Go bespoke or go broke: Manager consolidation pressures in 2024 put greater emphasis on white-glove client service

Asset management firms expect to see the volatility that battered financial markets in 2023 carry into the new year, bringing with it continued consolidation pressure as the industry struggles with shrinking profit margins and rising expenses.

One way firms are attempting to keep customers happy and justify their management fees is through an increased emphasis on bespoke, white-glove client service, often using data-heavy or AI-based technology to better handle customer relationships and create personalized investment products.

But developing new technology doesn't come cheap, industry sources said, and smaller players might struggle to keep up with an ever increasing technology spend, in particular, as firms race to develop AI applications and wrangle their data.

Marc Nachmann, global head of asset and wealth management at Goldman Sachs, said it's more likely that consolidation will happen through attrition, as smaller players get edged out by the behemoths, than via mergers and acquisitions, which he said are challenging in the asset management industry.

Nachmann said that Goldman Sachs' tech spend on things like AI and creating a new customized single-managed account (SMA) platform is "huge." While Nachmann didn't say how much his firm is spending, the asset management sector as a whole spent a record $24 billion on technology in 2022, according to data from McKinsey — its third-largest expense after investment management and distribution.

"We struggle with how to prioritize," Nachmann said. "I can't imagine how you do this if you're a tenth of our size. The table stakes are there, and if other people get to do things faster or have investment ideas faster or are more thorough … you're going to start being at a disadvantage."

As finance firms fight to maintain profitability amid higher interest rates and continued downward pressure on fees, executives say they will do more with less as they try to cut costs. And that will likely only continue – consulting firm Casey Quirk found that over half of asset owners are seeking to lower fees, and only 19% felt that asset managers' fees were "reasonable."

Cutting costs in the long run could require an upfront spend on things like generative AI co-pilots — essentially superpowered chatbots built on AI — to make their employees faster and more productive. For asset managers with deep pockets, like Goldman Sachs Asset Management ($2.68 trillion in assets under supervision) and BlackRock ($9.1 trillion in AUM), those projects are already in the pipeline. But for smaller, more cash-strapped firms, AI will likely continue to be out of reach in 2024.

BlackRock has already launched a pilot program of its first AI-powered copilot, and will roll out more over the course of the year.

J. Christopher Donahue, chair, president and CEO of Federated Hermes, said that his firm has a $300 million budget for "new toys" over the next three years, including AI development and a team of data scientists who have been working with the firm's head of distribution on new sales strategies.

"Everybody has a shopping list, and you've got to make priorities," Donahue said. "If you're not spending a whole bunch of money on technology, you're just getting left behind."

Donahue added that Federated Hermes is working with other firms, including BNY Mellon and State Street on certain projects.

"Those guys ... they have billions of dollars of technology budgets going," Donahue marveled. Federated Hermes had $715.2 billion in assets under management as of the third quarter last year.

Brian O. Casey, president and CEO of Westwood Holdings Group, said the technology spend "seems like it never stops."

"The tech spend seems to go up every year," Casey said. "But it creates a lot of efficiencies. You always want to try to do more with less if you can."

The rush toward AI at many asset management firms isn't just about the latest gadget. It's part of a broader strategy to cut costs while also providing white-glove, bespoke client services — including creating personalized portfolios or single managed accounts for smaller and smaller clients — and to justify their management fees amid the growing popularity of cheaper, passively managed products.

Nachmann said that one piece of technology Goldman Sachs Asset Management expects to spend money on in the new year is the development of a new customized solutions platform to handle an increase in separately managed accounts as the firm places a greater emphasis on client customization.

"Separately managed accounts are becoming a bigger and bigger thing … it used to be a thing of big institutions, big insurance companies would be able to do customized SMA accounts. We're doing it now for thousands of our high-net-worth clients," Nachmann said. "That will require a whole infrastructure technology build that will be very big."

Other asset management firms large and small also report a growing trend toward white-glove client service.

"The trend towards personalization has been going on for a while but it's going to continue," said George Patterson, CIO at PGIM Quantitative Solutions. "At the end of the day, asset managers are looking to customize because it's kind of what we call 'beyond alpha.' It's not just about performance, it's the things beyond just the performance — whether it's the client service, the reporting, (or) the customization," he said.

Despite the pressures the industry faces in 2024, many asset management firms remain upbeat about their chances to weather the storm and perhaps even profit from the volatility through an increased focus on higher-fee active management.

Jean Boivin, managing director and head of global research for the BlackRock Investment Institute, said investors will need to "grab the macro wheel" in order to effectively manage risk — "This is an environment where we think being active in the portfolio will be necessary," he said.

In addition to navigating choppy markets, some executives argue that active management — particularly in equities — will offer a chance to realize a profit not seen in the low interest rate era.

BlackRock's Antonio "Tony" DeSpirito, the firm's CIO of U.S. fundamental equities, said the opportunity for active managers in 2024 makes him "the most excited I've been in 20 years."

"From a bottom-up perspective, I actually do think we can get equity returns whether we have a soft landing or a recession," said Ann Miletti, head of active equity and chief diversity officer at Allspring Global Investments, which has $551 billion in assets under management. "Whether it's mid-single digit or high-single digit returns in the equity space, I think it's pretty reasonable if you're picking stocks and not just buying indexes."

Alison Shimada, Allspring's head of the total emerging markets team, said stock picking will be crucial when it comes to emerging markets equities.

"An ETF does not serve you well in emerging markets," Shimada said, citing the dispersion between the best and worst performing countries in the emerging markets division.

"I've been waiting five or 10 years for this, but it's time to do some stock selection — I've been waiting for the intelligence, and the experience and the critical thinking to matter and it really matters now."

Firms were unanimous in expectations of continued growth of private markets. BlackRock, which has $9.1 trillion in assets under management, has predicted the private debt market will balloon to $3.5 trillion by the end of 2028, from its current $1.6 trillion.

Though the markets have priced in rate cuts for the first quarter of 2024, asset management firms are, on the whole, more hawkish in their predictions, forecasting the first rate cut as unlikely until the latter half of the year.

"We think policy is going to remain tight," said George Bory, chief investment strategist for fixed income at Allspring.

"The market seems to be getting very excited about rate cuts for next year. We actually think the Fed's going to be on hold, probably at least for the first half of the year," he said.

Allspring's prediction matches that of asset managers including Federated Hermes and BlackRock, both of which predict that rate cuts will not happen until at least the third quarter.

Whether a recession is still on the horizon or a soft landing has been achieved is a more divisive issue among firms—– and even within them, according to Federated Hermes' Donahue.

"Our CIO of fixed income is still thinking there's a little bit of recession gas in this truck," Donahue said. "He's a little more reticent than the equity people who think that we've had the rocky landing and let's get on with it. It's unusual for there to be, shall we call it, a creative friction" within the firm, he said.