It’s been en vogue lately to write about Amazon Asset Management. We ourselves have covered the topic in this space. But this type of speculation hasn’t stopped with Amazon, and for good reason. For that matter, where there's smoke, there is fire.
The Wall Street Journal recently reported that Amazon will be offering checking accounts. Overstock’s FinanceHub is less discussed but noteworthy nonetheless. And yet, another elephant in the room is whether Apple will enter the asset management space.
Separating speculation from reality, technology companies are no longer confined to the tech sector. The emergence of Amazon, Apple, and Overstock means that others will have to aggressively adopt technology to survive. Moving forward, this will be one of the greatest determinants of success for traditional investment managers.
In this vein, the role of the typical investment analyst must evolve.
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It used to be that you hired a CFA charterholder and had him or her build models in Excel. That won’t be good enough when competing with Amazon. Instead, firms need to source their talent from programs like Berkeley’s Master’s in Financial Engineering, where the curriculum overlays traditional modeling techniques with data science and machine learning. This type of student is trained to write code that can easily do the job of many analysts.
According to McKinsey, almost 70% of data processing can be automated by adapting currently demonstrated technology. Therefore, the competitive advantage of a typical investment manager will no longer be the number of analysts on the bench, but rather the evolving nature of their skill sets. In some respects, this can actually favor smaller or more nimble managers. It is possible that these emerging managers stand to benefit from the fact that they have yet to be overstaffed with analysts that have antiquated skills. The 30-40 person asset manager, for example, will find it very difficult to either retrain their analysts or replace them.
Because smaller firms are comparatively unshackled, they can scale up by hiring analysts who are excellent developers vs. analysts who rely on discounted cash flow models. While it’s true that problem solving and creativity will continue to differentiate any type of analyst, those with a financial engineering background will give their firm a competitive advantage.
They might also enable their firms to compete with Amazon after all.