AG Delta: the SP supply chain in APAC is not well connected
Multi-issuer platforms have become a trendy subject in the structured products market in light of an increasing number of launches and head count expansion of a number of leading names in the APAC region. An online market poll by SRP has indicated over 85% of buy-side institutions have plans to increase their corporate spending on technological infrastructure in the next 12 months.
SRP spoke to Andrew Au, chief executive officer of AG Delta, about the latest developments in the financial e-commerce space and how market participants should position themselves to capitalise on the changing distribution landscape driven by automation.
What are the major catalysts behind the growth of multi-issuer platform in the region?
The concept of e-commerce distribution model is not entirely a new thing; in fact, numerous examples can be seen in daily life from online discount stores to budget airlines - which ultimately seek to connect the supply side and the demand side in a more technologically efficient way that leads to value maximisation for both.
For instance, if you are planning your holiday you are likely to visit Trip Advisor or a similar website where you can instantly compare contents and prices of packages from a large number of airlines and hotels and go for the one that offers the best value combination. I cannot see why this benefit of convenience and choices cannot be extended to financial services sector.
In fact, consumers, especially the savvy investors and early adopters are the major driving force behind the development of e-commerce platforms as they value transparency, convenience, availability of choices, amongst other attributes that are made possible by technology. The rapid growth of affluent investors and family offices in Asia are quickly outpacing the supply of wealth management services - which also adds to the demand for more integrated, timely, and advanced distribution model.
Can manufacturers capitalise on click n' trade platforms?
From the manufacturer's perspective, these multi-issuer platforms also open up a whole new horizon for prospecting and client relationship management. A typical private banker might have a couple of hundred clients on his book and often he will only have time to service the top 1% to 2% with the highest net-worth. What is he going to do with the next 5% to 10% potentially profitable clients?
The answer is that he would probably do nothing. However with the necessary tools at his disposal, he can now access and interact with this clientele by for instance filtering out those who had recently traded and profited from a specific product and setting up automated emails to target maturing issuance with the most relevant proposals.
At present the structured product supply chain in the region is not well connected and therefore is only as strong as its weakest link. Some structure product houses are more automated than the others but majority of them still have certain manual processes in place, which form bottlenecks that slow down the through-put for the whole system, regardless of strong the other links are.
Therefore, financial institutions will need to enhance the weak links of their own supply chain and optimize their business processes from the generation of idea, prospecting, execution all the way to post trade client servicing, in order to maximize their responsiveness to fast-changing consumer needs.
Would the adoption of more integrated platforms bring about increasing price competition in a market where a handful of houses dominate the supply chain?
Multi issuer platforms not only capture prices of structured products but also other important attributes that influence investor's decision making, including but not limited to issuer credit rating, secondary liquidity and post-trade client servicing and advisory.
Think about airline industry; while some travelers fly with Ryanair for their competitive no-frill pricing, others might actually prefer Cathay Pacific for their inflight entertainment and more comfortable seating. The same thing can be observed in wealth management where some investors for instance show preference for personalized consulting services, return enhancement of the total portfolio, or more frequent mark-to-market for illiquid trades, apart from simple cost-saving conveyed by the "price tag".
There exists a whole spectrum of different investment needs out there particularly in Asia where regulation and investor behavior vastly differ across jurisdictions, and one role of the multi-issuer platforms is to help discover more systemically those latent and otherwise invisible opportunities, and to translate them into actionable items for the product providers. In other words, with access to the big data on client transactions and trading behaviors these platforms actually broaden the scope of competition rather than limiting it.
What are the incentives for product providers to be part of the multi-issuer supply chain showcasing their products in what is like a "beauty contest" with the competition?
By default, the incumbents are resistant to change due to the inclination to protect their existing market share and generally see less motivation to "share" information with market followers; It is no surprise that leading banks have not yet found the concept appealing, and it is often the second tier players who are driving innovation and change as they have nothing to lose and much to gain from an open architecture.
Master cards and visa cards are great examples of how the e-commerce value chain model, despite the initial lack of interest from merchants and users, eventually developed into a critical mass that in itself attracts greater usage and popularity when both parties start recognizing its immense benefits. Similarly multi-issuer platforms will follow the same trajectory of development and we should expect to see in near future the emergence of a truly integrated "ecosystem" linking up individual providers, dealers, relationship managers and self-directed investors.
What is the added value of these e-commerce platforms?
The new ecosystem would enable the free flow of information amongst market participants and a genesis of ideas that originates from the investment bank trading desk and find their way to the buy-side distributors and eventually to the end investors. These ideas will go through multiple filtering processes and at the end some clients will translate while other don't; when the information feeds back to the investment banks who originated the trade, it immediately allows them to work out meaningful statistics about their trading ideas.
They might see that their sales team achieved a hit ratio of 25% on a particular thematic product which in turn has generated on average 15% annualized return on investment for their clients. In other words, the providers can easily generate measurable value out of ideas through this automated information feedback loop, and by supplying their own share of data, they together add to the strength and completeness of the ecosystem ultimately leading to overall growth of the industry pie.
How can technology providers position themselves to participate on this trend?
There are three core values that market participants can uniquely derive from multi-issuer platforms - namely the enhancement of productivity, the discovery of market opportunities, and the empowerment of "people" using these tools.
First, the traditional pipeline of distribution involves a lot of manual work and compliance documentation, and by the time the product comes out the market condition might have changed so drastically that it render the original idea or strategy useless. One client I spoke to the other day told me it took his compliance team to go through 13 different steps for the issuance of a single product.
In this respect multi-issuer platforms can increase internal efficiency by automating many processes in document generation and "getting the monkey off the back" for the providers - so that the RM can be liberated from administrative work and really focus on engaging with and advising the end clients. Note that the personalized service of financial advisers is not likely to be replaced by technology as they are there to fulfill the fiduciary duty to their clients.
Secondly, multi-issuer platforms made it possible for the discovery of investment opportunities which can be meaningfully compared on an integrated platform. And this comes down to the measurability of investment results. Suppose a client has bought a structured product at 97.5% with a 3-year tenor offering a digital coupon. That's not the end of the story. What is the performance of that idea over a period of time? The quality of idea can be measured by the actual return on investment that it generates for the user of that idea, and then shared openly in the system so the users have the same metric to assess the "quality" of investment opportunities.
Finally, product providers need to realise that consumers over time will demand access to multiple wealth managers offering a multitude of investment services via digital platforms. E-commerce technology can empower the "people" in the supply chain with the right tools to monitor and react to the fast-changing market dynamics.
For instance, clients will expect the RM to inform them very timely the status of their portfolio and advise them on the top three trading ideas sourced from various providers that are most relevant to them. With access to multi-issuer platform the RM can quite easily come up with customized product offerings that are well-researched based on a comprehensive database of providers and products, as well as the client's own trading history and preference.
Does the increased popularity of e-commerce in the financial sector in any way adds to or counters the regulatory challenges we are facing?
Technology has undoubtedly revolutionised the industry landscape of financial services and in the process might get into the nerve of regulators as seen in the recent story of China's e-commerce investment platform Yuebao - which rapidly attracted over $80bn from millions of retail users since its inception in just nine months, and worried the Chinese Banking Regulatory Commission (CBRC) over its potential threats to the traditional wealth management products market.
The current regulatory atmosphere resembles a passive healing process where typical symptoms such as mis-selling and failure of disclosure are observed for which a corresponding medication is then prescribed. However what is often needed is the "Chinese herb" that address the core issues which in many cases are the suitability of the trading ideas themselves.
For instance, without access to the right information the RM do not always know who they are going to speak to and therefore tend to sell everyone the hottest products or one that give the highest commission. This is where e-commerce application can add value by facilitating the creation, accumulation and sharing of ideas and ensuring that they are understood by the RMs and in turn channeled to the right clientele, effectively minimizing the issue of investor suitability.