a natural arc in history – adaptability is a trait that stands the test of time quite well. While some people fear that machines will take over the world, leaving humans with nothing to do, history is showing that machines actually are best suited for taking on tasks that do not require a layer of judgement – they bring about greater efficiencies and stimulate opportunities for new jobs and new tasks to be created and managed by humans. Taken together, man and machine can be a very powerful combination and the integration of human and artificial intelligence will better enable business development, portfolio optimization and client engagement.

Rebirth of Retail

Finally we arrive at a new vision for the investment industry. Having studied disruptive technologies and the history of the financial sector extensively, Thomas believes that the will be a renaissance in the field of retail investing. There are over $250 trillion in assets out there, he says, and the vast majority of that wealth is owned by individuals, with perhaps $5 trillion belonging to governments. It is important to remember that we are all serving as trustees or advisors working in behalf of these people. How well do we know the customer of today, let alone the customer of tomorrow?  The answer is not completely clear, but Thomas predicts that major demographic shifts, rapid technological adoption and business model innovation will fuel a renewed focus on direct distribution efforts.

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