Will smart beta ETFs revolutionize the asset management industry?

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Will smart beta ETFs revolutionize the asset management industry?

Understanding smart beta ETFs and their impact on active and passive fund managers

PerformanceMagazine

To the point

  • A variety of accelerating factors has put the spotlight on digitalization as a key enabler to support the strategic agendas of ManCos.
  • Despite the trend for digital transformation, we have not witnessed a large wave of such initiatives in the marketplace just yet.
  • A lack of dedicated resources and access to knowledge remains a challenge for ManCo organizations, meaning it is difficult to compile a comprehensive business case and kick off a digital transformation project.
  • At Deloitte, we believe that the benefits of ManCoTech massively outweigh the transformation efforts that it requires. The challenges relating to the latest regulations and new customer expectations are real and can only be overcome with the right resources.
  • We therefore recommend an agile approach to launch your ManCoTech journey. Initiated over three phases, our approach helps define a ‘light’ business case which outlines the expected benefits, tests the outcome of ManCoTech solutions, and gathers stakeholders to embark on a more comprehensive digital transformation.
 

The need for fund management companies (ManCos) to implement a robust and scalable operational framework through new dedicated technologies referred to as ManCoTech has been a topic of much discussion in recent months. For an industry under increasing pressure from complex regulatory constraints and growing competition, the digitalization of core activities is a crucial step in the ManCos’ transformation journey to migrate from traditional operating models relying on labor-intensive operations, towards a future-proof and efficient model exploiting the benefits of technology.

Recently, an overall rise in market awareness has occurred towards the business opportunities ManCoTech can offer. However, we are seeing little sign of major ManCoTech adoption within the industry. Here, we consider the reasons behind following the status quo but also propose ways to encourage and kick-start your ManCo’s digital journey.

 

Strategic agendas are calling for technology enablers


From survey feedback and exchanges with a representative array of management companies in the Luxembourg marketplace, we can see a clear interest in ManCoTech solutions. A variety of accelerating factors has put the spotlight on digitalization.

Reporting and data management solutions—often combined—are commonly adopted by ManCos to handle the mass production of regulatory reports, while cost pressures are accelerating the need for solutions to automate operational routines. The multiplication of interactions with external stakeholders has also increased demands for funds and third-party lifecycle management tools (i.e. oversight and onboarding solutions). Finally, the COVID-19 pandemic has been an accelerator for digital trends and has ignited the wide-spread adoption of web-based solutions to conduct virtual meetings, and share and sign-off confidential documentation.

 

Expectations vs reality, what are the hurdles?


Overall, there is a consensus that technology is a key enabler to support cost-effective organic growth and offers an alternative to systematic staff hiring or outsourcing to handle new regulations and/or new products or service launches. Yet, we haven’t observed massive launches of ManCoTech or digital projects within the market, leading is to question ManCos about their constraints and concerns in onboarding the available technologies.

A common hindrance is the limited capacity to identify relevant opportunities for transformation and to obtain the internal buy-in to ultimately introduce a formal initiative. For instance, screening the ManCoTech landscape can seem intimidating because of the sheer number and diversity of the solutions on the market and because of the lack of clear and established market leaders. As an example, 400+ RegTech firms already populate our Deloitte RegTech Universe, thus, it is easy to get lost when looking for the solution(s) that meet(s) your expectations.

Finance can also be an issue. In many cases, the minimum required budget of ManCoTech offerings is a no-go for small firms, whereas larger firms find it difficult to accept volume-based fees that may drive total cost way above historical ones (especially for technology-only solutions where a cap at some stage is generally expected). It is therefore crucial that ManCoTech providers carefully adapt their pricing model to the financial reality of their different target client segments.

At the end of the day, we must also answer the fundamental question: “Is there proof that ManCoTech adds value to ManCos?”.

This needs to be looked at by breaking down ManCoTech into the various elements that it covers. You will actually realize that there are many concrete use cases which demonstrate the benefits brought by new ManCoTech solutions. At Deloitte, just on the particular area of regulatory technology, we have witnessed those solutions in action, utilizing them both within the organization and in collaboration with our clients. Internally, we have developed our own solutions to massively increase workflows made of ‘mechanical’ mandatory activities such as regulatory reporting, as well as integrating third party solutions to enable a rapid launch of new services (i.e. in the domain of oversight, regulatory watch, and governance management).

In parallel, we have observed very impressive innovative implementations for our clients. Some have adopted innovative digital KYC solutions to reach new client segments and thus create new revenue channels, while others chose to digitalize their compliance monitoring processes to maximize effectiveness and minimize the risk of regulatory fines. Other practical achievements include the reduction in governance, risk, and compliance (GRC) personnel through the use of digital solutions, as well as reduced client case handling time or compliance check efforts.

 

What’s next? “Think big, start small, scale fast”


At Deloitte, we believe in designing an approach to unite your teams in order to accelerate decision-making and deliver a better outcome through the disruption of ordinary thinking. We encourage you to challenge the status quo of your current organization—start small with a given use case having a realistic potential of improvement, and define and track the expected benefits as you gradually integrate ManCoTech solutions.

We imagine three pragmatic phases to launch your digital journey:
 

Phase 1: Define a ‘light’ business case

Your journey starts with an initial workshop where you assess the current state of chosen processes in terms of key challenges, pain points, and constraints, including legacy tools but also the high-level efforts and costs spent. You may request external support to explore suitable solutions and best market practices. This phase ends with the definition of a ‘light’ business case setting the overall objectives to reach your target digital ManCoTech model and presenting the main integration options (i.e. rent, build, buy, or re-use) and their projected ROI.
 

Phase 2: Assess the suitability of the target solution

By developing a Proof of Concept (POC) to test the solution’s capabilities, you help your organization to pinpoint risks and obstacles when implementing the proposed target operating model, but also to verify its outcome and scalability. The POC will be showcased to your teams who will then share feedback about their user experience and other valuable details. The latter highlights any required improvement and gives significant insight for other relevant actions moving forward. With a refined cost-benefit analysis, you can decide whether to transition to a formal initiative and invest in a Minimal Viable Product (MVP).
 

Phase 3: Deliver a meaningful product

The MVP is the last phase of your digital journey initiation. It is based on developing only the main functionalities that will provide core added value to your business. This small-scale delivery in your production environment helps your organization to spend less effort on technical integration, make a quick launch, and then set the foundations for your change management. Closing the journey initiation will echo your first success story, making it easier to roll out ManCoTech over time to an increasing number of service lines and functions.
 

Conclusion

Despite all the obstacles discussed and all the head winds to be expected, we remain convinced that the benefits of ManCoTech greatly outweigh the transformation efforts that it requires. The challenges relating to new regulations and new customer expectations are real and can only be overcome with the right resources. Human capital will certainly remain as a crucial asset, but technology will soon reveal itself as the factor that distinguishes the best from the rest. This has been the case in many other industries and made very clear throughout the COVID-19 pandemic. So, it's time to walk the talk, to implement the digital agenda explicitly put forward in all surveys. Start small, test well, and thereafter, achieve great ambitions.

 

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