Seven future scenarios that can help asset managers plan for the future

From distribution to long-term value, future scenarios help asset managers identify areas that require attention and investment today.

Three questions to ask

  • As asset managers, how prepared are you to operate in an industry where this scenario was a reality?
  • How likely these scenarios are and what role can asset managers play in this transformed landscape?
  • What can be done now to begin preparing for these scenarios, in the event they accelerate?

Making detailed long-term predictions is difficult at any time, let alone during unprecedented times. The world is currently dealing with uncertainty brought on by the COVID-19 crisis, the war in Ukraine, the sanctions on Russia, and the ripple effects on supply chains and inflation. The cumulative effect of the last few years have seen investors’ demands grow ever more complex, which is forcing asset managers to accelerate diversification in the face of a growing operating-margin squeeze.

The EY Future of Asset Management Study predicts that the next five years will be much tougher for asset managers than the last five. How can asset management firms prepare for what’s next?

Looking beyond current paradigms allows asset managers to imagine possible futures and work backward to identify their strategic implications. This “future-back” approach to strategy has often helped companies to use times of change as a springboard for subsequent growth.

Asset managers not only need to transform their present performance but they, must also plan for a range of future scenarios. We believe the industry’s ultimate winners will be those firms that can navigate an increasingly complex and fluid world to create long-term value.

In this article, we set out seven ways in which the asset management industry might be reframed by 2030. These scenarios are very different from the status quo — and from each other — but they are not as remote or implausible as they may appear. They are all inspired by structural shifts and industry trends that are already reshaping asset management.

Individual asset managers should begin planning their responses to these alternative realities now, based on their assessment of each scenario’s likelihood, timing and potential impact on their business. They should then ask themselves, “How would we respond to this scenario?” We have used this question to frame each of the seven future scenarios and explore how asset management firms would use future-back planning to respond.

Scenario 1: Our industry’s purpose is to help every adult to invest in capital markets for a zero or minimal fee

Long-term value to all industry stakeholders is increased by democratization of investing via the provision of financial education, access and zero-fee products to the entire adult population. This is now a necessary “licence to operate” required from asset managers. 

Response to this scenario

Asset managers and national governments collaborate to create greater financial literacy. Passive products are provided at minimal or zero fees, with revenue generated from customer data insights or securities lending. Fractional ownership of assets — recorded on a public distributed ledger — removes the need for fund structures and their associated costs.

Scenario 2: Direct-to-customer (D2C) relationships are the norm, not the exception

Asset managers have sizeable D2C distribution networks. They source a large portion of their inflows directly from investors or via investment platforms. Investors’ preferred digital interfaces vary between different markets, with simplified distribution as the common theme.

Response to this scenario

Large asset managers acquire or build D2C portals to drive vertical integration. The regulatory push for greater fee transparency and clearer reporting encourages firms to pursue D2C, and platform relationships. Distributed ledger technology allows platforms to provide instant processing of fund transactions while direct-indexing will also allow mass personalisation.

Scenario 3: Every investor knows the impact of the assets they hold

Every investor — institutional and retail — has full “touch of a button” transparency into their holdings. The ability to look through to underlying assets reveals the ESG impact of every investment, along with full accountability and liability for that impact.

Response to this scenario

Advances in technology enable granular, real-time investor reporting. Universal ESG standards allow for instant comparisons. Higher taxes on profits with negative ESG impacts encourage investors to screen their investments, funnelling capital into sustainable assets.

Scenario 4: Asset managers are paid for long-term value and impact

Funds no longer charge fees for pure investment performance, making conventional benchmarks obsolete. According to the weightings and objectives, fees are based on a blend of investment performance and nonfinancial value. Calculations take place over a period of at least three to five years, with refunds for subsequent underperformance. Asset managers help build a greener, fairer and more sustainable economy by fuelling recovery via a new public-private collaboration model.

Response to this scenario

The importance of a green post-COVID-19 recovery — combined with governments’ record levels of debt — make private investment a critical enabler of sustainable recovery. Asset managers place themselves at the nexus of these new flows of capital, creating value for investors and wider society alike. Advances in taxonomies, technologies and data allow for consistent, transparent measurement of the long-term value that asset managers create and enable — assessed through the four lenses of clients, society, talent and financials.

Scenario 5: Index providers partner with “Big Tech,” such as Amazon, Apple and Alphabet, to become the largest asset managers

With the shift to passive investing, the influence of index providers has grown to such an extent that they are best placed to provide access to index investing. In contrast to asset management, the index industry has not experienced cost pressure. Since indexing is now an investment strategy with billions in assets under management (AuM), index providers have become the biggest asset managers by 2030. 

Response to this scenario

The shift to passive investing increases asset managers’ delegation of investment decisions to index providers. As costs fall, direct indexing becomes widespread and index providers issue funds tracking their own indices. Tighter regulation of index providers increases investor trust, further eroding the role of asset managers.

Scenario 6: Fractional ownership removes the need for funds

The fractional ownership of assets is recorded on a public distributed ledger, removing the need for burdensome fund structures and their associated costs. Tokenization broadens access, allowing anyone to invest in previously restricted asset classes — ranging from private companies and infrastructure to property and fine art.

Response to this scenario

Technological advances allow for the fractionalization of existing securities and financial assets, and the tokenization of physical assets and legal titles. With the security and reliability of distributed ledgers proven, their efficiency, convenience and transparency cause demand for funds to plummet.

Scenario 7: What if a combination of artificial intelligence (AI) and quantum computing could augment human portfolio managers?

If computers can beat humans at chess, a combination of AI and quantum computing could augment or even replace portfolio managers, as technology can absorb, analyze and process more information than any human. AI decision-making is more transparent than its human equivalent and can conduct investment management with minimal intervention. All required data is available in a digitized format, suitable for machine learning.

Response to this scenario

Asset managers have high technological capabilities and use a combination of acquired and proprietary tools for portfolio management. Decision-making is instant, automatic and hugely scalable. Quantum computing follows AI in making the jump from lab to office.

How should CEOs prepare for these seven future scenarios?

One thing is certain: there is no single course of action that will lead to success. CEOs should plan for an unpredictable future by assessing the likelihood and the possible negative or positive impact of these seven scenarios on their business, and work backward to evaluate how they can protect, prepare and position their business now. This exercise should always start with a clear idea of each firm’s purpose in the industry of the future. Which clients will firms serve? How will they reach them? What investment solutions will they provide? How will technology support both the creation and distribution of these solutions?


Explore EYs framework for Asset Managers

You can explore the EY multitrack success strategy framework for asset managers in the graphic below. Select each track to reveal the underlying components. 

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    The COVID-19 pandemic highlighted the need to build flexibility into asset managers’ strategy to accommodate different scenarios. The shift to digital operating models and the application of ESG criteria to all areas of the business may be one of the biggest future learnings for asset management companies priming themselves to compete in a post-pandemic world. Viewing today’s investments through a long-term lens, based on plausible scenarios, can create powerful benefits in the long run.

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