Firms see technology as savior to cut costs, offer competitive edge

U.S. money managers will face greater pressures to invest in technology to enhance client service capabilities and uncover potential savings as the cost of doing business rises in the industry, sources say.

In the year ahead, firms can also expect institutions to push harder for transparency into fees and ESG products.

For money managers, implementing tech-driven efficiencies throughout the business will contribute to a competitive edge in the current landscape, said Taimur Hyat, chief operating officer at PGIM Inc., Newark, N.J.

"I think we will end up with a very long tail of firms that don't have the scale, ability to invest in technology and the global reach," leaving them with "little prospects for growth," Mr. Hyat said.

The use of automation to simplify and bring the down the cost of middle-office and back-office functions is where Mr. Hyat sees technology having the biggest impact on money managers.

Another impact will be "the transition of client servicing and marketing to digital marketing within the institutional sales and marketing world," he added.

"Institutional clients now expect simplicity (and) ease of access to portfolio information," mirroring the digital experience of retail investors, Mr. Hyat said.

John Delaney, senior director, investments, at Willis Towers Watson PLC, said the continued downward pressures on fees and the need for asset managers to be more efficient has led many firms to invest in technology.

The asset management business is "still very much an industry that runs on Microsoft Excel," Mr. Delaney, who is based in Philadelphia, said. As such, he expects to see more firms investing in better software and automation.

"Managers have their trading platforms, but they still do an awful lot of work in Microsoft Excel. As far as day-to-day portfolio management, it's still reliant on manual spreadsheets," Mr. Delaney added.

"There is room for (firms) to create more efficient technology that does a lot of manual downloading of data," as opposed to retrieving data on fixed-income and equity markets from Bloomberg terminals daily and downloading that into spreadsheets, he said.

Michael Spellacy, a New York-based senior managing director for capital markets and global leader of asset management at professional services firm Accenture, said the "vast majority of asset managers are under assault on the cost side of their ledger."

As such, Mr. Spellacy expects that three technologies will drive the best cost advantage for asset managers in 2020:

• The strategic use of cloud technology and replacement or modernization of aging in-house investment platforms.
• The deliberate use of artificial intelligence technologies to drive cost advantages in customer servicing and investment processes.
• The advanced use of outsourcing and shared services in middle-office functions.

In April, The Bank of New York Mellon Corp., New York, announced it was partnering with BlackRock Inc., New York, to deliver integrated data, technology and asset management servicing capabilities to the firms' common clients.

Through the move, BNY Mellon will integrate its data insights, accounting and asset servicing tools into BlackRock's investment and operating platform for investment managers, called Aladdin, a news release said.

Allen Cohen, digital officer for BNY Mellon Asset Servicing, said the partnership allows for greater efficiency within firms, such as helping those in front-office roles, like portfolio managers using Aladdin, to get information from other parts of the business more quickly.

"From a portfolio manager perspective, having access to things like available cash, from half a day to a day sooner, allows you to make stronger decisions around your investment portfolio," Mr. Cohen, who is based in New York, said.

He, too, has seen a trend of asset managers looking to reduce their overall costs. And one of the ways firms are doing this is by finding innovative ways to manage data, which is growing in complexity and volume, yet needed to run their business, Mr. Cohen said.

Chicago-based money manager Nuveen LLC is exploring how it can use data to "find where (business) opportunities are and know much more about clients before we even walk into the door," said Margo L. Cook, president of the firm's global client organization, Nuveen Advisory Services.

While Ms. Cook expects the effort to be "more deeply used in the wealth space," it will also be relevant for its institutional business, as those clients also want to know that money managers "know who they are before you walk into (a) meeting."

In 2018, Nuveen, which had more than $1 trillion in assets under management as of Sept. 30, implemented a new customer relationship management system to better bring together and clean data that allows it to get a better understanding of clients, Ms. Cook said.

With the new CRM system, the firm can look at a range of issues of importance to clients, from their thoughts about certain alternative asset classes to capital markets forecasts.

"We are trying to ensure that we gather all of that information together and approach the client more holistically," she said.

As money managers continue to evolve to better integrate technology into their business, demand for professionals with this expertise also grows.

And while firms are moving to lower-fee investment products and facing increased operational costs, the "best technologists and data analytics (professionals) continue to be expensive," said Alan Johnson, managing director of Johnson Associates Inc., New York.

Despite this, moving into 2020, pay for asset management staff, on average, is expected to look similar to 2019, "down slightly," according to Mr. Johnson.

Year-end incentives, which include cash bonuses and equity awards, for asset management professionals were projected to be flat to down 5% compared to year-end 2018, a November report by Johnson Associates said.

"I think (compensation declines) probably would be worse, but firms continue to look at their headcount to make sure they don't have too many people," Mr. Johnson said of pay projections heading into 2020.

In the year ahead, U.S. money managers can also expect institutional investors to push harder for transparency in two areas in particular — fees charged for investment strategies and managers' environmental, social and governance products, sources said.

Rakhi Kumar, senior managing director, head of ESG investments and asset stewardship at State Street Global Advisors, Boston, said institutions will increasingly be asking what kind of financially material information firms are considering in their ESG process.

"I think the biggest challenge for asset managers is going to be giving clients clearer visibility and insight on how they are thinking about ESG from a fiduciary perspective. In the U.S., investors are starting to see ESG as a fiduciary responsibility," Ms. Kumar added.

Furthermore, there will be additional scrutiny related to how ESG products are designed and developed, including specific ESG objectives of strategies, she said.

Managers will also be challenged to lift the hood on fee arrangements with investor clients, said James Martielli, head of defined contribution advisory services at Vanguard Group Inc., Malvern, Pa.

"Savvier consultants and plan sponsors are going beyond the headline of expense ratios," and looking further into details such as ownership structure and what portion of securities lending revenue is returned to asset owners, he said.

For instance, regarding securities-lending revenue, "how much is going to benefit the underlying shareholders that are taking on the risk vs. the asset management companies?" Mr. Martielli said.

Additionally, despite continued fee pressures within active management, he said there is still more room for fees to come down.

"There's still some pretty high-cost active (products), but we are starting to see that come down," Mr. Martielli said of the industry. For clients, "on the active side as well as passive, it's not just about cost, but value."

A fee study published last month by investment consultant Callan LLC, San Francisco, analyzed $1.8 billion in fees paid in 2018 by its clients, and found that 98% went to active managers, while 70% of assets were managed actively.

Fees were also concentrated among a small group of firms, as 50% of total fees went to fewer than 10% of management firms, the report fund.

The clients in Callan's study represented more than $500 billion in assets.

Given the recent rally in stock and bond prices, money managers and institutional investors should prepare to adjust return expectations looking forward, said Rafi Zaman, San Diego-based chief investment officer and principal at Meketa Fiduciary Management LLC, a subsidiary of Meketa Investment Group Inc. focused on outsourced CIO services.

"It is quite likely that expected returns going forward will be lower," he added, while volatility will increase.

Ms. Cook at Nuveen also said that, looking forward, "we aren't going to see the return scenarios we've seen in the past. We think that interest rates are going to stay low for a long time." She noted later that investors are seeking income and diversification in this environment.

"Investors are looking for ways to diversify into areas like middle-market lending, private debt, real estate and infrastructure. We are seeing massive amounts of money moving into private markets," Ms. Cook said.