A lack of innovation and long-term underperformance within asset management has left the industry open to new entrants — technology-enabled firms, according to a new report from Moody's Investors Service.
The report released Tuesday, said the money management industry is particularly vulnerable to competition from new tech-enabled entrants with regard to distribution. For example, some market share has already been ceded to robo-advisers, including Wealthfront, Acorns and Betterment.
Technological disruption in asset management is most likely to stem from innovations in distribution through better client contact, relevance, identification, customization and retention.
"We think technology firms have the advantage here," said Stephen Tu, vice president and senior analyst at Moody's, in a phone interview.
Mr. Tu noted that the asset management industry has already seen digital disruption in China. In 2013, an affiliate of Alibaba launched Yu'e Bao, a money market fund for its digital payment system, Alipay. With $211 billion in assets, the fund has grown to become the world's largest money market fund in just four years.
Digital payment firms like PayPal, which have large user bases and are seeking new revenue streams, could benefit from offering investment funds. Meanwhile, U.S. technology giants such as Amazon, Apple and Google, could enter the asset management industry not just for investment management fees but also to enable data collection and keep their clients within their companies' business ecosystems.
Robert M. "Rory" Callagy, senior vice president and manager at Moody's, added in the same phone interview that these technology firms "with strong distribution channels" can enter the asset management business to make "their ecosystems that much more attractive" and give their users fewer reasons to leave that business platform.
Some money managers are better prepared to accommodate the need for digital upgrades. Although most managers have recognized the threat of competition from technology companies with more advanced distribution channels, few have substantially invested in addressing the problem.
Fidelity, for example, has invested heavily in improving its digital interaction and customization of services to clients through its web interface and apps. Blackrock, meanwhile, in addition to developing its Aladdin risk management platform and making its fundamental investing more quantitative, has made several recent acquisitions and investments in financial technology.
"Traditional asset managers must adapt their businesses to reflect the technology-oriented preferences of their client base," the report said. "Otherwise, technology firms will more easily be able to capitalize on their own strong distribution channels and begin expanding their existing ecosystems by cross-selling financial products to their clients."