Paperjam, April 2018

The challenge of the Asset Management industry

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Since recovering from the aftermath of the 2008 financial crisis, the asset management industry is faced with the challenge of transforming itself through a combination of market forces and megatrends, including:

  • New investor and other stakeholder demands
  • Technology and digital innovations
  • A significant shift in the flow of assets from active to passive funds
  • Increasing fee and margin pressure
  • Macroeconomics factors

Taking a closer close look at some of the megatrends makes change imperative:

1. Fee and Margin pressures

Focus on “Value for Money” by both institutional and retail investors, in addition to pressures from regulatory, political and public bodies, continues to drive fees lower while at the same time increasing demand for greater product risk transparency and disclosures.  

Given this focus on value for money, pricing of products is expected to fall, with an underlying drive for price being much closer aligned to performance, and that performance being measured over a multi-year period. As a result, the “traditional active” managers have begun to introduce new pricing models, many of which have features borrowed from the alternative sector.   

Additionally, “value” is no longer simply viewed in terms of risk-adjusted net returns, but must incorporate a range of criteria including overall client service, digital engineered reporting and, in particular, whether the product delivered on its initial objectives.

Fee and margin pressures has begun and will continue to drive consolidation across all parts of the industry, with size being seen as a critical factor in being able to offer a competitive range of products to reach the key distribution channels.

2. Value of Brand and Trust

The top 10 asset managers are on average attracting 70% of all net new asset flows.

This winner-takes-all phenomenon is increasing the so-called barbelling within the industry, with certain managers concentrating on passive related products, including exchange-traded funds, with others concentrating on alternatives including private debt, hedge, real estate, private equity and infrastructure. 

Younger generations appear to trust nonfinancial services brands more than traditional firms, thereby potentially creating an opportunity for new entrants into the industry’s ecosystem, provided they are willing to take on the regulatory and risk management requirements. The more likely outcome will be that these nonfinancial services brands will partner with the global asset management brands to try to reach new investors including the millennials.

3. Macroeconomics factors and product development

Product innovation over the coming years will be driven by a combination of:

  • Relatively low interest rates in the major economies
  • Increasing aging populations in developed countries
  • The need for asset protection
  • The continued shift in retirement funding from the state or the employer to the employee  

In order for many of the “traditional active” managers to survive and grow, they will need to re-focus on their product range with a significant shift to alternatives through a combination of acquiring firms and teams.

4. Technology and Digital

Technology and digital developments continue to revolutionize every part of value chain, covering manufacturing, operations and distribution.

This includes developing digital tools to facilitate product distribution via financial advisors in intermediary channels, as well as distribution directly to investors.

Managers seek to use alternative data aided by machine learning and artificial intelligence to improve the investment process.

Distributed ledger technology and blockchain have the potential to transform custody and clearing and further drive cost bases lower. 

Robotic process automation offers the opportunity to highly automate processes such as Net Asset Value calculations, portfolio valuations and reconciliations in a cost efficient way. According to the Institute for Robotic Process Automation, a single robot costs approximately one-third of the cost of an offshore full-time employee, and initial industry studies show that costs can be recouped in as little as six months.