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A recent Cerulli Associates report found that more than four in five asset managers (85 percent) plan to use client data to create new investment products such as thematic ETFs and investment vehicle structures.Blue Planet Studio/iStockPhoto / Getty Images

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Asset managers in the U.S. are diving into data about the clients who buy their investment products to create new and better investment options they know customers want – and will buy.

While most consumer-oriented product industries have been using customer data to create and improve their products for some time, this is a bit of a new phenomenon for asset managers who didn’t always have access to data about the individuals who purchased their investment products, says Matt Apkarian, senior analyst, product development, at Boston-based investment research firm Cerulli Associates Inc.

Previously, new products came to market when “fund managers had an idea for a strategy,” he says. “They’d pitch it to the firm, and if [the firm] liked it, they would say, ‘Okay, we’ll start the fund and see if investors come.’ Then, it’s the job of the sales team to push it out to the market and get it adopted.”

However, asset managers have a better chance of success with new products if they can get a head start by knowing the target market is out there and if there’s a greater likelihood that existing clients will adopt the product.

It can lead to quicker adoption and less of the “Throw the spaghetti at the wall and see what sticks” strategy, Mr. Apkarian says.

Asset managers are using aggregate data such as age, gender, portfolio size, risk objective, and account type – whether taxable or non-taxable – as well as the type of advice investors are receiving, and what kinds of products clients are invested in currently to create new products that meet specific needs.

A recent Cerulli Associates report found that 85 per cent of asset managers plan to use client data to create new investment products such as thematic exchange-traded funds (ETFs) and investment vehicle structures. Another 80 per cent plan to use data for new active investment strategies, while 70 per cent will use it to choose distribution partners. About 60 per cent will use it to market existing products.

The report also found that more than 81 per cent of asset managers consider incorporating environmental, social and governance (ESG) principles in their investment products a “high priority” because of client demand.

Invesco Canada Ltd. has seen that demand for specific ESG investments, which is why it launched eight new ETFs focused on ESG principles in January, says Jason MacKay, head of wealth management intermediaries Canada in Toronto.

Mr. MacKay, who focuses on the firm’s sales and distribution efforts, says Invesco Canada looked at data that showed 96 per cent of Canadians felt ESG investments help create a resilient portfolio.

Invesco Canada also saw increased traffic on its ESG web pages, and data from its portfolio analysis division showed the number of portfolios with an ESG component rose 163 per cent between 2020 and 2021.

That “seismic interest” in ESG investments combined with the knowledge that “there’s not going to be one ESG product that meets everybody’s needs,” led to the creation of these eight new ETFs, Mr. MacKay says.

The new funds include three U.S. and two Canadian-focused equity ETFs, two new international equity ETFs and a global bond active ETF – adding to Invesco’s ESG ETFs based on the Nasdaq 100.

Mr. MacKay says the use of data will also be helpful as asset managers look to create new thematic funds that resonate more with investors and tap into areas of interest.

“If you’re going to go down the path of [creating] a thematic [investment product], you want to validate it with an investor,” he says. “But if you don’t do it right, the investor is going to have a bad experience, or they’re not going to come to [that product].”

Downsides of a data-driven approach

Nevertheless, Daniel Straus, director of ETFs and financial products research at National Bank Financial Inc. in Toronto, says that even when investment companies didn’t have access to as much data as they do now, they were using what they had to create products they felt investors wanted.

For example, BMO Asset Management Inc.’s covered-call ETFs, such as BMO Covered Call Canadian Banks ETF ZWB-T that launched in 2011, came after the bank saw many advisors in their network doing covered calls as a way to boost yield.

“That product was a runaway success,” he says, and now many asset managers offer covered-call ETFs. Asset allocation funds, such as balanced funds, are another example of products targeting investor needs.

However, many niche or thematic ETFs “are just kind of standing up in the wilderness hoping that the herd comes to graze on their patch of land eventually,” he says, adding they don’t necessarily have the data to back up their investment strategy.

An example of the downside to a data-driven approach, Mr. Straus says, is the meme-stock craze when stocks like GameStop Corp. GME-N, AMC Entertainment Holdings Inc. AMC-N, and BlackBerry Ltd. BB-T were being scooped up by retail investors amid the hype.

If a “shiny” product was created based on that momentum, investors might want to buy it, “but is that necessarily in [investors’] best interests?” he asks.

“The risk is that the products hitting the market attract some kind of attention on the basis of marketing over merit,” Mr. Straus adds.

The other issue is investor privacy, which is highly guarded and regulated in the investment industry, and should be kept that way, he says.

Investors will need to ensure they understand the financial products they’re buying and the risks associated with it – educating themselves on the products in their portfolio, Mr. Straus says.

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