Today’s investment management industry is under pressure in ways that go beyond responding to the COVID-19 pandemic. Assets under management (AUM) have been growing at a healthy rate, but much of the industry struggles to generate adequate risk-adjusted returns.
Competition from emerging FinTech and established big technology firms is increasing. Intensifying shareholder scrutiny has resulted in many firms to look to the M&A market in search of efficiencies of scale, differentiated products, new distribution channels or deeper customer relationships, but relying solely on such traditional strategies has not been enough.
To remain competitive and satisfy activist shareholders, wealth and asset management firms may want to think boldly about using ecosystem business models, similar to those employed by Amazon or Uber, to unlock value. The accelerating digital transformation has caused growth-minded firms to look beyond traditional industry boundaries and leverage the capabilities of partners to meet customer needs, drive growth and lower operating costs.
Leveraging diverse ecosystems of third parties can allow investment management firms to redesign product mixes, strengthen distribution capabilities and enhance operating platforms without the need to build or buy. This approach can free up energy and capital to develop, implement and market their own differentiated products and services.
Partnership models require wealth and asset management firms to expand their strategic playbooks and acknowledge that M&A may not be the only way to achieve efficient and resilient outcomes in a rapidly changing digital environment. To prepare for the journey requires an honest assessment of the firm’s strategy, strengths and weaknesses. It also demands a structure for prioritizing partnership opportunities, thoughtful planning and sharp execution.
These are still early days for ecosystems in the wealth and asset management space. At the pace the digital world is evolving, it may only be a matter of time before they become a core part of every investment firm’s strategic arsenal.
Asset management: partnering for growth and efficiency
The urgency to embrace ecosystems may be the greatest for institutional asset managers, that can risk losing increasingly sophisticated investors if they cannot find ways to offer differentiated products, expand digital distribution and build resiliency on a budget. Growth and efficiency are the name of the game, and ecosystems are a potentially more effective way to achieve those goals than acquisitions.
Today, asset managers are using M&A to chase growth in one of two ways. The biggest firms are seeking scale to support strategic objectives. For example, Invesco’s acquisition of Oppenheimer is focused on achieving scale to drive down costs. Franklin Templeton’s deal for Legg Mason creates needed scale in fixed-income trading and other key product sets.
On the other end of the spectrum, smaller, more-nimble asset managers are looking to reach, attract and retain customers by acquiring boutique firms with differentiated products or distribution capabilities. The effectiveness of these M&A-driven growth strategies has been mixed.
Ecosystems provide a potentially less-costly and less-complicated alternative to achieving many of those same objectives. Partnering generally does not require the same investments of time, capital and labor as an acquisition, yet it can afford many of the same benefits in an expedited fashion.
For example, BlackRock is hosting its Aladdin infrastructure on Microsoft’s Azure platform to enhance client experiences with greater computing scale. Partnering with cloud platforms or FinTech firms can enable asset managers to pursue continuous innovation and develop scalable operating solutions in resilient, cost-effective ways.
Ecosystem partnerships can be an effective way for asset managers to achieve growth and efficiency goals without massive capital outlays, while also avoiding some of the more complicated cultural and integration challenges commonly associated with M&A.
Wealth management: partnering to expand reach and capabilities
For wealth management firms, it’s crucial to attract and retain clients through different stages of financial maturity to meet growth objectives. Recent M&A deals, including Morgan Stanley’s acquisition of E*Trade, Charles Schwab’s acquisition of TD Ameritrade and Goldman Sachs’ acquisition of United Capital Financial Partners, have been driven in large part by this strategic imperative to broaden customer bases.
Ecosystems provide a more cost-effective way to achieve similar objectives. Leveraging the capabilities of partners to serve the digital needs of clients — something they have come to expect in other parts of their daily lives — can make those relationships more meaningful and longer lasting.
The following are some top considerations clients are seeking from wealth managers, and some perspectives about how ecosystems can help meet those expectations.
- Digital access. Retail clients are accustomed to accessing and buying products and services online and expect wealth managers to provide the same convenience. Partnering with FinTech and nonfinancial technology firms to enable seamless digital interactions not only can enhance the user experience, but also may enable stickier relationships.
- More diverse investment choices. By partnering with specialists to provide leading-class environmental, social and governance (ESG) and thematic fund options, wealth managers can solidify relationships with mass-affluent customers as their needs evolve. We expect global financial services firms will continue to partner with more technology-focused asset managers that have expertise in ESG investing to allow advisors to create personalized values-based portfolios for clients who increasingly care about the social impact of their investments.
- Account assessment and monitoring. Retail investors are more hands-on today and want transparency around the social impact of funds. Providing third-party tools that filter, screen and monitor investments can empower customers, making the relationship more relevant.
- Lower costs. Leveraging lower-cost back-office functionality from partners to enhance efficiency, resiliency and risk management can enable firms to provide greater value to clients.
Partnering with nimble FinTechs and other specialists via ecosystem strategies is becoming a preferred way for wealth managers to provide customers with high-quality digital experiences and leverage emerging technologies in pursuit of efficiency and resiliency.
Four actions firms can consider now to leverage ecosystems
Align vision with strategy
Investment firms can identify clear strategic objectives for an ecosystem operating model and resist the temptation to simply react to what is happening in the marketplace. Firms can establish frameworks based on those objectives to assess existing capabilities and value chains.
- Which customer needs, product deficiencies and operational challenges need to be addressed, and is that best accomplished through building, buying or partnering with a third party?
- Where does the firm stand relative to competitors — in terms of AUM levels, product specialization, distribution channels and customer experiences? And how can partnerships help make up the most glaring gaps?
- Which core products and capabilities are very unique to the firm’s offerings to be part of an ecosystem? Which customer and back-office needs can be best addressed by partners?
- Which customer segments may be targeted through the ecosystem and what value propositions will drive ecosystem participation for each of those segments?
Evaluate and prioritize focus areas
Leverage industry and proprietary data sets to scan the market for partnerships that can provide the greatest benefit. Analyze potential partners’ track records, investment histories and capabilities to prioritize opportunities relative to the firm’s short-, medium- and long-term strategic objectives.
Develop an engagement plan
Prepare to work with partners by developing a baseline version of the firm’s current operating model, including people, processes, existing third-party relationships, regions and platforms. Develop the integration strategies, talent, tools and IT capabilities needed to execute a platform-based business model.
Execute the transition
Identify and conduct due diligence on potential partners and business models that extend beyond basic financial metrics to integration strategies, operations, technology compatibility and cultural fit. Finalize the details of partnership agreements, including ownership, management, branding and communications rights, and exit provisions.
Form teams to integrate partner capabilities based on well-defined execution plans and establish that partner incentives are aligned with those of the firm. As ecosystem capabilities mature, the firm may consider developing a center of excellence to manage its ongoing ecosystem relationships.