morningstar direct forum perspective on asset...
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©2018 Morningstar, Inc. All rights reserved.
Ramsin Jajoo,Head of Asset Management Client Solutions, North America
Morningstar Direct ForumPerspective on Asset Management Industry
Strategic Market Drivers
2
Investor preferences
Regulation
Modern advice
Digital evolution
Consolidation
Disruptors
Strategic Market Drivers
3
Investor preferences
Regulation
Modern advice
Digital evolution
Consolidation
Disruptors
Investor preferences – education & sophistication, low cost, goals/values-based
Source: Morningstar Direct. © Morningstar. All Rights Reserved.
Percentage of Assets in Passive Funds, Equity
Source: Morningstar Direct. © Morningstar. All Rights Reserved.
Percentage of Assets in Passive Funds, Fixed Income
Source: Morningstar Direct. Data on this slide in only for U.S. funds. © Morningstar. All Rights Reserved.
Since 2014, Fees Matter More Than Ever for Actively-Managed Funds
7
So far this year, Morningstar has received 1,062 media mentions regarding Sustainability, reaching 939 Million people
Strategic Market Drivers
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Investor preferences
Regulation
Modern advice
Digital evolution
Consolidation
Disruptors
Investor preferences – education & sophistication, low cost, goals/values-based
Regulation – transparency & fiduciary standards (conflicts of interest, best interest)
9
Global Reg-Scape
10
Regulatory Areas of Focus / Morningstar Capabilities
Regulations
North America Europe AsiaPac
• Fiduciary or Best Interest Standards Best Interest Scorecard Data Catalyst Due Diligence Scorecard
RBICRM II
RDRMiFid II
FOFAFAIR
Royal CommissionFSA in Japan
• Advanced Portfolio Analytics Full Portfolio Holdings Aggregate Portfolio Reporting Data and Software Performance Reporting Real-time
RBICRM II
RDRMiFid II
Solvency IIBasel III
FOFAHK & Singapore Product
Due Diligence
• Fee Transparency Granular Fee Data Cost Calculator Fee Analysis
RBICRM II MiFid II
RG97SEBI in India
SFC in HK
• Unbundled Research Procurement Independent research MiFid II MiFid II
• Banning Commissions / Professional Standards Open architecture Whole of market data
Trend to fee based accountsRDR
MiFid IIFOFAFAIR
• Other regulatory initiatives Disclosures RBI
Clean Share – Service Fee Arrangement
11
Strategic Market Drivers
12
Investor preferences
Regulation
Modern advice
Digital evolution
Consolidation
Disruptors
Investor preferences – education & sophistication, low cost, goals/values-based
Regulation – transparency & fiduciary standards (conflicts of interest, best interest)
Modern advice – holistic advice, behavioral coaching, goals-based, value of advice
An Established Trend to Fee-Based Accounts Professional Services and Standards
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Source: Company filings, Morningstar.
Engagement with Modern Advisors has changed
14 ©2018 Morningstar. All Rights Reserved.
Practice Management and Behavioral Insights
15 ©2018 Morningstar. All Rights Reserved.
Strategic Market Drivers
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Investor preferences
Regulation
Modern advice
Digital evolution
Consolidation
Disruptors
Investor preferences – education & sophistication, low cost, goals/values-based
Regulation – transparency & fiduciary standards (conflicts of interest, best interest)
Modern advice – holistic advice, behavioral coaching, goals-based, value of advice
Digital evolution – low barriers, scale/efficiency, big/small data, blockchain/crypto, robo/fintech
17
49% of asset managers say technology innovation will cause fundamental change in their operating model over the next 24 months.4Q 2017 Confluence Trend Survey of asset managers and third-party administrators
48% of organizations surveyed now have a Chief Digital Officer and 23% are planning to establish the role this year.
Capgemini 2018
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Increase and improvecustomer engagement
Operate efficientlyand scale
DigitalTransformation
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Increase and improve customer engagement Growth New experiences End-to-end experience Customer data User behavior
We drive digital transformation with top firms globally
Operate efficiently and scale Third party integration Cross-platform
effectiveness Sales productivity Efficiency & integration Cost savings
Digital Transformation
20
Personal portfolio analysis
A few of the most prevalent projects we’ve seen
Consolidate vendors
Digital Transformation
User analytics
Sales force effectiveness
Artificial Intelligence
21
What is Artificial Intelligence?
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AI
Knowledge Reasoning Planning
Machine Learning
Natural Language
Processing
Computer Vision
Robotics
Linear Regression Decision Tree K-Nearest Neighbors Random ForestSupport Vector Machines Neural Nets Deep Learning
Algorithms
Artificial Intelligence Requirements: Data
23
Artificial Intelligence Requirements: Scalable Infrastructure
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Algorithms Require Tradeoffs
25
Morningstar QuantitativeTM Rating for FundsMachine Learning Algorithm: Random Forest
Morningstar QuantitativeTM Rating for Funds
27
Morningstar QuantitativeTM Rating for Funds
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Morningstar Global Risk ModelInvestor PulseMachine Learning Algorithm: Linear Regression
Morningstar Global Risk Model
30Source: Morningstar Direct
Investor Pulse
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Natural Language-Based Fund ScreenerArtificial Intelligence Type: Natural Language Processing
Natural Language-Based Fund Screener
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Natural Language Process
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Robo Advisor - Latest Equity Research
Key Takeaways:
g Robo-advisors have failed to disrupt and many are still unprofitable
g Moaty financial service firms (e.g. Vanguard & Schwab) have leapfrogged the early entrants
g Cost of client acquisition ($300-$1,000 p/client) means access to a fertile pool of prospects/clients is key
g Partnership with established firms may be the best path to success
g Revenue enhancing strategies improves the outlook for select robo-advisors becoming profitable
Download at http://www.morningstar.com/learn/robo-advisors
Strategic Market Drivers
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Investor preferences
Regulation
Modern advice
Digital evolution
Consolidation
Disruptors
Investor preferences – education & sophistication, low cost, goals/values-based
Regulation – transparency & fiduciary standards (conflicts of interest, best interest)
Modern advice – holistic advice, behavioral coaching, goals-based, value of advice
Digital evolution – low barriers, scale/efficiency, big/small data, blockchain/crypto, robo/fintech
Consolidation – M&A, smaller shelf space, more usage of models
Data as of June 2018. © Morningstar. All Rights Reserved.
Fastest-Growing Fund Families
Impact Analysis – Outsourced Investment Value Stack
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When we refer to the ”stack” we mean the sum of fees paid by the investor. Market participants can move fees up and down the stack depending on competitive positioning
Custodian Float
Custodian Fee
Advisor
Technology
Broker Dealer
Strategist
Asset Management
100 BPS\0 to 25 BPS for robo
30 BPS
10 BPS
12 BPS
75 BPS
8 BPS
10 BPS (basis point equivalent)
Asset Management
Custodian
Platform
Impact Analysis – Competitive Lane Hopping
40
Custodian
(robo) Advisor
Technology
Broker Dealer
Strategist
Asset Management
New Capability
The full stack providers may move costs up or down the stack as suits them competitively (software for free if you custody with us)
Strategic Market Drivers
41
Investor preferences
Regulation
Modern advice
Digital evolution
Consolidation
Disruptors
Investor preferences – education & sophistication, low cost, goals/values-based
Regulation – transparency & fiduciary standards (conflicts of interest, best interest)
Modern advice – holistic advice, behavioral coaching, goals-based, value of advice
Digital evolution – low barriers, scale/efficiency, big/small data, blockchain/crypto, robo/fintech
Consolidation – M&A, smaller shelf space, more usage of models
Disruptors – direct to consumer, internet giants (Amazon, Apple, Google, IBM)
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Morningstar Research Publications – Recent Insights
Source: Morningstar Direct
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What Factors Drive Investment Flows
Data as of March 31, 2018
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What Factors Drive Investment Flows
Data as of March 31, 2018
0
0.2
0.4
0.6
0.8
1
1.2
1.4
1.6
1.8
2
4/1/2013 4/1/2014 4/1/2015 4/1/2016 4/1/2017
Net Expense Ratio Fund Age Fund Size Trailing Growth Rate Trailing Return
APPENDIX
Unbundled (“Clean”) Share – Service Fee Arrangement
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Unbundled Share – Service Fee Arrangement
Expense Type Unbundled Semi-bundled Bundled
Management fee Yes Yes Yes
Fund operating expenses Yes Yes Yes
Sub-TA No Yes Yes
Revenue sharing, platform, or other access fees No Yes Yes
Distribution fees (12b-1 and other) No No Yes
Loads and commissions No No Yes
Transaction and other operational fees No No Yes
Fees for advice or planning No No No
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Strategic Market Drivers
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Investor preferences – education & sophistication, low cost, goals/values-based
Regulation – transparency & fiduciary standards (conflicts of interest, best interest)
Modern advice – holistic advice, behavioral coaching, goals-based, value of advice
Digital evolution – low barriers, scale & efficiency, big/small data, blockchain/crypto, robo/fintech
Consolidation – M&A, smaller shelf space, more usage of models
Disruptors – direct to consumer, internet giants (Amazon, Apple, Google, IBM)