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Changing fortunes

Sanjiv Sawhney, Head of Global Custody and Fund Services at Citi, on the pressures facing the investment industry – and how it’s helping clients respond

The investment industry has undergone intense change over the last two years, with many businesses and individuals working in the sector searching for growth in an age of significant disruption.

New fintechs and challenger banks offering an alternative to traditional wealth management by a trusted third party have been growing in the public consciousness for some time. They’re putting pressure on asset managers to maintain market share and reduce costs while also living up to the transparency demands of regulators and investors, including the desire for data on investment styles, fees and performance.

As a result, the role of custodians is also changing: from straightforward safe-keepers of assets to strategic partners as clients reassess their business models.

“We’ve gone through a lot of change and most of it has been driven by what our clients, the asset managers and pension providers, are facing in the industry,” says Sanjiv Sawhney, head of Citi’s global custody and fund services business. “They’re obviously figuring out the economics of their businesses in terms of whether they want to become a large player or a specialised one.

“In parallel, there are changes in the types of products they’re trying to build – so, the active versus passive debate remains. New asset classes have also come on board and lastly, and probably most importantly, the way they distribute their products or the way their end clients want to see those products, has also changed. So, transformation, expense control and digital ecosystems all link closely with the environment we are working in and are front of mind for C-suite asset managers, service providers or anyone who’s part of that overall ecosystem of investments.”

On the face of it, the still hugely profitable asset management industry might not seem to be breaking a sweat. PricewaterhouseCoopers (PwC) predicts global assets under management will have grown from $84.9trillion in 2016 to $112.2trillion this year, and again to $145.4trillion by 2025.

But those figures mask a downward pressure on fees, due to weak investment performance, greater price transparency, new regulatory controls and the ongoing trend towards passive-over active fund management. Meanwhile, costs are rising as managers keep pace with compliance and the process of digital transformation.

Advances such as artificial intelligence (AI), blockchain, machine learning and data harvesting and processing have already begun to drive real change for them and the service industries that support them. Technology isn’t just fuelling change in asset management – it’s also facilitating a response from custodians, says Sawhney.

“As the asset manager community looks at its operating model, it is looking to us as security services providers to do a lot more for it. And technology is a big enabler in us being able to do that.

“In this environment of expense pressures, many technologies – natural language processing (NLP), machine learning, etc – are being used across our business to further automate what we do.”

Citi’s award-winning data and analytics platform Citi Velocity Clarity is a good example of that. The platform uses big data and private Cloud technology, delivered through an integrated suite of online capabilities to give clients fast, easily consumed information from a variety of sources, including Citi’s custody and fund services systems, clients’ own internal data and third-party data providers.

“Data is becoming an important element for ensuring we have a single book of record between ourselves and our clients. Any technology that’s facilitating data being uniquely stored and shared is therefore important.”

For that reason, Sawhney believes that blockchain will more than likely play a part in the future of asset management. Indeed, it’s already a vehicle for investing in cryptocurrencies, startups, and tokenised real-world assets, with global research and advisory firm Gartner forecasting that it will generate an annual business value of more than $3trillion over the next 10 years. But, as with any emerging technology, challenges and doubts exist around its reliability, speed, security and scalability.

“There are important questions that remain unanswered,” says Sawhney.  “Whether it could scale appropriately, cross geographical borders, and how an infrastructure of this sort would be regulated on a more global basis. But, conceptually, what it does can very much become part of our future.

“It will ensure there is a single version of the truth, a single record, of any information across the different participants who use it; between the asset manager, the end investor and the service provider.

”The other side of it is that a number of market infrastructures are looking at digitising certain asset classes with this underlying technology being used to facilitate that, so more asset types could be available to investors.”

And what about more investors for asset managers? It’s been estimated that around 66 per cent of global financial assets, including individual securities and assets managed internally by institutions, and bank deposits, never touch the industry.

If asset managers don’t find ways to explain what they do and use digital technology to do it better, then Sawhney thinks others will do their job for them.

“At the end of the day, the objective of the investments industry is to find a broader set of clients to sell its products to, provided they’re appropriate for their risk needs, their investment needs and so on. A lot of the social media-type companies have access to many, many more individuals than the traditional distribution network that an asset manager has access to,” says Sawhney.

While none of the big tech companies has so far entered the investment market, they have penetrated lending, insurance, money transfer and payments – indeed, Citi itself has partnered with Google in America to facilitate the first Google current accounts, due for launch this year.

Uber, as Uber Money, wants to be a bank for its drivers, while Facebook recently announced Facebook Pay. And then there’s Libra, its attempt to build a global cryptocurrency payments network.

Today, according to the Bank of England’s 2019 Future Finance report, the world’s largest financial service firm is China’s Ant Financial (formerly Alipay), with more than a billion clients. Its ecommerce affiliate Alibaba is pushing into social media with its hugely popular Taobao and investment in Snapchat. Imagine the impact Ant Financial could have if it turned its attention to the investment market. There is already a whole generation of investment services built on a ‘social’ model. Why shouldn’t it work the other way?

“That’s something I would keep a close eye on – organisations that could disrupt in some shape or form,” says Sawhney.

Changing relationships

Some in the investment industry are further along than others as they wrestle with the new norm of lower fees and higher costs. But there may be tough times ahead for those that fail to get a foothold in shifting sands – as well as opportunities for those that position themselves correctly, through acquisition in order to scale or, conversely, by unbundling services to focus on the niche, specialising in research or reporting, for example.

Meanwhile, custodians like Citi will recalibrate their relationships with clients, even as those clients reevaluate their relationships with investors.

This article was published in The Fintech Finance Magazine: Issue #15, Page 86 & 87.

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