Does the music industry provide a blueprint for the future of asset management?

Chris Rule

Big changes in markets often happen unexpectedly. Twenty years ago, for instance, no one would have imagined how business models in the global music industry would be completely upended.

At the turn of the century, music labels were focused on product. They made money by selling CDs, and artists performed concerts to promote those CDs.

This model ran into trouble, first of all, because it made music very expensive to own. That made it ripe for disruption, which is what happened when Napster arrived making pirated music free to everyone.

The result was a significant pivot, led by Spotify and Apple Music. They recognised that free music is not sustainable, as the artists need to be compensated. They solved that by creating streaming services that are either free to consumers, supported by advertising revenue, or based on a subscription. Artists could then be paid on revenue share.

The music industry hated this initially, because they were in the business of selling albums. But the shift was unstoppable. Music has now become a personalised platform, that each user can access as an individual.

From buying a few CDs – perhaps 100 in a lifetime – consumers now have access to just about any music they want, virtually for free. What they are paying for is the service and the experience.

It may sound far-fetched to suggest that asset management will head in a similar direction, but there are similarities worth contemplating.

First of all, the evolution of asset management led it to become largely about product. Fund managers created a proliferation of funds competing for market share.

Until the arrival of indexation, those products were growing increasingly expensive. The massive global shift to passive has brought costs down significantly in most cases, but the asset management industry is finding other ways to generate revenue.

Mostly significantly, alternative products – the likes of hedge funds, private equity and private debt funds – have grown rapidly to now account for 20% of the global industry. Significantly, this slice accounts for 57% of market revenue. There is therefore a huge commercial incentive for asset managers to create and sell these offerings. But they are expensive.

At the same time, we now have some firms offering asset management for free. Fidelity famously started the trend by offering zero-fee index products.

Consumers in every industry have also become used to hyper-personalisation, enabled by technology. That is what music streaming services offer. Essentially, consumers are still buying records, but the experience has become individualised.

Music streaming services use AI and algorithms to send you recommendations to suit your profile. Consumers can get suggestions for new music that they haven’t listened to before based on their past preferences. They never have to buy another CD, but if they are paying a monthly subscription fee of R90 per month, they could spend more than R50 000 in a lifetime. That’s probably more than most people would spend if they were actually buying CDs, but they have unlimited access to any music, and the benefit of the personalised experience.

Put another way, consumers don’t have to settle for something that kind of fits their preferences. They can get something that exactly fits.

There are signs that asset management is going the same way. Already we are seeing online “robo” solutions in the US that maximise tax efficiency for individuals based on the state they live in and their personal circumstances. Equally, investors can choose their own asset allocation and investment preferences, even down to the level of including or excluding specific stocks.

Asset managers have already started to move away from being product proliferators focused on selling funds to delivering portfolio solutions. They are not just making these available to advisers and intermediaries, but other asset managers.

BlackRock, for example, sells its Aladdin platform as a technology service to users across the industry. It offers risk, performance and portfolio tools.

There is much more that can happen in this space, with asset managers increasingly becoming platform providers rather than product pushers. This would happen in much the same way that the business model in the music industry has changed.

Services such as asset allocation, building blocks, risk tools and portfolio construction can all be offered as a service. It’s even conceivable that firms could offer something like a chief-investment-officer-as-a-service to other managers who need a seasoned professional without incurring the expense of employing their own resource.

There is so much scope for innovation in this space, and it is going to be very interesting to see how this unfolds. It’s no longer a question of if the industry will have to pivot, in my view, but when.