Can your existing revenue model handle finer margins, uncertain macro-economic conditions and rapid, tech-influenced trends in customer behaviour – and still turn a profit?
It is clear that the established economics of the asset management industry are under pressure. Competitive forces and regulatory reforms are having a significant impact on budgets and revenues. And while input costs are rising – from research to trading to capital to staffing – returns to investors remain stubbornly low, putting further pressure on fees.
Traditionally, fee pressure has been countered by asset managers in two ways: extending the product set and expanding distribution channels. For very different, but compelling reasons, neither of these strategies can be regarded a silver bullet in present conditions.
Recent market trends have highlighted the limits and perils of striving for growth through a wider product range. Over the past decade, many traditionally active asset managers have looked at passive strategies in order to respond to the push from regulators to reduce costs to the investor.
While there is evidently a place in the portfolio for ETFs, trackers and other passive investment vehicles, it is an extremely crowded market. Globally, the ETF market has grown from US$700 billion in 2008 to more than US$4 trillion in 2017, according to data provider ETFGI1, boosted by a growing European appetite.
However, passive products do not necessarily perform in all weathers. Passive investments strategies have thrived under central banks’ quantitative easing policies, which have tended to lift asset prices together, regardless of intrinsic value. As the cheap money era fades, the stock-picking skills of active asset managers may become more attractive, perhaps deflating the passive bubble. Indeed, many actively managed funds outperformed last year.
At the other end of the risk curve, alternatives have also experienced a sharp increase in both demand and competition. The infrastructure and expertise required to deliver on high expectations are costly, typically requiring a distinctly bespoke approach, due partly to the less-liquid nature of many assets compared with traded securities. As such, funds focused on private equity, real estate, hedge funds and increasingly private debt are a serious commitment for any asset manager.
Similarly, broadening the client network is not without its challenges. In recent decades, distribution has shifted toward independent financial advisors and multi-fund platforms, as multiple forces, notably increased calls for transparency, have distanced the fund manufacturer from the end-investor. A side-effect of this disintermediation is the increased difficulty for asset managers to communicate value effectively. As many have found, third-party conduits are blunt sales tools at best, offering little if any opportunity for differentiation.
Regulatory change has played a significant role in these trends, codifying the relationship between fund manufacturers and distributors. But regulation – in the form of MiFID II – also provides an incentive for asset management firms to re-engage with investors. As part of its purpose to increase investor protection, MiFID II requires fund distributors and manufacturers to have a demonstrably clear understanding of their target clients’ needs, in particular their suitability to buy specific fund products and comprehend fully the inherent risks.
For all asset managers with products marketed in multiple European jurisdictions, this is a far from trivial challenge, due to the wide variety of existing distribution practices. For those that wish to continue marketing funds on both sides of the English Channel in the aftermath of Brexit, the challenge may become more substantial, and may need to be factored into plans for establishing new operations or ManCos2 post-transition.
The task of rebuilding that intimate level of client understanding should become significantly easier, thanks to some of the digital technology innovations that have been maturing over the past decade. A number of emerging technologies also have the potential to provide new insights, while working within the new data privacy standards established by the EU General Data Protection Regulation (GDPR) coming into force on 25th May. Asset managers and asset servicing providers such as BNY Mellon are working to ensure they can continue to support their clients as these technologies evolve.
Historically, it has proved difficult to source, collate and analyse information residing within transfer agencies and elsewhere that could lend insight into client behaviours and preferences. But the increased digitisation of retail investment and wealth management in particular could help to forge a closer connection between clients and fund manufacturers than has existed in recent decades.
Already, it is clear that millennials are more comfortable making decisions via digitised intermediation than their parents, interacting with advisors via apps rather than face to face, and outlining risk appetites via pull-down menus. As such, we may be in the early phases of a data-fuelled understanding of how to fill investors’ needs.
By better understanding the information held within fund platforms and other distribution networks, asset managers may be able to comply with MiFID II in a more cost-effective manner. Equally important, from a revenue model perspective, they may also improve their ability to differentiate themselves more clearly to customers, and tailor their product offerings accordingly.
1. Source: etfgi.com
2. A third-party management company established to manage the investment management, administration and / or marketing of a UCITS fund.
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