Burn the Ships: Innovation in Asset Management

Destruction and change landscape

Any established asset management firm has been developed on a careful, low-risk basis. Almost by design, they have created a culture and infrastructure that is not dynamic, as they (quite understandably) sought to build a firm that was perceived as very safe, secure and trustworthy. In an environment that is slow moving and consistent (which asset management largely has been for the last 20 years) this approach can work well. It might be said, however, that the technology that has entered the asset management industry, up to now, has simply automated processes that were already in place. Technological advances haven’t really disrupted or changed the industry to a large extent; they have merely improved processes within the boundaries that were already in existence.

Today, technology is starting to alter all aspects of people’s lives, as the digital economy takes hold. It is hard to see how this sea-change will not eventually affect the asset management industry. One of the problems that the industry now has to overcome is the cultural resistance to change that the last 20 years has created. If you look at the technology that is now at the industry’s disposal and the shifting demographics of tomorrow’s investor, it is hard to see how the majority of established asset management firms will survive without some kind of intrinsic adjustment to their business models, culture or technology footprint. Those firms that can adapt to what tomorrow’s customer wants will be far better positioned to succeed.

Customers are evolving and loyalty is much more to the customer experience than the ‘big brand’ that used to be the decisive factor. The investment management industry’s traditional customer base is developing and technology is a huge enabler, so firms should be carefully planning on how best to deploy the technology in order to meet customer expectations.

To combat the cultural inertia that prevails, many of the large asset management firms are creating innovation centres, or ‘incubators’, to generate new ways of thinking. This is very laudable and a pragmatic response to a cultural problem that could take years to overcome. The issue with this approach, however, is that the pioneering ideas at some point will have to traverse into the mainstream organisation in order to be effective. One could argue that this is, in effect, hiding the problem. In order to avoid this scenario, the senior management will have to buy-in to the incubator and be seen to actively sponsor its new initiatives and enforce change. The leadership team will have to be prepared to break the current model in order to move to a new model.

In 1519, Captain Hernán Cortés landed in Veracruz to begin his great conquest of Central Mexico on behalf of the Spanish Crown. Upon arriving, he gave the order to his men to burn the ships. The lesson here is that retreat is easy when you have the option. Cortés was on a mission and he knew that the only way to keep himself or his men from abandoning the mission was to take that option off the table.

Innovation in our industry is in my view as much, if not more, about cultural change than technology. Asset managers that want to successfully deploy innovation incubators will have to take a leaf out of Cortes’s book and ‘break’ the current business model so there is no way back.