The true meaning of digital transformation and the potential of big data – Investec IMS

The true meaning of digital transformation and the potential of big data – Investec IMS 1Daryll Welsh, Head of Product at Investec Investment Management Services (IMS) comments on digital transformation in the South African investment space, discusses personalisation and AI and outlines future technology developments on the cards at Investec.

Please tell us a bit about yourself and your role at Investec Investment Management Services.

To start off, just to make it clear exactly what IMS is and what it does: IMS is a platform, it is officially known as a linked investment service provider (LISP) in the South African context, or a category 3 Administrative FSP. We offer a range of product wrappers, like a retirement annuity fund, preservation fund, living annuities and international investments. Within each of those product wrappers you have the choice to invest in a range of unit trust funds both from Investec Asset Management and a whole host of third-party asset managers.
I’ve been involved in the industry for close to 25 years now and I’ve been with Investec Asset Management for close to 20 years. Firstly, starting off in the multi-manager investment division, before moving into product development for the asset management side of the business and then onto my current role in the business which is really to look after product development and the overall proposition that IMS takes to the market.

The investment industry is under increasing pressure to reduce fees and consequently cut costs, as investors are increasingly looking for a value-added service at the right price point. How is Investec dealing with these challenges and how do you ensure your products appeal to investors?

For as long as I can remember fee pressure has certainly always been part of the investment landscape, both globally and in South Africa. There are periods when the volume around fees increases and typically those periods seem to follow a period of poor market returns. So, it’s not really that surprising, given the poor market returns that we’ve had in South Africa over the last couple of years, that investors are asking the question around what value they get for the fees that they are paying.
If one looks broadly at the value chain, you can break it down into three components: investment management, the advice element and platform administration. All three have really experienced pressure to reduce fees over the years, but I think platforms have certainly felt the brunt of this pressure.

If I think back to 10 years ago, we’ve probably seen platform fees more than halve over the period, and that’s partly on the back of increased competition, but also due to the efficiency gains that have been made over the years that have allowed the platforms to pass these costs savings on to clients.

To answer the question around fee pressure – I think it will always be part of the investment landscape and so it’s important to understand the role that you play in the value chain and how to price fairly for that role. So, for example, an asset manager that consistently beats the index is able to price their fund at a fee above that of a typical index fund, and that’s fair because the asset manager is rewarded for their role in delivering active returns.
Similarly, the platform industry is also competitive and it needs to price for the services that it offers to the market and the value that it adds through these services. So, in the case of IMS, we only deal with independent financial advisors, and as such they are really free to use any other platform in the market, so we need to make really sure that our proposition offers value to IFAs and their clients.
We are essentially a B2B business and we have to offer a proposition to advisors that allows them to deliver a great outcome for their clients. That proposition is broad and includes things such as making it easy for advisors to onboard and transact on their client accounts, offering financial tools to analyse their clients’ portfolios, taking care of regulatory requirements, offering great reporting to clients and generally helping advisors bring efficiencies into their practice, so that they can grow their businesses over time.

We’ve been interested in finding out more about personalisation in the wealth management space based on some key findings in our digital marketing survey. 62% of our respondents were making personalisation a key priority in 2019. Do you believe personalisation to be important to South African investors and what is Investec doing with regards to personalisation?

Personalisation is quite a broad term and it probably means different things to different people. I think, in the context of investment management and the discretionary management of client portfolios, if personalisation can lead to a better financial outcome for clients, for example through a more accurate matching of asset and liabilities, then yes, it’s a good thing.
In practice though, given the number of variables at play from a client and market performance perspective, or the performance of underlying investment funds, personalisation can sometimes be a little bit spurious. It’s largely impossible to predict the future and therefore we have to make certain assumptions and plan accordingly, and trying to personalise something to the nth degree will not always yield something that is measurably different from following a well thought out plan.
So I think what’s more important is coming up with a decent financial plan and sticking to that plan. And in this regard the advice element shouldn’t be underestimated, and holding a client’s hand through difficult times and ensuring they stick to the plan will probably yield even greater benefits. So to assist financial advisors in doing this we provide tools and reporting features to advisors so they can have the right conversations with their clients and hopefully get their clients to stay the course. Through that sort of personalisation and more bespoke reporting the client and the advisor can have a meaningful conversation and understand how their portfolios are performing.

We are seeing a rise in robo-advisor platforms and the use of AI and machine learning in the global investment space, but also in South Africa. What role will new technologies like AI and machine learning play in the future SA investment space?

We think it’s probably too soon for robo-advisors as a standalone tool to fundamentally change the landscape – not only in South Africa, but abroad as well. Many of the early robo-advice platforms that came to the market, mostly in the UK and the US, have morphed their business modelling to a hybrid approach which includes a bit of a human element as well.

I think that is because at the end of the day, there’s an emotion attached to investing and investors feel generally more comfortable dealing with some sort of human interaction before departing with their hard-earned cash.
That’s not to say that there isn’t a place for a digital type of investment platform, particularly perhaps with the younger generation and more tech-savvy investors, but we believe it will take a long time, if it ever becomes the mainstream of investing. We think digital can play an important part in helping with the advice process but the growth is likely to come where it is used to supplement an already existing advice process.

So far as AI in the investment space is concerned, we are seeing more and more asset managers speaking to us around new funds they are promoting, that use big data as part of their inputs. It’s still early days and it will be interesting to see if that adds any real benefit. But there again I think AI in the pure investment space will probably be used to supplement investment management decisions.

Many believe that the SA investment industry is lagging behind compared to other global markets when it comes to digital transformation. What is your opinion on how the local investment industry is faring in terms of digital transformation?

I would agree with that statement, although I do believe we are starting to play catch-up. I think the investment industry at all levels was generally slow to adopt digital transformation, for example when you compare it to the banking industry in South Africa. And perhaps this was because the investment landscape was far more intermediated, compared to the banking space where clients tend to deal directly with their banking provider.
Globally, however, the D2C market is far more advanced which has led to the asset management industry there paying more attention to digital propositions. In South Africa I think it’s starting to change as companies have realised their clients are demanding a great digital experience from their providers in all aspects of their daily lives – not just in terms of investment.
But it’s also important to clarify what is meant by digital transformation. People often think of it in terms of what you see on a webpage or how you experience a certain app. But I think the digital experience at the front end, i.e. what the client experiences, is really just one aspect of digital transformation and one needs to look quite a bit deeper at digital transformation right through to the backend. This includes looking at how you digitise certain processes, and functions within the business so you get the benefit of people actually using and consuming the digital frontend.
It’s rather pointless to have a great digital frontend, if at the end of the day it gets routed through to a manual process which doesn’t really yield any real business or client benefits.

In which areas of the investment space do you see the most room for complete overhaul, disruption or genuinely fresh thinking?

It still amazes me today how difficult it is to open a new investment account or to move your account from one provider to the next, compared to, for example, taking out a short term loan, which seems to be fairly simple. As such there is scope for technology to be used to help people to save and invest easier and to cut through a lot of the regulatory hurdles that often prevent it from being a seamless and easy process.
Secondly, as an industry we sit on a lot of client data and information and we haven’t really harnessed the data that we sit on. It’s still early days but I think that big data is another buzzword that is thrown around a lot and I think we need to start thinking a little bit more about how we use the data we have to interact better with our clients.
And then probably the third area that looks quite interesting is blockchain – another word that is thrown around quite a bit. Blockchain potentially offers some interesting development on the client register side, but it really needs the industry to come together for that to gain some real traction in the South African context.

Where do you seek inspiration from on a day-to-day basis? Are there any social influencers or businesses you follow?

I work with an amazing and talented team of people across the business and my boss always says: “make sure that you hire people who will be better than you are, only then can you really move forward as a business”. So, I get inspiration from those people that I work with.
Time permitting, I also try to read as much as possible, not just in terms of what’s happening in our market, but also internationally. I’m also really fortunate to be part of a global business so we have access to similar platforms in other markets that we don’t compete with but where we can get a deeper understanding of some of the trends and challenges that those platforms are experiencing.

Can you tell us what’s on the horizon at Investec? What can we expect to see from Investec IMS in the next 12-24 months, particularly with the rise of new technologies?

We’ve spent a lot of time over the last couple of years working quietly in the background on the backend systems – redefining a lot of the processes and introducing new technology. That has been a long journey undertaken over the past three years which officially comes to an end at the end of March. We’re excited about what that rebuild will enable us to do as a platform.
So we’ve now started the frontend rebuild that sits on top of this new technology and that will enable us to deliver a completely new transactional website to the market in the next 12 to 18 months, with some really cool new functionality for advisors to use with their clients.
A key strategic objective of ours is to improve the ease of doing business and to make it easy for clients to save and invest with us so that’s a key focus for the next 12 months, which is enabled by the new technology that we will be introducing.
After that we have a big backlog of other cool ideas that we always wanted to do but we’ve really been holding back in anticipation of the new platform being built and the new technologies being available for us to leverage.