There has been much buzz recently around the advent of the 3D printer. It is easy to see why. By creating the ability to deliver customised, bespoke, manufactured solutions at lower cost, it can revolutionise the world of manufacturing
The 3D printing revolution has all the potential to achieve these aims because it creates an ability to move away from two traditional forms of manufacturing. Firstly, the large scale, low cost, volume driven manufacturing of standard products that many of today’s plants are set up to produce. And secondly, it is a move away from the high cost manufacturing of bespoke solutions. 3D printing creates a business model in between the two where tailored, bespoke designs can be manufactured at a much lower cost because of the ability simply to print the unique product. This is all without having to specifically reconfigure a machine or production line to deliver it. The value derived comes almost exclusively from the design and not the manufacture.
Why is 3D printing of relevance to the funds industry? There are parallels between the changes 3D printing is bringing about to the manufacturing sector and the changes being undertaken across the funds industry. In the 3D printing world, there is potential to create bespoke product designs which are better suited to a client’s individual requirements at a much lower cost. This compares neatly with the fund industry, which is now talking about solutions rather than products recognising that the era of high volume, low cost manufactured fund product needs to be enhanced with more targeted fund solutions for specific groups of investors. This is especially true as more individuals across Europe are being encouraged, and sometimes mandated, to save for their retirement through DC pension schemes where outcomes and solutions are key over the long term.
Creating Bespoke Fund Solutions
Every financial advisor or wealth manager would like to achieve the creation of bespoke designs to match a client’s specific requirements. . They would typically do this via the development of a unique model portfolio which they design and maintain to match a client’s current investment capacity, lifestyle plan and risk profile. This is especially true in the current environment where commissions are rapidly being replaced by fees for financial advice in many markets. This has already happened in the Australia, UK and Netherlands. And with the introduction of MiFID II, it will soon take place more widely across Europe. In this environment, financial advisors and wealth managers need to justify any costs over and above the management fees within a ‘product’ by showing the value that they add in the creation of solutions for clients. This cost means that the service is typically only available to those with large investment pools to manage.
In the UK, as we enter a post-Retail Distribution Review era, there is currently a greater focus on ‘fund solutions’. This is in part, due to the current phasing of auto-enrolment into DC pension schemes. The increased attention on ‘fund solutions’ can be seen in the following trends across the market:
- Asset managers are creating multi-asset and diversified growth funds to try and create pseudo risk/return profile solutions to support desired investor outcomes
- Increased inflows into multi-manager products which are effectively playing in the space of model portfolios with defined risk/return outcomes
- Platforms offering more model portfolios or model portfolio capabilities to their advice community so they can offer more tailored investment strategies to their clients and also the rise of direct to customer (D2C) solutions
- Life companies increasingly entering the wealth management space, using their ability to create blended funds to offer model portfolio like investment solutions
All of these trends are ultimately leading to the phrase ‘fund solution’ being used increasingly across the asset management industry. More and more fund solutions are being ‘manufactured’ to create model portfolios with risk/return profiles. These portfolios are looking to address the needs of different segments of clients who want different outcomes from their investments, but will not necessarily pay for completely discretionary advice services or do not have the assets to justify this expense.
Lessons from 3D Printing
So what could we learn from 3D printing? At a high level, it is back to the bespoke nature of a design and the ability to manufacture it at a non-bespoke cost; albeit at a higher cost than a mass produced product. Again, this is a direct analogy with funds management business. In funds management, an underlying asset class portfolio could be considered the ‘mass produced’ product used as the building blocks to create bespoke fund solutions designed to achieve given outcomes. In addition, from a product marketing perspective, why wouldn’t we want more granularity in the design of these fund solutions to allow them to be targeted at more tightly defined client segments which may even go down to the individual?
What’s missing in the fund management industry at the moment is the equivalent revolution that 3D printing is set to bring to the manufacturing of physical goods. In the funds space, this means the ability to ‘manufacture’ these new funds at low marginal cost where the manufacture means the creation and on-going administration of these fund solutions.
To highlight this point, consider the following representation of the fund industry.
At the ‘bottom of the stack’ are the fund products (portfolios of assets) where traditional asset managers work hard to achieve one of two things. This could be either alpha in a specific asset class through active management, or efficient beta through low cost, passive index tracking. . The ‘manufacture’ or on-going administration of these portfolios of assets is relatively complex. This is because of the nature of the assets they typically are sometimes difficult to value, have corporate actions to be processed, collateral to manage, and high volumes of transactions to execute with numerous reconciliations required.
The administration of these fund products requires appropriate investment accounting technology and skilled fund accounting resources to operate. This is a typical factory style that an asset management back office or an outsourced third party administration partner has established and achieved the manufacturing goals of high volume and low cost.
On top of this stack of fund products, are the fund solutions. These can range from fund of funds or blended funds, multi-managed funds, multi-asset funds, model portfolios, to individually managed accounts. . A fund (of funds) solution is a much simpler to administer than a portfolio of direct assets. By definition, a fund (of funds) solution would typically invest in fewer assets which are all of the asset class ‘fund product’, it will transact less and have more simple corporate actions to process.
Fund solutions need to have a number of things. From the calculation of income and expense accruals, processing capital flows, managing target allocation model, to processing their income distributions and ultimately, striking their NAVs each day. They also have the headache of controlling the dependencies that exist where the solutions are organised into complex multi-tiered fund structures.
But, because of the more simple nature of processing and administering a fund solution, a different technology and processing profile is required. This profile is ultimately one which can benefit more from automation which as a result, requires fewer people to administer a larger volume of funds.
Creating the Fund Solutions Factory
The administration of fund solutions does not currently reflect this scenario. Asset managers who still administer their own funds and the third party administrators who perform the task for those that have outsourced their back offices, typically use the same technology, processes and people to manufacture both fund products and fund solutions. All this means that internal and external rate cards do not necessarily differentiate between the administration of a product and a solution. This leads to a situation where it is prohibitively expensive to manufacture more fund solutions to target different outcomes.
The equivalent 3D printing disruption for the funds industry means appreciating that the administration of fund solutions requires a different sort of process, technology and people profile. If a fund solution factory were put in place, more tailored, bespoke fund solutions could be implemented as the marginal administration costs would be low, and therefore less volume of funds under management (FUM) would be required to justify the creation of the fund. The focus would shift to the design of the solution and the additional fees that these designs will justify and generate.
Then, and only then, could the funds industry achieve a revolution similar to what we are seeing 3D printing bring to the physical world: bespoke designs at acceptable costs.
Nathan Travell is product manager EMEA at Milestone Group