PUTTING YOUR MONEY WHERE YOUR MOUTH ISPRACTICAL IMPLEMENTATIONS OF ESG AND TECHNOLOGY IN ASSET MANAGEMENT

It’s easy to discuss the pace of change and what needs to be done to keep up; putting theory into practice, implementing significant structural transformation and, crucially, investing in brand new systems, people and technology is not so straightforward. ESG considerations have been on the radar screen for some time, but many remain sceptical.

Can it make money?

Is it just “greenwash”?

Digitisation is everywhere, but what to invest in remains confusing.

FundForum is committed to helping the industry navigate these difficulties, provide clarity and solutions to move asset management towards a more sustainable future.

In our second of the FundForum 2018 quarterly eMagazine series, we want to provide you with exclusive insights from experts leading the pace of change, and crucially “putting their money where their mouth is”.

Enjoy!

The FundForum Team

CONTENTS & INTRODUCTIONP3 THE FUTURE OF FINTECH IN ASSET MANAGEMENT: PARTNERSHIPS?

Chris Bartz, CEO & Co-Founder, Elinvar

P6 SOCIAL MEDIA: A WINDOW INTO RISK AND PUBLIC SENTIMENT

JP Kloppers, CEO, BrandsEye

P7 ROBOTICS WILL TRANSFORM ASSET MANAGEMENT. WHAT'S HAPPENING BEHIND THE LINES?

FundForum 365

P9 ESG: BALANCING THE RISKS AND OPPORTUNITIES IN ASSET MANAGEMENT

FundForum 365

P10 FIVE TIPS FOR BUILDING A BRAND THAT MATTERS

April Rudin, Founder & President, The Rudin Group

Driven by the goal to reshape finance for the better, Chris Bartz is an advocate for the benefits of digitalization and a strong ecosystem for FinTech and digital banking. Ahead of speaking at FundForum International about the future of FinTech in asset management, we get a quick glimpse into why Elinvar believe partnerships are key to getting it right and how they've made it work for them.

THE FUTURE OF FINTECH IN ASSET MANAGEMENT: PARTNERSHIPS?Chris Bartz, CEO & Co-Founder, Elinvar

WHAT ARE THE MAIN CHALLENGES ASSET MANAGERS ARE FACING RIGHT NOW, AND HOW CAN FINTECH HELP?Many asset managers are seeing digitalization as a serious, yet promising challenge for their businesses. Most of them are well aware of the long-term benefits of adopting new technologies, but the technological and organizational know-how to do so differs significantly from their established core competencies. By partnering up with financial technology experts like Elinvar, asset managers can ensure their competitiveness and innovation today and in the long run. In doing this, successful partnerships build on the three long-term trends we see today:

First, the regulation of the financial markets will further increase – on national as well as European level. Just this year MiFID II came into effect – and it won’t be the end of the road. But regulation also opens up opportunities, e.g. the stronger harmonization of the single European market for financial services is a huge opportunity for asset and wealth managers which position themselves for growth.

Second, we have to focus on the asset manager’s customers: the investors. Their expectations

regarding a state of the art user journey are shaped by Apple, Amazon & Co. Asset & Wealth Managers have to fulfill the same standards regarding transparency, availability and customer service based on superior data analytics.

This leads to the third trend: Data is key. Companies will need to significantly increase their knowledge on the organizational level. It is not sufficient anymore if an advisor understands the needs of his customers. This knowledge – in an even more profound quality – needs to be accessible throughout the complete organization – consistently, in real-time and compliant to data privacy, security and all other regulatory requirements.

These trends lead to additional requirements for financial technology providers as well. In addition to the technology competence it is necessary to understand the asset and wealth manager’s business – the combination of technology and financial expertise is key to successful partnerships. The optimal digital platform leverages the established core competencies of every asset manager, the personal experience and expertise, and also the relationship to customers. Technology alone will not be a game changer.

HOW HAVE THE MAIN TECHNOLOGY INFRASTRUCTURE DEMANDS CHANGED FOR ASSET AND WEALTH MANAGERS?90% of all the data available on the internet has been created within one year. For example, more than 46,740 pictures are posted on Instagram and over 4 million videos are being watched each minute of the day. With every innovation, the pace with which we are adopting new technology is speeding up. To keep up with this speed and the changing – and growing – demands of customers, a flexible, constantly adapting infrastructure is crucial.

Especially in asset and wealth management, it is important to know the investor’s needs, ideally even to anticipate them in advance, but definitely to absolutely fulfil them. We are talking about some of the most demanding customers possible. Therefore, it is necessary to implement the same approaches leading technology companies have, to ensure a state of the art user experience.

As the “new normal”, we should expect technology infrastructures to be completely exchanged every 5-7 years – and ensure partnerships and business models are sustainable considering this precondition.

WHAT SHOULD ASSET AND WEALTH MANAGERS KEEP IN MIND WHEN PURSUING A PARTNERSHIP WITH A FINTECH?The two most important topics from my perspective are a clear set of strategic goals and the openness for cultural change.

Digitalization in itself is never the goal but always a means to an end. Therefore, the clear definition of strategic goals is key for the successful digitalization. It has proven valuable to start with the established core competencies and build the strategy from there to ensure the maximum benefit from a partnership.

In addition to the hard facts like numbers and technical features, I would like to emphasize the cultural change which goes along with

digitalization. To ensure constant learning and adaption, developers and product teams established agile processes with clear ownerships to enable quick decision making and fast progress. It might be very rewarding to align the decision-making processes with these actual production cycles – which means nothing less than entering a partnership with each other, rather than just being customer and provider.

As a summary, I can say that we are achieving the best results with asset and wealth managers who pursue long-term goals and, therefore, value partnerships focused on shared sustainable, long-term success.

WHAT GREAT EXAMPLES DO YOU SEE FROM BUSINESSES OR OTHER INDUSTRIES THAT HAVE GOT IT RIGHT?Netflix in my eyes is a great example – not only because they use a similar micro services structure like we do at Elinvar. Netflix started as an online video store. It simply brought the rental system online. But what made them successful

was their ability to rethink how people consume video content. Hence, they used technology in a very smart way to change the way people watch their favorite movies and series. With Netflix, linear TV was over. As was the question of location. With Netflix, you don’t need to finish an episode on your TV, instead you can continue on your tablet or smartphone any time and place you like. They started by simply making content available online, they carefully analyzed their users’ behavior and with the generated data systematically improved the user experience, going even one step further by producing exactly what their users want to watch. Eventually, they have revolutionized a whole industry in only a few years.

What that example clearly shows is what you can actually make happen and what you can achieve as a company, when you have a clear vision and focus on your customer. The way you deliver your product, what it looks like, which features it has – it all starts with the customer. This is something that all companies need to internalize, the only way to have an excellent product is by creating customer value.

YOU HAVE SAID “YOU CAN BUY TECHNOLOGY, YOU CAN BUY PEOPLE, BUT YOU CAN'T BUY CULTURE - THAT'S WHERE YOU HAVE TO BUILD YOUR USP!” – WHAT ARE YOUR TOP TIPS TO BUILDING A SUCCESSFUL CULTURE?First of all, there isn’t anything like ‘the one’ corporate culture that works for every company and every employee. As an employer, you develop your unique culture and everything else is derived from it. Therefore, you should proactively choose the kind of company culture you would like to have and work every day to create and foster it. At Elinvar we understand ourselves as a high-performing team with diversity and ownership as core values. This means, that we foster a positive work environment where everyone is welcome with their specific expertise and professional background, and that inspires personal as well as professional growth.

One aspect of building a culture I would like to highlight is getting rid of the traditional definition of HR responsibilities. Hiring and developing people is one of the foremost management responsibilities – as is shaping a culture which fits the strategy of the company.

The Telegraph article noted that despite a social media “outcry”

only 31% of Londoners felt that that Transport for London had taken the wrong decision. That’s all the mention that social media received. The traditional polling methodology was taken as the final word. Londoners, it seemed, were OK with the ban.

But a sentiment analysis conducted by BrandsEye from 22 to 25 September (The ban was announced on 22 September) on Twitter, found that of the sentiment-bearing conversation, emanating from London about the ban, some 48%, were against it. And crucially, only 8% expressed support for it. Social media was telling a significantly different story to the YouGov results that so many papers ran with.

In recent years, the rise of populist movements has been energised by the notion that ruling elites have lost touch with ordinary people. However, critics of this notion have dismissed the so-called gap between politicians and the people as the reason for their success, often pointing to campaigns being fronted by billionaires and Oxbridge alumni. But despite this irony, leaders, be it in politics or business, ought to remember that what they read in the newspapers or watch on TV may not reflect public sentiment on a particular policy issue or company product.

Many critics have also scoffed at social media, probably unaware that Twitter and Facebook are goldmines of public opinion. People take to these platforms, usually without prompting, to volunteer their opinion on everything from the price of their broadband service to their criticism of a political candidate running for office. And unlike traditional polling methods, public opinion on social media is not framed by a questionnaire or limited to a small number of participants. Everyone with a mobile phone or internet connection is now able to have their say.

One reason why so many people have ignored social media as a source of public opinion may have something to do with the task of converting large amounts of unstructured data into decipherable and valuable insights. Even the technology that can assist in this process, natural language processing algorithms, has its own limitations. With an accuracy of at best 60%, these tools regularly fail to capture the nuances of our online posts which include sarcasm, slang, and emojis. Consequently, the data they provide is not accurate enough to inform key decisions in business and government.

The answer to this problem lies in combining algorithmic and human analysis. This allows one to process vast amounts of data, while the human integration allows for verification of the data. At the end of the day, despite impressive advancements in AI, when it comes to analysing human conversations, computers still struggle.

By integrating humans into the process, a sentiment accuracy of 95% can be achieved. At BrandsEye we do this by distributing a relevant sample of social media posts to a team of human contributors that we call ‘the Crowd’. The Crowd code the posts for sentiment and tag the topics contained in each posts. By doing this, one is able to ascertain not only how people feel about a particular issue, but more importantly what is driving them to feel this way.

Increasingly, businesses will look to social media sentiment data to compliment, and in some cases, replace, the traditional polling methods they’ve respected for so long.

Had Uber known that only 8% of Londoners supported the ban, and that such a gap existed between local government and their constituents, their interaction, both with the public and the City of London would have been bolstered by a compelling case.

SOCIAL MEDIA: A WINDOW INTO RISK AND PUBLIC SENTIMENTJP Kloppers, CEO, BrandsEye

In late 2017, Transport for London announced that it was revoking Uber’s operating licence in the city. The ban made headlines in number of international papers. One article reported on the results of a YouGov poll which found fewer than one in three Londoners thought that the ban on the ride-hailing app was wrong.

A fund manager who provided career counselling to economics undergraduates at his old alma mater, described how he was now recommending to students that they learn how to code given the implications that AI will have on financial services. A decade ago, the same manager said he advised students to consider law or accountancy training, given the mass hiring sprees that were going on in financial services’ middle and back offices. Nowadays he would not give that advice, as those very jobs are at risk from disruption, whether it is through AI redefining accounting, or smart contracts revolutionising the law.

The back office is a cost centre, which during a period of rising costs, poor returns and increasing competition from exchange traded funds (ETFs) and index trackers charging little more than zero basis points, makes it a prime target for automation. Aviva, for example, recently wrote to all of its staff asking whether their roles could be performed better by robots. Those that boldly answered yes were told they will be retrained.

A lot of functions in the back office are repetitive. Filing a regulatory report on a set-time basis to market authorities; disclosing information to end clients; and performing reconciliations are jobs that can be undertaken by robotic process automation (RPA) or machine learning technology. Futurists speculate what asset management will look like in the next decade and it is not inconceivable to suggest that reporting will be completely digitalised with barebones human intervention.

PROSSome believe regulatory disclosures will be facilitated by AI software sifting through huge data pools holding fund-wide information, and inserting the relevant details into a regulatory report submitted onto a Blockchain or via distributed ledger technology (DLT) to the relevant market authorities. Not only will this remove human mediation from reporting, but AI is far more accurate and speedier.

If similar technology is adopted by regulators, then invalid responses, frauds or potential systemic risk issues could be picked up seamlessly in these disclosures and resolved very rapidly.

AI will of course introduce massive savings for asset managers, a number of whom are drowning in operational costs, or so the theory goes. The reality is that building AI tools into back office processes is not cheap and predicted savings will not materialise immediately. A lot of the technology is also relatively new, meaning firms will initially have to retain personnel to monitor the AI to check it is working as intended.

CONSAI creates risk, if used badly. In mathematics or science, inputting the wrong calculations or information will typically result in an incorrect or abnormal answer. The same is true for AI. If data is not 100% accurate, then the AI results will be factually wrong too. Equally, if the AI is programmed incorrectly, then errors could also creep in. During the interim, there will need to be human involvement in ascertaining that data and AI’s general mechanics are working smoothly. Once the market is confident the technology can work independently, the need for such oversight may be diminished. In other words, AI’s early stage operating costs will be quite high. As such, this technology will be mainly used internally by the biggest fund houses in the market whereas smaller firms will probably leverage an outsourced provider’s commoditised AI software.

In the next decade, a lot of jobs will disappear because of AI. Optimas – a Boston-based consultancy – estimated that around 90,000 jobs in asset management would disappear as a consequence of AI by 2025. The official, rosier public relations line offered by organisations experimenting with this technology is that it will allow affected staff to be reassigned to more interesting and rewarding roles. Only time will tell which outcome rings true.

ROBOTICS WILL TRANSFORM ASSET MANAGEMENT. WHAT'S HAPPENING BEHIND THE LINES?FundForum 365

Enormous amounts of materials have been produced about the impact robotics and machine learning could have on front office processes. The ability of AI tools to analyse vast data pools, pick out trends, and trade off the back of them has captured people’s imagination, and rightly so. But the real, near-term impact of AI and robotics, however, will be felt most starkly in the back office.

ALPHA. BETA. LEADER.Create connections. Build business. Shape change.

An international gathering for ambitious players from asset management, wealth management, institutional investment, investment banking and financial technology, FundForum International is the #1 global investment management event

5 FOCUSED EVENTS. 3 DAYS. UNLIMITED GLOBAL OPPORTUNITIES.Explore the benefits of our new structure for 2018.

Whatever you need, we’ve got you covered.

11-13 JUNE, 2018 InterContinental Hotel,

Berlin

10% discount for

FundForum InternationalUse code:

FUNDFORUMEBOOK

1500+ attendees. 50+ countries. 6 continents.The world's premier global investment management event.

BOOK NOW

ESG: BALANCING THE RISKS AND OPPORTUNITIES IN ASSET MANAGEMENTFundForum 365

INSTITUTIONALISATIONInstitutional allocators have come under pressure from active stakeholders about some of their investments, which have been criticised for being opposite to ESG principles. In turn, institutions are telling asset managers to become more observant of ESG practices. Of the asset owners that adopt ESG, nearly half have 25% or less invested in ESG, although this is likely to increase to over 50% in the next two years.

MILLENNIALSIt is not just institutions who are demanding managers prioritise ESG, but retail clients as well. According to Schroders, millennials are far more interested in ESG matters than older investors, and likelier to redeem capital from companies which do not support ESG or that have poor ESG records. In fact, the Schroders report acknowledged millennials rated ESG outcomes as highly as investment outcomes. As millennials start collecting their inheritances and rising up the employment ladder, this demographic will need to start investing to enjoy wealth accumulation. The forward-thinking managers have already recognised this and will be exploring ESG.

GOVERNMENTSAnother more recent driver of ESG investing has been governments. Both the UK and France have committed to ban petrol and diesel vehicles by 2040. Long-term investors and managers holding equity positions in car manufacturers will certainly be reviewing their holdings, and may dis-invest if they feel insufficient efforts are being made in the development of electronic, carbon neutral vehicles, for example. Policy changes are pushing fund managers to consider ESG friendly investments, and this trend shows no sign of stopping or slowing, at least on this side of the Atlantic.

A number of managers have expressed concern about the costs associated with ESG, and its impact on performance. Some have argued that adopting ESG prescriptively could undermine their ability to select promising stocks, forcing them to divest

from potentially lucrative opportunities. While there is certainly some truth to this statement, data does suggest companies which embrace ESG deliver greater value to shareholders. Admittedly, the notion that ESG outperforms non-ESG investments has to be taken with a pinch of salt for now, mainly because there is not enough historical data.

Nonetheless, there is logic in arguing ESG’s performance case. Good governance equates to good business practices. Corporate bankruptcies or underperformance are all unique, but a common theme at many has often been poor or piecemeal governance. Those organisations where senior management is routinely held to account and have their performance and decision-making regularly scrutinised by engaged directors tend to be well-run, and deliver shareholder value. The opposite is true when boards are timid.

On the environmental front, huge innovations are being made in renewables, in what is likely to put the sword to traditional heavy-pollutant industries in the years to come. At the same time, owning an asset or commodity which is likely to be banned by governments in the coming decade is going to result in a dramatic price fall. Simultaneously, companies which take a positive environmental approach are likely to enjoy greater energy efficiencies thereby keeping costs down.

A socially responsible company may be one that offers fair remuneration, flexible working arrangements or generous staff healthcare. Having a positive workforce environment is critical to a company’s success whereas those which routinely fail their staff tend to have higher turnover rates or more frequent disruption through strike activity.

For managers, an ESG framework is something investors want and it is a performance enabler. As investors become more conscious about the contents of their portfolios and governments promote a sustainable agenda with greater alacrity, managers are going to have to change their business approach, and this will include upping their ESG game.

ESG is now commonly defined as an asset class, and it is something the buy-side community need to factor into their portfolios. In fact, a study by BNP Paribas Securities Services found that 79% of respondents incorporate ESG, either in how they invest as asset owners, or in terms of the products they market, as asset managers. ESG’s growth is down to several factors:

WHAT'S NEW ON THE FULL AGENDA?

Think about brands that people know and respect today: Google, Amazon, Apple. Since the financial crisis, banks and wealth managers have fallen in people’s esteem. Millennials came of age right when the legacy financial institutions failed them. Surveys and news headlines repeatedly tell us that millennials don’t trust or like banks, and they want other options. It should be no surprise that many bankers fear a threat from the big technology companies more than FinTech startups. Apple has payment options now. What is stopping them from being the next generation’s wealth manager? Or look at Chinese tech giant Alibaba. It’s already breaking into the wealth management space! To compete and survive today, financial advisors need a brand that matters. Here are a few steps to get you started.

UNDERSTAND AND TARGET YOUR CLIENTSWealth management should be client-focused. It sounds obvious, but as an industry, wealth managers are still falling short in understanding themselves as relationship managers. Clients are rarely just one person. They’re families with spouses and a younger generation that also play important roles in money management. Wealth management can’t be one-size-fits-all approach. Not every millennial wants a robo-advisor any more than every baby boomer wants a traditional financial advisor. The growth of technology will only help financial advisors focus on relationship management. With technology taking care of the mundane tasks and creating more efficient processes, financial advisors will have more time to focus on what counts the clients.

PREPARE FOR THE NEXT GENERATIONThere is $30 trillion in wealth set to be held by millennials in the next decade or so. Financial

advisors need to assess if they are doing enough to get a piece of that pie. Millennials are savvy in their own right, and they’re not going to automatically rely on their parents’ wealth managers to carry them through their adulthood. Wealth managers need to be prepared to connect with millennials on their own turf, and demonstrate their value add. Below we’ll talk about some of the technology that is necessary to communicate with millennials in a way they want. The millennial mindset is open to trying new things, especially if it’s efficient. These young workers favor mobile banking, and have few qualms about exchanging money digitally. They’re even open to the idea of having accounts at branchless banks. Accenture found that nearly a fourth of millennials seek financial advice on social media, something only 3% of those over 55 reported doing. Meeting the digital needs of millennials is one hurdle for financial advisors, but that’s only the first step. Personalizing their experiences and meeting their expectations for a customized financial experience will be the next.

HAVE A WEBSITE THAT WORKSHaving a website that attracts and retains your clients is easier said than done. One FICO report found that 43% of millennials don’t think that their bank communicates with them through their preferred communication channels- email, text messages, the bank website, and a mobile app. Websites need to be relevant, easy to understand, and functional. Financial advisors should aim to translate their own expectations for online experiences as high end consumers to their online platform. A website is truly a blank slate for presenting your brand and what you have to offer clients. Your products and services should

FIVE TIPS FOR BUILDING A BRAND THAT MATTERSApril Rudin, Founder and President, The Rudin Group

Take it from April Rudin, "financial advisors need a brand that matters". Ahead of speaking about millennials and wealth management 2.0 at FundForum International this year, April gives you five tips you need to get to grips with.

be highlighted and understandable. You should add value with focused reports, blogs, and videos that educate, demonstrate your knowledge, and inspire clients to turn to you for information. Think about what makes you turn away from a website. It likely involves an unappealing design, difficult navigation, and buried information. And don’t forget being mobile friendly. If your clients have to jump through hoops to find an answer to their question on your website, will that be reflected in the client relationships and service?

UNDERSTAND THE ROLE OF SOCIAL MEDIAYou have a brand that matters, so how do you make sure that the right people see it? Your message needs to be broadcasted across multiple online and offline platforms, including social media. Social media isn’t just for sharing your family vacation photos, and all social media platforms are also not created equally. Financial advisors often forget to think about how they consume information. Again, as high end consumers themselves, financial advisors should be able to translate their personal expectations to their clients. LinkedIn allows the easy distribution of thought leadership blogs in a professional

network. Twitter allows for quick dissemination of headlines, photos, and videos. There are so many social media options today that each have their own value. Communicating the right messages across the right platforms will solidify your brand relevance.

DEVELOP ‘THOUGHT LEADERSHIP’Beware the assumption that millennials just want robo-advisors! A recent study found that millennials are much more likely than their older counterparts to value financial education. About 24% rated education from their bank more important than other adults. As we’ve previously discussed, there are multiple ways to reach millennials across your website, social media, and offline. You as a financial advisor have the years of experience and expertise. It just needs to be translated into “thought leadership” nuggets that are useful and easily understood. Think about industry trends and market headlines and respond to them. Your thoughts are what can differentiate you from your competitors. Become your clients’, and the market’s, go-to source for education and information.

JOIN THE CONVERSATION @fundforum | #FundForum