The wealth management industry is facing a time of unprecedented change. Challenges such as shifting demographics, changing client expectations, automated advisory tools and ongoing regulatory demands are driving digital transformation and reshaping the competitive landscape. The next generation of investors are tech-savvy, socially conscious and less likely to seek out financial advisors to manage their wealth. Early players in the online investment space, such as Wealthfront and Betterment, are disrupting the market with automated personalized advice tools.i
As competitive pressures intensify, the path to differentiation will lie in wealth management firms’ ability to deliver more robust, secure and personalized offerings on any device at any time. While data may be the fuel to start down that path, smarter insights will be the secret sauce separating the leaders from the pack. To get there, wealth management firms will need to directly and securely exchange data traffic between financial markets, digital ecosystems and customers at distributed exchange points using private Interconnection.
Alt data and AI to the rescue
The fact that our digital world is deluged with data is old news. A recent estimate by the IDC indicates that data will grow to 163 zettabytes by 2025, a tenfold increase from today.ii In this tsunami of data, the key to smarter insights will be discovering the right data to analyze for alpha generation and having the right engine to analyze that data in real-time. Some wealth managers are beginning to look to alternative data (alt data) sources, such as data from satellites, the Internet of Things and social sentiment to capture that edge. While traditional research relies on annual reports, earnings and other economic data, alt data supplements these insights by looking at data that is driven through digital footprints. Alt data firms are on the rise, offering everything from data cleaning to relevant investment metrics and even fully formed research insights.iii
The promise of superior insights to be gleaned from vast sets of digital data is too rich to ignore. Artificial intelligence (AI) is increasingly being used to mine all that data to provide differentiated insights for better investment decisions. For example, Fintech Singularity Trading LLCiv is an alt data firm that uses AI to rapidly identify events from news headlines, such as product recalls, takeover bids, FDA drug approvals, etc. that could affect the value of equities in seconds. Wealth management firms are also getting in the game:
- BlackRock, the world’s largest asset manager, launched a series of funds in the UK that leverages machine learning with a range of alt data sources, including earning calls, internet traffic and satellite images, to select stocks. It’s a strategy that’s brought them winning results – they say that 90% of the capital managed in these funds have outperformed the benchmarks over five years.v
- Man Group is a global active investment firm that already has $13 billion in several hedge funds using machine learning. CEO Luke Ellis believes that, in 10 years, AI will play a role in everything the firm does. He says, “If computing power and data generation keep growing at the current rate, then machine learning could be involved in 99 percent of investment management in 25 years.”vi
This race to capture, and maintain, the competitive edge through secure exchange of data insights is one factor driving demand for private Interconnection in the wealth management industry. In fact, the securities and trading sector is expected to reach 844 terabits per second (Tbps), or 10% of total Interconnection Bandwidth by 2021, according to the second annual Global Interconnection Index (the GXI).
The GXI, a market study published annually by Equinix, delivers insights that drive digital business advantage by tracking, measuring and forecasting growth in Interconnection Bandwidth – the total capacity provisioned to privately and directly exchanged traffic with a diverse set of counterparties and providers at distributed IT exchange points inside carrier-neutral colocation centers. By 2021, the GXI estimates that installed Interconnection Bandwidth worldwide could reach 8,200+ terabits per second (Tbps), a fivefold increase over five years, with double-digit growth across all industries.
Interconnection growth in Securities and Trading
As wealth managers scramble to respond to market challenges, speed, security and ecosystem collaboration will be key, driving demand for private Interconnection. The securities and trading sector will remain a strong consumer of Interconnection Bandwidth, with a projected 61% CAGR from 2017 to 2021, reaching 844 Tbps by 2021.
INTERCONNECTION BANDWIDTH BY INDUSTRY
The Interconnection bandwidth growth for the securities and trading industry is expected to be strong across all regions, with some differences. As early adopters of digital business for the largest number of multi-national enterprises, the U.S. leads the way with a projected installed Interconnection Bandwidth capacity of 362 Tbps by 2021, at a 57% CAGR. Benefiting from rapid urbanization, Asia-Pacific comes next with a projected 234 Tbps, at 63% CAGR, followed closely by Europe. Increased regulations there put projected Interconnection growth for securities and trading at 220 Tbps, with a 69% CAGR. Wrapping up, growing digital adoption in Latin America puts the sector at a projected growth of 28 Tbps by 2021, at a 55% CAGR.
Interconnecting the world’s markets
Smarter, faster and more convenient is the name of the game that wealth managers will be playing to compete in the future. The proliferation of alt data sources is just one indicator that automated intelligence everywhere is where the investment management industry is headed. Delivering personalized advice in real-time on any device that outperforms the market will require collaboration across digital ecosystems that provide the right insights at “as-a-service” speed. By deploying Interconnection Oriented Architecture® (IOA®) best practices, wealth management firms can enable the kind of real-time interaction between people, locations, clouds, data and things to achieve this.
itarle AG is an algorithmic trading service provider for banks and brokerages across global exchanges. To effectively serve its expanding market, itarle wanted the scalability and cost effectiveness of AWS, but with the fastest, smoothest access to the world’s leading finance customers and exchanges. By colocating in the Equinix London Slough Campus, itarle sits within an ecosystem that includes brokerages, exchanges and low latency multi-asset trading platforms. Said itarle AG Founder and CEO, Paul Lynch, “Equinix was the natural choice because it is very much the center of gravity for data providers, exchanges and brokers….It is the best bang for our buck.”
Equinix hosts the largest multi-asset class electronic trading ecosystem in the world with a global footprint of 200+ data centers over 52 markets, including the world’s top financial markets. Offering a foundation for competition and collaboration, Equinix financial services ecosystem is made up of more than 1,250 companies, including 500+ capital markets firms.
Download the Global Interconnection Index for more information on Interconnection growth trends by region, vertical markets and vital ecosystem partners.
You may also want to check out these resources for Interconnection best practices in the wealth management industry:
Wealth managers need interconnection as customer demands, digital capabilities evolve
Wealth Management Industry Solution Brief
[i] Business 2 Community, Will Wealth Transfer To Millennials (Finally) Pressure Traditional Investment Firms?, Dec 2018.
[ii] Forbes, What Will We Do When The World’s Data Hits 163 Zettabytes In 2025?, April 2017.
[iii] AlternativeData.org, List of alternative data firms by industry.
[iv] Fintech Singularity Trading LLC, About Us.
[v] Citywire, BlackRock’s $105bn team opens up brave new fund range, June 2018.
[vi] Bloomberg, How AI Will Invade Every Corner of Wall Street, Dec 2017.