Biggest names have all the resources to switch gears, experts contend
Behemoths such as Alphabet Inc., Apple Inc. or Amazon.com Inc. have the size, brand recognition, distribution capabilities — and, of course, the technology — to compete with traditional long-only managers, industry observers said.
And asset management isn't immune to disruptive forces that these giants have unleashed against other established rivals, they added.
"They have the ambition, appetite and resources," said Thusith Mahanama, co-founder and CEO of the Boston-based client reporting services provider Assette LLC.
Industry experts said technology companies already are getting into the asset management business in North America, albeit slowly and indirectly. Meanwhile, in Asia, technology giants such as Alibaba Group Holding Ltd., SoftBank Group Corp. and Paytm already have entered the money management business.
"The tech giants control such an enormous part of our lives online, financial services could be one of those things that could make sense for them to offer," said Michael A. Rosen, managing partner and chief investment officer of Angeles Investment Advisors LLC, Santa Monica, Calif.
Added Mr. Rosen: "We've shown that we're willing to trust our data — even intimate data — to a lot of these companies. They don't just have brand awareness but a trust in the brand that is very valuable."
However, these companies would still face challenges, from regulatory hurdles to being novices competing with seasoned professionals to jeopardizing their reputations if they fail to deliver strong performing strategies.
Representatives from Apple and Amazon declined to comment. Microsoft Corp. and Alphabet, the parent of Google LLC, did not respond to requests for interviews.
Some tech giants already are managing money internally, said Mr. Mahanama. Amazon, for example, has the Alexa Fund, a venture capital fund that provides funding to companies whose products use voice-enabled technology. Meanwhile, Google has its own VC fund, CapitalG, which provides growth capital to growing technology companies.
As for whether this means these firms could manage money on behalf of pension funds down the road, the Assette CEO explained that although he wouldn't presume to predict if or when these companies would enter the business, several pieces would need to come together before that could happen.
Those pieces are the operational, marketing and client service elements, such as the people, processes and systems. Mr. Mahanama said that this could be relatively easy for companies to achieve, since they could expand their venture capital investment arms by hiring additional staff or acquiring an investment firm.
They'd also need to establish their investment processes and philosophies to add and demonstrate value over traditional managers. "This is relatively harder," Mr. Mahanama said.
In terms of what a technology firm could bring to the table that a traditional manager couldn't, these companies have access to a broad set of data and expertise in artificial intelligence that could lead to superior investment decisions.
"They certainly have the necessary ingredients to make good investment decisions, such as massive amounts of data, artificial intelligence capabilities and smart people. But that doesn't necessarily mean they'll make a good cake," Mr. Mahanama said.
Disruption in Asia
While the money management industry is in the early stages of seeing possible disruption from tech firms, it's already happening in Asia.
Alibaba, for example, moves surplus funds from customers' AliPay accounts into a money market fund. Its financial arm also launched Ant Fortune — a platform for other money managers to market their funds, in June. SoftBank in December acquired alternative investment firm Fortress Investment Group LLC with $36.1 billion in assets under management as of Sept. 30. Tokyo-based SoftBank is also considering additional acquisitions in the financial sector to create a $300 billion asset management arm.
And New Delhi-based One97 Communications Ltd., which runs mobile payment service Paytm, set up Paytm Money Ltd. to offer investment management for retail investors in the first quarter.
That has market watchers wondering when or if Google or Amazon might be looking for similar openings in the U.S.
Although he couldn't offer a timetable, Stephen Tu, vice president and senior analyst at Moody's Investors Service Inc., New York, said in a phone interview that he would not be surprised if one of these U.S. technology giants does enter the business.
"The bar's not very high for them to get involved," said Mr. Tu. "But given how massive they are, we believe it's probably not going to be solely for fee revenue — it'll be done for keeping the customer in their ecosystem."
Could benefit from move
A report issued by Moody's in November that Mr. Tu co-wrote states technology firms with established brands could benefit from a move into asset management. "Offering a fund product that could store value would directly benefit the primary business of digital payment companies such as PayPal, which have large user bases and for which new revenue streams could be significant," the report said.
The report also noted the money management industry is particularly vulnerable to competition from new tech-enabled entrants. For example, robo-advisers such as Betterment LLC, Wealthfront Inc. and Acorns Advisers LLC already are gaining market share.
There are a few ways technology companies could enter the business. The most logical would be as a data provider to feed into existing investment engines, said Tyler Cloherty, senior manager at Casey Quirk, a practice of Deloitte Consulting LLP, Darien, Conn.
With the enormous amounts of data many of these companies have, this point of entry would be far more likely than jumping right into active management.
"The question is, once they do that, could they create their own passive funds?" asked Mr. Cloherty. The answer: it's very possible, but he thinks that move is a few steps in the future.
The Casey Quirk senior manager also noted there would be a lot of hesitation because of the regulation and compliance aspects of the business, as well as brand perception. Some tech firms worry they could sully their brand by getting into the asset management business if they fumble, Mr. Cloherty said.
He believes that firms already in financial technology that have personal financial data, like Intuit Inc. (which owns TurboTax), Equifax Inc. and TransUnion LLC, might be more natural entrants.
"It can come from a lot of different directions. The big question is, can they build this into a large enough scaled business where it starts to look profitable?" said Mr. Cloherty.
Another way that technology firms could enter the business is not by being a competitor to traditional managers, but by being a distributor for those managers' investment products and services.
"Asset managers could be the engine behind the user interface that technology firms build out," said Casey Quirk's Mr. Cloherty. "So, there are definitely opportunities for partnerships to develop."
Robert M. "Rory" Callagy, Moody's senior vice president and manager, said the U.S. market has "many strong incumbents that recognize technology will be more important going forward," and tech firms entering the industry "could partner with experts in the field to gain exposure."
And with several large money managers — including BlackRock (BLK) Inc. (BLK), Vanguard Group Inc., J.P. Morgan Asset Management (JPM), Acadian Asset Management LLC and Legg Mason (LM) Inc. (LM) — investing heavily in technology, it might make more sense for a novice in the field to team up with one of these established managers rather than to compete with them.
"I think the conduit route could be very useful as they have an ability to reach an enormous population," said Jeff Margolis, founding partner of money management consultant Margolis Advisory Group Inc. "It may constitute their best value added."
Not likely, some say
Not all industry experts in the U.S. expect to see such disruption in the West from tech-enabled firms anytime soon.
"Technology firms aren't seen as much of a threat and I doubt they would enter the business directly a la Alibaba," said Domonkos L. Koltai, a partner and co-founder of investment bank PL Advisors, New York. "China had a big void to fill. No such thing exists in the U.S."
For one thing, China has a much more underdeveloped payment and investment market than the U.S., noted Mr. Koltai. For another, U.S. regulations are much tougher.
Mr. Rosen also noted that even though it's quite possible for tech firms to provide money management services, there is no direct comparison between Alibaba and a company in the West.
"It's a little bit of a lot of things: it's a little bit of Amazon, a little bit of eBay, a little bit of Facebook," he said. "So, it's not a perfect analogy. Alipay had a lot of advantages that companies in the West don't."
However, Mr. Rosen pointed out: "That doesn't mean Amazon or Google can't do it."