The asset management industry is going to change substantially in the coming years. Regulatory and demographic trends have already transformed the sector and the advance of technology is only speeding things up.
During the past decade, the asset management industry was mostly occupied with regulatory changes dictating costly compliance procedures. The increase in regulatory burden was mainly felt by small asset management firms. In addition to increased regulatory costs, fee pressure has had a large impact on the industry as well. In the coming years we believe these two forces will remain top of mind, but they have different drivers now.
Technology has entered the asset management industry. This will add costs because asset managers have to live up to ever-increasing demands of customers, who require immediacy, connectivity and ubiquity in a simple and transparent service offering. At the same time, this leads to an increase in fee pressure due to growing transparency, comparability and competition from non-financial companies. We think the asset management pie is still growing strongly, but not everyone is invited to take a piece.
To incumbents, the control over the customer relationship is at stake. They will have to make a strategic choice between spending on technology to offer satisfactory services to their clients, or losing the customer relation and becoming the very efficient infrastructure to the newcomers from the technology sector.
Next to the broad thematic changes within technology, regulation and demographics we observe some changes that are more specific to the asset management industry. Index funds are gaining popularity and make up almost a third of assets under management in the US. This has led to the separation of alpha and beta, which in turn is impacting fees. Partly due to the low fees and ETF opportunity we also observe a growth in demand for multi-asset solutions and liability-driven-investment solutions.
Next to changing products we also see changing customer profiles. As a result of regulation, low commodity prices and central bank policy we observe a shift from the institutional client towards the retail client. Most asset managers have optimized their sales effort on the institutional side, while retail investors require different methods of engagement. We also think the role of the middle-man (wholesale) will be re-defined in the coming years.
Contrary to doom-thinkers, the odds are not necessarily against traditional asset managers. Demographic trends combined with a diminishing role of governments in pensions and social security bode well in terms of demand for asset management services. By means of incorporating technology, the customer relationship that was built up during many decades can be preserved and new customer groups can be served.
We think the impact on the asset management industry can be summarized as higher costs, lower fees and a battle for the customer relationship. We think the first two impacts will lead to consolidation because scale is essential in this new environment. The customer relationship requires a complete mind shift and perhaps even alliances with the technology sector. Not all asset managers will be able to develop the required skills in-house. Strategic alliances between technology providers and asset managers are very likely, but the stability of those alliances boils down to a prisoner’s dilemma. When both sides cooperate, the payoff for society is largest and the pie is divided efficiently. However, the prospect of a bigger piece of the pie is very tempting to some. Not every asset manager will be able to adapt to this changing mind-set. We look for asset managers with scale, multi-asset solutions and integrated technology. Companies that offer investment advice face a more challenging environment.
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What is a Wholesale Client?
A person or entity is a “wholesale client” if they satisfy the requirements of section 761G of the Corporations Act.
This commonly includes a person or entity: