Brave new world - creating a composable finance ecosystem
A flexible, modular financial system, where investment components can be easily combined in one place, offers a customised solution to meet unique client needs.
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Asset managers exist as wealth creators for clients. We strive to deliver comprehensive solutions that meet the complex and unique financial goals of our diverse customers, but to truly address clients’ unique needs effectively, we need to shift to a client-driven mindset.
Digitalisation presents a unique opportunity to fully embrace a client-centric business model, creating a new financial ecosystem that can deliver investments personalised to our clients’ needs. And it can do so in a simple, secure and cost-effective way.
Clients’ needs are individual and nuanced. All want to grow their wealth within the constraints of a comfortable risk and liquidity profile; however, many also want their wealth to fund key life events and ambitions, with differing tolerance to risk over time – a first home, a new business, tertiary education for their children for example. Investment managers must therefore also consider flows of value in addition to growth.
Conventional funds have successfully democratised investment. However, while investment audiences have evolved, fund structures have changed little, constrained by technology and process. This has made customisation of investment solutions at scale prohibitively expensive and slow. Digitalisation enables us to rethink the delivery of investment strategies to a wider range of clients, and address issues around the pricing, liquidity and flexibility of funds.
As investors become increasingly familiar with, and reliant on, mobile phone apps for banking and trading across multiple asset classes, the need to enable instantaneous transactions and to manage their assets, of all types, in one place becomes essential. Asset managers must focus sharply on creating solutions that better meet clients’ real needs, while ensuring attention is paid to the delivery of those solutions too.
As an industry, we should be working towards delivering individualised investment solutions to clients at scale. This means evolving to offer direct asset-owning portfolios that address the dual imperative aspirations of wealth flow and growth.
Tokenisation is one way to help standardise the way that we own assets and to simplify our operating models. However, tokenisation alone does not deliver all the potential benefits of digitalisation. Tokenising a conventional asset does not create a digital asset: it just gives us a new, digital way of owning the asset – a token instead of a share, a unit or a title deed. Equally, tokenising a fund does not automatically make the fund offer a more customised solution to meet unique client needs.
Blockchain and distributed ledgers must also be adopted to create a fuller digital experience and reduce friction in trading. With the addition of smart contracts, we can also begin to automate portfolio transactions at scale. In a direct asset owning portfolio model, we can also remove layers of cost and complexity.
This brave new world opens the door to composability: portfolios that can be componentised into building blocks and built as required. But to evolve to a composable finance model, we need to create a flexible, modular financial system where investment components can be easily combined in one place.
In this world, tokens represent the client’s investment needs, such as their wealth ambitions, their risk tolerance and their need for more certain flows to support their key life events and commitments. Providers, such as asset managers, bid to offer tailored products or services that match the client’s needs. The winning asset manager would implement a tailored investment strategy, which could include a mix of tokenized assets like stocks, bonds, alternatives, and even fractional ownership of assets, to directly meet the growth and flow aspirations of the client. The investments would be flexible and dynamic, allowing for adjustments as the client’s needs evolve.
If we then make those tokens self-executing through smart contracts on a blockchain, then settlement management, asset servicing, order and execution-management can be radically simplified, reducing friction and ensuring a secure, transparent, immutable transaction.
With financial assets and products now constructed from composable building blocks, we have enabled a single digital operating model across financial markets, eliminating additional layers of cost as well as technological and geographical restrictions. In this world, the investment process, which continues to be orchestrated by an asset manager, becomes wholly client-driven.
Regulatory support is critical to the successful adoption of composable finance. The transparent nature of blockchain could provide earlier and broader visibility of activity, which, combined with automated compliance controls, will allow regulation to move closer to the point of transaction, providing appropriate protection for clients.
Contemplating change as fundamental as this will enable us to deliver the highest value to our clients, maximising the benefits of digitalisation to create a fully client-driven industry. To this end, we are pleased to present the Guardian Funds Framework developed by the Guardian Asset and Wealth Management Industry Group led by Schroders, in collaboration with policymakers such as the Monetary Authority of Singapore (MAS) and UK Financial Conduct Authority (FCA), published on 4 November.
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