The ALFI report published by Deloitte Luxembourg analyses the impact of fintech on the fund distribution value chain and the current operating model of the fund management industry.
Fintech has become a booming part of the tech industry and is disrupting traditional financial institutions by offering alternative financial solutions to consumers and businesses. The lending and payments space has seen the most influx of fintech market entrants, while the investment management sector has seen the emergence of new competition from robo-advisors.
In recent years Luxembourg has become a leading European hub for fintech, with over 150 fintech companies currently based in the country. Furthermore, Luxembourg is the world’s second largest investment funds domicile and therefore has strong vested interest in technological changes that affect the fund management industry and its distribution value chain.
The fintech disruption in the investment management industry is largely driven by investor demand. The new investor base does not trust traditional financial advisors and their advice. They prefer to manage their investments themselves, ideally using online or mobile services, and want a more customised experience. This is what has largely driven the success of robo-advisors in the investment management industry.
The blockchain technology will most likely severely disrupt the current operating model of the investment management industry and its entire distribution value chain, once it has been successfully implemented and a blockchain regulatory framework has been created. The disintermediation of players in the fund management industry, such as custodians, transfer agents, distribution support, clearing and settlement houses and payment system providers, will take place once the blockchain technology is implemented. Until then, there will most likely be a transition phase where the traditional operating model will run alongside blockchain integration.
The four trends affecting the fund management industry in Luxembourg and Europe are regulation, new behaviour of investors, big data analytics and fintech innovation. Through the use of big data analytics asset managers will be able to better tailor their products and marketing strategies towards the new investors and their behavioural habits. Innovation from the regtech space will improve burdensome regulatory reporting for asset managers and will curb regulatory reporting costs, while robo-advisors will deliver a lower cost and more customized experience for the investor.
Robo-advisors and online investment management services will be a key driver for customer acquisition and retention, and will most likely result in a hybrid scientific and human advice-based model further down the road. Also, consolidation is expected in the booming robo-advisor sector, with leading players buying up the competition, and becoming a fully integrated part of the larger fund management industry.
Luxembourg’s fund management and private banking industry has the opportunity to benefit greatly by becoming an early adopter of new technologies and reshaping its distribution and asset serving model, through co-operating with local fintech companies. This would cement its strong footprint as a European financial centre and as a fintech hub.
Click here to read the full report by Deloitte.