Winning with technology: planners and clients will benefit

BlackRock’s country head of Australia, Dominik Rohe, says financial advisers and their clients will be the big winners from greater use of technology, including robo-advice, big data, factor investing and artificial intelligence (AI) in the asset management industry.

Technology will provide access to better investment products, better product screening, and better portfolio construction tools that will allow more effective tailoring for clients.

Download full Infocus report, “Winning with Technology”, in pdf form.

“That will allow advisers to build more efficient portfolios for their clients that are outcomes driven,” Rohe says. “Technology is not just changing distribution – through features like digital advice, but also the investment process itself, through the use of big data and machine learning.”

Rohe says technology’s major impact is occurring at the macro level and will continue to put downward pressure on costs. The investment industry, like other parts of the economy, faces ‘Amazonification’: to succeed, you need to be a lower-cost producer and the most efficient.

Rohe believes competitors for technology and human capital are not financial firms, but technology firms.

“Technology will determine the industry’s future winners; those winners will be the companies that design their business model around their client’s future needs.”
But those macro forces will ultimately benefit advisers and their clients, Rohe says.

More efficient sources of beta

For a start, technology means advisers and their clients will get access to better passive and actively managed products at cheaper prices.

Toby Potter, chair of the Institute of Managed Account Professionals (IMAP), agrees that technology will generate better product.

“I absolutely think we’re just on the cusp of seeing a significant reduction in price of investment management and improvement in the customisation and specificity of portfolios,” Potter says.

Many advisers are turning to passive investing, and particularly factor-based investing, through products known as ‘smart beta’, which are a transparent, liquid and fee-friendly way to achieve the benefits of active management.
Rohe says investors have known for a long time that inexpensive stocks outperform expensive ones, quality outperforms junk and winners outperform losers. “But the challenge is to identify which are which,” he says.

Style investing has always relied on the same insights, “but we now have access to more data and more technology – meaning increasingly sophisticated tools with which to analyse factors, as well as the ability to analyse more stocks more quickly, and reach into many more markets,” Rohe explains.

Better alpha generation

He believes technology will also improve active management. Active managers, particularly in developed markets, are struggling to outperform the market over any length of time.

“But we believe it’s important to incorporate the best of both active and passive into portfolios and that in this low-return world, high conviction active management continues to play an important role in helping financial advisers work with their clients to achieve their investment objectives,” Rohe says. “We believe that in a persistent low-growth world, advisers will be willing to pay for high quality active management and that the use of data and AI will be increasingly necessary to develop an edge in alpha creation.”

Investment managers like BlackRock are turning to big data and AI to help make investment decisions, cut costs, and deliver better and more consistent performance.

Rohe says it’s not a matter of robots taking over. Instead, it’s using AI to sift through reams of ‘democratised’ data for insights. That information is passed to fundamental portfolio managers to inform their investment decisions. “It’s not man versus machine,” he says. “It’s taking the power of data and computing power and enabling the portfolio manager to make better decisions.”

Rohe cites an example. For some time after the global financial crisis, there were widely held negative views on the Spanish economy. Some of BlackRock’s ‘big data’ search signals revealed that consumers were searching for new white goods and looking to re-mortgage their properties.

These were unexpected behaviours from consumers operating in an economy that was thought to be under stress. This information led BlackRock to pick a turnaround in the Spanish economy earlier than most and take some contrarian positions in Spanish companies, which was additive to alpha generation for its investors.

AI will certainly allow asset managers to cut costs. Opimas says AI will cut the cost/income
ratio of financial institutions by more than 25 per cent by 2025.

More tailored investment portfolios

Rohe says technology will then allow advisers to find those more efficient, low-cost options from amongst many providers. They will be able to select the best portfolio building blocks. “It will allow advisers to weed out high-fee, nonperforming benchmark-hugging product,” Rohe says.

Armed with technology and better product, advisers will be able to better mix those products up in customised portfolios for clients. They will be able to put the investment blocks together to form the best portfolio for each client.

IMAP’s Potter agrees that technology is about improving investment portfolio construction for clients.
“We’re living through the early stages of the significant impact of technology on portfolio construction at every level of the investment management process,” he says. “Compared to only a few years ago, we’re seeing sophisticated portfolio tools, which enable an adviser to understand the characteristics of a portfolio
and ensure it’s better aligned to the circumstances of an individual client.”

Rohe says BlackRock believes that while start-up robo-advisers are gaining market share, robo-advice will not take the place of the human adviser. Rather, hybrid models, which have a mix of both, will become more prevalent.
Rohe says BlackRock wants to offer its institutional-level technology to advisers in Australia via a tool called Aladdin Risk for Wealth Management.

“BlackRock sees a lot of applicability for Aladdin Risk for Wealth Management in the Australian market and has received a lot of interest from Australian clients that we are in discussion with,” he says.

In the US, UBS has selected this risk management and portfolio construction tool for its wealth management advisers and home office professionals.

Rohe says it allows advisers to sit with clients and build portfolios with them that deliver outcomes in line with their objectives. In real-time, the client can also witness how various portfolio constructions might perform.
“It allows advisers to deliver much better, and less surprising, outcomes for their clients,” he says.

BlackRock also has a tool called iRetire, an end-to-end retirement planning framework. Rohe says iRetire uses Aladdin’s technology to solve one of the biggest problems facing clients: a sustainable retirement income. iRetire provides sophisticated asset and income management capabilities.

The 2017 BlackRock Symposium attracted hundreds of advisers across the country AND ideas were exchanged about the disruptive forces shaping how money is managed, portfolios are constructed, risk is measured
and brands are built. To dive deeper into these topics and earn CPD hours, go here.