How can the Network Economy Revolutionize the Institutional Investment Market?

The network economy has already had a significant impact on different businesses. In several industries we can readily access reviews and see how the service provided is rated by hundreds of clients and not just what the business owner says about itself. So, why is a similar service not provided within the institutional investment Market?

23 Oktober 2018, By Jessica Sama

In 1999, TripAdvisor founders Stephen Kaufer and his wife Caroline decided to take a vacation. Their trip would have turned out to be a disaster if they hadn’t checked out the hotel before. But finding a review resulted to be a tedious process. That’s when Caroline had the idea of starting a website to make the search easier and accessible to everyone. The idea was simple: before we invest money, we want to be sure what is the best service for us.

Online reviews have already revolutionised the hospitality, mobility and leisure sectors and they will continue to do so. But what about the investment industry?

What is a Network Economy?

The term “network economy” describes a situation in which a business will benefit through the feedback provided by those who use the product or service. The network economy is the natural outcome of what happens when all the actors inside a business ecosystem are interconnected. Through technology, these interconnections enable clients to drive choices, select preferences and make their perceptions known. This leads to a brand-new level of transparency where reputation becomes a great and important asset as more and more people have the desire to investigate the experience that others can provide.

Nowadays, we sleep in beds of people we’ve never met, we lend money to persons on the other side of the world and we get into cars with complete strangers. This means that a powerful new currency is emerging, and it’s based on trust.

The nature of trust can be difficult to assess but we need trust to make society work. In the world of finance, where experts need to safeguard and grow the financial wealth of their clients, trust is becoming more and more crucial.

Trust among Institutional Investors toward their Managers is now as Important as achieving High Returns

Following the global financial crisis, there has been a severe loss of confidence in the financial management system. Trust among Investors in the financial services industry has been woefully low, even after the strong gains following the 2007-08 financial crisis. In 2014, a PwC survey showed that only 12 per cent of Investors trusted their fund managers. This means that now Asset Managers must strike a balance between business profitability and trust risk as well. They need to understand their clients’ risk tolerances, offer products that their customers need rather than the ones managers have while avoiding unrealistic claims about returns.

Therefore, the trust level among Institutional Investors toward their money managers is now as important as achieving high returns. But how can a new level of transparency be assured within the financial world?

It’s Time for Asset Managers to Regain Investors´ Trust

The Network Economy is already helping several industries in providing personalized and better services based on the knowledge of their costumers´ preferences, but there’s much more opportunity on the horizon. Over the next decade, the world will see similar revolutions in about every industry. It is already shaping the financial one as well.

In 2017, the publisher IPE, Investment & Pensions Europe, became strategic partner of INSTICUBE to further develop the Pension Fund Perception Programme (PFPP). The PFPP was founded by IPE in 2013 as a source of information about the overall performance in service by Asset Managers. Today, the programme has reached a new level with the development of the INSTICUBE database. It creates the first pan-European research platform in which Asset Owners can share feedback about the Asset Managers they employ.

INSTICUBE represents the first example of the network economy within the institutional investor market. In fact, investors have the chance of sharing intelligence on the managers they employ and compare their perceptions with other Asset Owners. Therefore, they can now obtain inspiration from their peers all over Europe as people do in the leisure industry.

Performance cannot be the only factor in manager selection

As the hospitality and retail industry, the world of investments is also highly competitive and choosing the right manager represents a crucial step. When the evaluation is ineffectual, it can quickly destroy the best-laid investment plans.

Many studies enlighten that performance cannot be the only factor in manager selection and that Asset Owners should focus on other criteria as well. Many Investors ask themselves: “If you had to hire/fire and allocate capital to external managers, how would you do it? Tools and mechanisms like those offered by INSTICUBE can help to take strategic decisions with more awareness. For example, the platform covers all aspects of the relationships between the Asset Owners and their Asset Managers; from risk and investment management procedures to relationship management and value delivered, over the full duration of a mandate.

Feedback as Communication Strategy for Building a More Efficient Investment Market?

Feedback is a form of communication that provides information as well as a strategy for building trust and strengthening relationships. Feedback can work effectively to advise Asset Owners in selecting and monitoring their managers. This can in turn enable investors to better evaluate the potential future performance of their investment strategy.

The advantages are not only for the Investors, but also for their managers; having feedback can be a great way to stand out from other competitors and effectively understand clients´ issues.

Considering this, we can affirm that these new mechanisms could provide greater transparency in a business dimension that has always been somehow obscure. The institutional investment market might achieve new levels of efficiency as well and, if we look at what is going on in other industries, the implications could become far more extensive.

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