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The world is changing, are you ready?

23 April 2019 Jonathan Faurie

The world is changing, and the asset management industry is facing significant challenges.

There are major themes and trends that will shape future success in asset management and companies need to be brave to cope with these changes. 

These are the thoughts of Alexander Forbes as the company looks towards what it says will be a challenging year. The company points out that there are some key challenges that will ensure that the industry will change. 

Shifting preferences

One of the major challenges that asset managers will need to come to terms with is shifting investor preferences. Janina Slawski, Principal Investment Consultant at Alexander Forbes, points out that this adjustment will not be easy. 

“Between 2010 and 2020, more than one billion middle-class consumers will emerge globally. This represents the largest single decade increase in customers in the history of the investment industry. This increasing affluence will fuel the need for financial products for a young and growing client base. In addition to the growth of the middle class in developed countries, there will be a massive increase in the middle class in the developing regions,” said Slawski. 

“She added that private equity and hedge fund managers alike are finding their investor base is challenging what products fit best within their portfolio. Further, they no longer want a one size fits all solution. Investors’ desire for customisation and diversification is causing managers to re-evaluate their product offerings,” said Slawski. 

According to global research, Millennials and Generation Z (born from 1995 to 2010) prefer engaging with online and mobile channels. This comes with a low initial investment amount and clients have round the clock access to investment advice on smart devices. In addition, Generation X and Baby Boomers expect interactions through their mobile and online investment accounts with professional advice that is on demand. 

A force to be reckoned with

Technology is proving to be a massive force that is exerting pressure on the asset management industry. 

“Investment management firms are planning for the potential disruption caused by new technology-based entrants who could shake up online fund distribution. This includes digital advice and micro-investing. These potential new entrants are likely to provide low-cost services, coupled with digital-age capabilities, aiming to build relationships with Millennial and Gen Z investors at an interpersonal level. Peer-to-peer lending and crowd-funding have revolutionised the way personal and small businesses are financed,” said Slawski. 

She pointed out that some investment managers are acquiring robo-advisers to offer custom portfolio solutions for independent advisers as well as tied agents. 

“The widening application of artificial intelligence (AI) across the investment value chain increases the possibilities of a shift in business models, especially across customer touchpoints,” said Slawski.  

Margin compression

The challenges above are creating a perfect storm for margin compression. Asset managers are just not seeing the returns that they did five years ago. 

Slawski pointed out that a new free pricing model for passive funds has emerged and zero-commission platforms are being launched across the globe. Additionally, asset managers’ revenue-generation focus has moved toward securities lending, order-flow payments, and shareholder servicing fees. 

Larger investment managers will use zero-fee products to sell other offerings and keep investors within the fund family. Active funds are also seeing resurgence of a fulcrum model for pricing that charges a base fee if the fund does not outperform its benchmark plus a performance fee if the fund achieves alpha.

“Continual operational improvement is required to alleviate the pressures of shrinking margins. This includes operating models that can be incrementally improved by investing in talent, technology, and processes. In addition, firms should monitor the evolving legal and regulatory landscape to identify potential cost control opportunities. Investment management firms need to evolve their business models to improve efficiency and maintain regulatory compliance,” said Slawski. 

A new breed will emerge

Adversity makes some asset managers stronger. Slawski pointed out that out of the challenges that are currently facing the market, a new breed of asset manager will emerge. 

“Economies of scale will become more important. Some of today’s large global managers will become mega-managers while others may struggle to keep pace. Additionally, some of today’s larger alternative managers will become large global managers with full service alternative product offerings and distribution channels. The drive to achieve scale will be given further impetus as fee unbundling is rolled out across the world,” said Slawski. 

She added that many regions will see a decline in the number and power of intermediaries who rely on commissions; therefore, asset managers will have to develop or expand their own distribution capabilities through alliances with fee-only distribution channels. Finally, branding will play a major role for asset gathering and for own capital raising. Strong branding and investor trust in 2020 will only be achieved by those firms that avoid making mistakes that irritate investors, regulators and policymakers. 

Editor's Thoughts:
While there are common challenges in the market, there are specific challenges that will be unique to each company. The secret to overcoming challenges is to have a focused, measured approach. Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts jonathan@fanews.co.za.

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