The asset management industry faces an unforgiving environment. True, asset management is one of the few reliably profitable patches of the financial services marketplace, and institutional firms remain formidable stewards of capital. But there is a certain species of firm that can't afford to rest on its laurels: the average asset manager.
The average manager offers among the lowest-fee, plain vanilla, institutional funds, has no particular forte other than mimicking the returns generated by benchmark stock and bond indexes, and is unwilling or unable to change gears anytime soon. These managers would do well to heed the wisdom of an Ernest Hemingway character who warned that bankruptcy happened in two ways: gradually and then suddenly.
We might be living through the longest bull market in U.S. history, but the bell is tolling for the average asset manager. Unrelenting pressure from shareholders, regulators and customers to deliver higher value at lower cost will continue.
And institutional managers cannot find protection in their size. Scale no longer translates into profitability as directly as it once did since return generation is largely independent of operational costs. Managers are under assault on the cost side of the ledgers, with most having operational costs that are 25% to 35% higher than to their best-in-class peers.
It is not hyperbole to forecast the demise of several familiar industry names, but smart companies can survive and flourish by acting decisively and strategically on their product, technology and cost mix.
The following technologies can help average institutional managers drive costs advantages:
- Strategically using cloud technology to replace aging in-house, inefficient investment platforms.
- Deploying artificial intelligence to drive down the cost of customer servicing and gathering and analyzing data across the investment process, including asset allocation, research and model building.
- Leveraging outsourcing and shared services of middle-office functions, including finance, human resources, client service and reporting.
The time to embrace these technologies is now. Excuses for not doing so previously — including privacy, security and compliance concerns — have largely been shown to be red herrings.
Surprisingly, very few leading firms have invested heavily in these new technologies. Several institutional managers are piloting fintech, but their focus has mostly been confined to investment activities like sifting market data, rather than on enhancing operations in areas such as trade execution and settlement.
Even if firms implement cutting-edge fintech, they cannot simply sit back and wait for a profit bounce. Long-term success will depend on how thoroughly a company has prepared for the industry turbulence. Many will fail because their data quality is poor. The AI winners will boast clean data, in the right formats and systems, and exploit that data profitably.
The onus is on asset managers to change because their environment will not. Ask any asset manager what causes them to have sleepless nights and "fee pressure" will top the list. It is no surprise that alpha-generating potential has evaporated when institutional asset managers charge as little as 0.15% per year for active management and close to zero for passive funds. Accenture has calculated that fee contractions will continue to offset any future growth in AUM, severely crimping industry profits.
The numbers will look even uglier if there is an economic downturn. Remember that the current bull market has lasted for more than a decade and the stock market's previous 12 upward journeys lasted an average of about 5.5 years each. It is easy for managers to succeed in a passive market when every index is up. However, as the market starts to crumble, investors will seek smarter and more creative money management. We believe that is the biggest opportunity on the horizon for managers.
For example, managers that can separate themselves from the pack by finding new approaches will be rewarded, even if that means flirting with higher-risk investments. That could be anything from focusing only on emerging markets or sustainable investments, to offering ETFs that hold only gold, cannabis, vegan or sin stocks.
Alternative investments are also increasingly an area of interest, although they are not without risks. Around 10% of the industry's asset mix is currently invested in alternatives, and the sector drives about 30% of economic value. There is a real risk that these markets could quickly get saturated.
Whatever approach firms take, it is only a means to an end, rather than an end in itself. Asset managers' capacity to survive the looming crisis will not just depend on their imagination, but also on the quality of execution.
The industry would also do well to remember that crises often bring opportunities. In this case, survival offers the opportunity to shape the future asset management industry. There is only one certainty: A failure to act now will see asset managers writing their own requiem.
Michael Spellacy is a senior managing director at Accenture and leader of its capital markets practice globally. He is based in New York. This content represents the views of the author. It was submitted and edited under Pensions & Investments guidelines, but is not a product of P&I's editorial team.