Invoking H. G. Wells and Aldous Huxley in the context of asset management might seem like theatrics, but the business of asset management has changed. The stark reality is that players must adapt to a new world — and perceiving a clear way forward is the first step.
In the not-too-distant past, asset managers made money by either implementing active mandates with high fees, by executing large passive mandates with low fees but at scale, or by customizing active or passive mandates to client needs, also with high fees. But as competition has ramped up, margins have narrowed.
Active managers felt the pinch first, as the value of their active alpha was challenged by lower-cost passive alternatives. Competition then erupted in the passive area itself, developing into an all-out fee-fight, as underscored by Fidelity Investments' announcement of the first no-fee index fund. Now we are witnessing the robo-advisers' challenge to the more traditional customized business.
Increased competition and lower margins inevitably force firms to take a hard look at operational efficiency, including technology. Unfortunately, due to a lack of investment since the global financial crisis, many asset management firms are today powered by a patchwork of antiquated legacy systems and technology that both inhibit scalability and require constant and expensive maintenance and reconciliation. While asset managers readily acknowledge that being in the technology "plumbing" business is ancillary to essentials of asset management, exit strategies are scarce. Granted, firms can simply hand over the keys of their investment infrastructure, including all the necessary plumbing, to a BlackRock or Bloomberg. But while such decisions may reduce some of the pain, firms also surrender control and the critical ability to differentiate through customization of their investment processes.
The investment processes of asset managers ultimately will be driven by flexible and powerful technology ecosystems that cost-efficiently provide customizable, scalable and integrated front-to-back solutions for investment management. Practically speaking, however, such systems are still years away — numerous current marketing claims notwithstanding. But here's the good news: the foundation on which those systems will be built already exists. Consider the following — and fully executable — new model: a cloud-based, open platform built upon proven best-of-breed solutions for portfolio construction and risk management.