The asset management industry is undergoing profound change that has only been accelerated by the coronavirus pandemic. Many of the trends influencing the industry were already in motion prior to the onset of the pandemic, but with social distancing, working from home and on-demand communication thrown into the mix, asset management companies must adapt or risk being left behind.
RSM has identified 10 key trends shaping the asset management industry of the future:
1. The impact of technology
Are asset management firms positioned for the future with their current technology? The pandemic has highlighted—and accelerated—the potential for technology to redefine the industry. Automation, harnessing data, gaining insight from analytics and offering a personalized customer experience are several initiatives asset management firms can implement in the race to a digital future. The implications for firms that do not keep pace are significant, posing an existential threat to their business.
2. Digital transformation and controlling costs
Controlling costs is a priority for securing profitability in the future. In many cases, this goes hand-in-hand with adopting new technologies that automate certain tasks once managed by people.
We must also acknowledge the relentless rise in outsourcing: the notion of doing what you do best and letting others do the rest. The end result is a rapidly evolving business model that allows asset managers to control costs and pass along the savings to their clients in an increasingly competitive environment.
3. Balance sheet strength and liquidity
The current market environment has showed the importance of balance sheet strength and liquidity issues. Firms that were already strong financially will be the ones that can capitalize on market disruptions brought on by the pandemic. The upside? Win new business and grow the revenue base. The downside? Opportunities are missed without the capital to invest.
4. Pressure on fees
It’s called the Race to Zero. Ever since regulators abolished fixed trading commissions in the 1970s, asset managers and brokers have been in a relentless race to lower fees. Today’s customers have alternatives to the traditional business model in asset management, which charges fees as a percentage of assets. Now, more firms are offering clients the option of being billed by the hour or even a flat fee for their services. This doesn’t include the rise of so-called robo-advisors, which charge exceptionally low fees in return for services.
The result: Asset managers must prove their value to clients more than ever.
5. Active vs. passive investing
The low fees associated with passively managed funds, the allure of the returns such funds have generated during good economic times and the fledgling recovery since late March 2020 should continue to attract more capital into passively managed ETFs and mutual funds. This has led to a different type of investor, one who is younger and often less experienced. Similarly, the Labor Department issued guidance in June 2020 effectively allowing 401(k) plans to invest in buyout firms. The agency said the move will bolster investment options for consumers and let them access an asset class that can provide better returns than stocks and bonds.
Moreover, the search for yield is spurring a push toward alternative classes as investors seek ways to meet the expected returns. Asset managers who are unable to launch offerings in other asset classes or adjust existing product offerings to unlock the increasingly elusive alpha that investors demand will struggle to grow or keep assets under management.
6. Regulatory compliance
Registered investment advisors spend an increasing amount of time on compliance, with many relying on a chief compliance officer or outsourcing these requirements to an outside firm. Some compliance considerations for the asset management sector include traditional risks (including marketing, investor eligibility and fees), more recent exam findings in portfolio management and trading, valuation, custody, use of leverage, funding capacity, voting and consent solicitations, recordkeeping and technology issues.
7. Cybersecurity and risk
Many investors assume their data will remain secure and private. But as with any industry, asset managers must contemplate cybersecurity and risk management of their customer information—as well as how a lack of investment in these areas can have potentially disastrous effects on their business. The threat of a breach or loss of sensitive client and employee data can be a serious blow to an asset manager’s brand and investors’ trust, alongside the risk of losing proprietary intelligence and a competitive edge. While breaches may not result in a regulatory issue, it will impact investors’ desire to continue working with the asset manager.
8. Investing in digital assets
As digital assets become more accepted in the mainstream investing community, asset managers are increasingly receiving requests from their clients to include such assets in the investment mix. This marks a striking change from even a couple of years ago, when digital assets were seen as the province of scam artists and criminals lurking in dark corners of the web. But as they have held up in value, many asset managers are finding ways to incorporate them. RSM’s Jay Schulman and Todd Briggs discussed the ways to do incorporate digital assets, noting that while it is challenging, it can be done provided asset managers approach it in a thoughtful and diligent way.
The rise of environmental, social and governance criteria (ESG) in a managing a business has been one of the signature movements in the asset management industry. New generations of investors are increasingly demanding that their money go to investments that reflect these priorities. But fulfilling that goal has been a central challenge to asset managers, particularly those in the middle market. Anthony DeCandido, an RSM partner who specializes in ESG, discussed the importance of understanding these issues and putting them into action.
10. Get big or get out
It’s no mystery that making the investments to remain competitive in today’s asset management landscape requires significant resources. But there really is no way around it; customers are demanding the personalized experiences that, in many cases, only technology can provide. Think of the experience they’ve grown used to when they order a product from Amazon or watch a movie on Netflix: It’s a highly personalized experience enabled by technology. The annual meeting with the client, a cherished tradition in the asset management industry, is still important, but customers are demanding access to their information whenever and wherever they want it. In fact, some surveys show that for the first time, the biggest banks score higher in customer satisfaction than smaller banks, precisely because they have made the investment in the technology that customers have come to expect.
Asset managers in the middle market are thus left with a decision: Do I consolidate with a bigger firm to gain access to the resources that firm can offer, sell off a minority or non-controlling stake to gain access to a platform that may be available on the secondary market or do I try to go it alone? Increasingly, the answer to that question has become clear as the industry continues to consolidate.
Amid these significant changes in the asset management industry, the businesses that stay nimble and attuned to changing customer needs will be in the best position to succeed. In the risk-reward calculus of the industry, those who do not adapt risk being left behind, while the rewards for those who do indeed adapt can be substantial.