• Zorawar Ghumman

How FinTech is Disrupting the Portfolio Management Industry


The synthesis of finance and technology, popularly known as FinTech, is revolutionizing the field of portfolio management. The COVID-19 pandemic has highlighted the efficacy of digital strategies, and consequently accelerated the adoption of FinTech solutions by asset management firms. Significant developments involve the use of artificial intelligence, machine learning, cryptocurrency, and blockchain to enhance portfolios, assess investment opportunities, and alleviate risks. These innovations streamline operations and allow firms to expand and optimize their services. For these reasons, FinTech startups and innovations are disrupting the industry, thereby threatening established investment firms. Some of the most important applications of FinTech include the following:


Data Analysis

New innovations are able to analyze conventional data sources while also incorporating non-traditional databases such as social media. All this information can be watered down by computer algorithms into just a few key insights. These insights can then be incorporated into key investment decisions- reducing losses and improving performance.


Applications of AI

By simulating human intelligence- combined with a computer’s processing power- AI has the potential to recognize non-linear relationships and better analyze millions of data points. Analysts have already turned to AI in order to sieve through earnings calls, annual reports, and other company fillings to unearth trends and generate insights that account for human behavior.


Machine Learning

The ability of machines to learn from data, detect patterns, and make decisions allows platforms to more accurately predict future trends. Based on this, portfolio managers can forecast forthcoming investment trends, quantify risk, and maximize their returns.


Automated Trading

FinTech solutions automate the clerical job of investors communicating with portfolio managers to monitor the status of their investments. More importantly, automation enables investment decisions to be made and executed by algorithms. This is beneficial for investors as it reduces transaction costs and leads to more efficient trading.


Robo-advisers

Digital platforms that deliver algorithm-driven investment advice online without human supervision. These automated investment services assist retail investors at a lower cost than traditional advisory models can provide. The market for this service has grown exponentially. In 2015 Robo-advisers aided in the management of assets worth around $60 billion. By 20205, however, their market share is expected to reach a projected $7 trillion. This class of financial adviser is typically used for tax-loss harvesting, retirement planning, and selecting investments.


Blockchain and Distributed Ledger Technology (DLT)

These technologies are creating new ways to record, track, and store financial transactions. Blockchain strengthens data security while also speeding up data transmission. DLT delivers a safe way of tracking the ownership of financial assets on a peer-to-peer basis. Such interactions would allow firms or individuals to directly transact with one another without third-party facilitation, removing the need for financial mediators.


Data Privacy Issues


One of the many hurdles towards the ubiquitous adoption of FinTech solutions is the risk of cyberattacks and privacy breaches. FinTech applications necessitate the storage and distribution of private financial information. Naturally, such applications are prone to hacking and privacy infringements. Additionally, new applications need to submit to data privacy regulations, further encumbering the FinTech wave. Therefore, the acceleration of investment in FinTech and adoption of novel technologies needs to happen in conjunction with stronger cybersecurity and compliance with data privacy regulations.



Is the FinTech Wave Being Underestimated?


Despite FinTech's enormous potential there is an argument to suggest that asset and wealth management firms (AWM’s) are undervaluing its disruptive capabilities. Firms are prioritizing investment in analytics and automated asset allocation rather than in FinTech. Most firms are failing to capitalize on market developments, indicating that AWM’s aren’t prepared to embrace the coming change. PWC estimates that only 45% of AWM’s place FinTech at the core of their strategy, while 1/3 of them aren’t even incorporating FinTech as a part of their approach. The industry is evidently still reckoning with the changes posed by digital solutions. In order to remain competitive, private equity firms and traditional hedge funds will have to contend with the depth and breadth of changes generated by FinTech. The firms that are most responsive to the coming change will be the ones that survive, and ultimately thrive.


 

References:


How Fintech is Shaping Asset and Wealth Management. (n.d.) https://www.pwc.com/gx/en/industries/financial-services/publications/how-fintech-is-shaping-asset-and-wealth-management.html

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