How FinTech is Disrupting Portfolio Management

There is no denying that Fintech dominated our industry landscape in the 2010’s. New technologies emerged: AI, peer-to-peer lending, digital investment platforms, block-chain and machine learning techniques to name but a few.

Worldwide, investment into this space is growing exponentially.  The global market was valued at approximately $127.66 billion in 2018. FinTech is expected to grow to $309.98 billion at an annual growth rate of 24.8% through 2022 (PR newswire). A report from KPMG puts this growth into perspective. The multinational accounting firm reported that in the first half of 2019, three colossal deals that took place increased spending into FinTech to $120 billion (VC, PE & M&A). If we look back to 2013, FinTech spending reached $19 million (VC, PE & M&A), comprising of 1,132 deals. This growth had risen to a staggering 2,196 deals in 2018.

In January 2020, Visa placed an offer to pay $5.3 billion for Plaid, a company that was created in 2013 and allows consumers to securely link FinTech apps to their accounts at incumbent banks. Example apps include TransferWise and Acorns.  This offer is significant indicator of the transformation taking place within the financial services industry and the driving force behind FinTech. Why? Plaid is a relatively young company to be receiving such a sum, given that it that was valued at $2.4 billion pre-money by investors during its previous venture funding, completed at the end of 2018. (EuroMoney)

There are no signs of this pace of change slowing down. EY confirmed that in 2019, 64% of consumers globally had adopted FinTech in one form or another. The UK is the FinTech capital of the world, the Department for International Trade reports. The global average of Fintech adoption stands at 33%. In the UK, the average is 42%. In 2019, there were over 1600 FinTech firms in the UK alone. This is predicted to more than double by 2030. Echoing this, Deloitte reported that the proliferation of AI is expected to reduce bank operation costs 22% by 2030. This translates into savings of approximately $1 trillion.

As we begin the next decade, the term is no longer a buzz word floating around amongst the industry chatter between fund managers and their clients. It is a key driving force behind the new business model for financial services. 75% of fund managers now view the impact of FinTech as the number one reason that they must strive to adapt to changing client demand, PwC confirmed.

FinTech has been a game changer that has inspired a new wave of investors and disrupted how asset managers service their clients and distribution intermediaries. The consequences of FinTech’s rapid evolution has been vast and the opportunities are boundless. So what does this growth mean for discretionary fund managers?

Fundamentally, ‘FinTech is helping to standardise and commoditise portfolios, which is now being reflected in lower operating costs’ James Churchman of Linear Investments reflects. For starters, robo-advisors have disrupted the asset management industry by algorithm-based portfolio management and asset recommendations. This has not only lowered the costs of portfolio management but has increased the efficiency too. What’s more, technological disruption and the increase of data available to private banks has also meant that portfolio creation can be increasingly more personalised to better suit a client’s demands and needs. Not only does AI facilitate a greater opportunity to better understand the markets and asset selection, it also enables firms to better target clients with financial products that are suited to their investment goals.

At Linear we are now seeing the fruits of our own labour in this space. Take our new passive portfolio range. Its underpinned by technology and an AI rules-based approach. There is still of course human input but the technology we use enables us to make decisions very quickly. The subsequent reduction in resource means we pass that cost onto our financial planning clients and offer this discretionary service for just 0.15% pa.

If you would like to know more about Linear Investment’s DFM offering, please visit www.linearinvestment.com or email jchurchman@linearinvestment.com