Ernst & Young LLP
About the author
Senior Manager, Wealth & Asset Management, Ernst & Young LLP
About the author
Read the article and learn about:
- Why AUM growth does not automatically mean revenue growth
- Why structural changes put new demands on the operating model
- How structural changes affect investment strategies
- Why client expectations are changing, and how to adapt
The investment management industry is undergoing a period of significant structural change, disruption, and innovation. In this article, the authors explain why firms need to adapt their operating models, investment strategies, and client servicing to tackle the challenges and retain a competitive edge.1
Over the last thirty years, the industry has been characterized by input-driven growth, for example the Japanese equities surge, the late nineties’ technology boom, and the surge of assets going into fixed income.
In today’s economic environment, the industry is still characterized by a positive growth trend. However, it is clear that asset managers need to move to output-driven business models to ensure that they get a share of this growth. Managers need focus on how to best service their customers, offering solutions most suitable to meet individual investment objectives. At the same time, asset managers must operate in a much more complex environment than previously.
Challenges to asset growth and pressure on revenue
AUM growth is broadly positive; with a forecast of 4-5% growth annually over the next 3-5 years, outstripping global GDP growth in the same period. The growth in AUM is supported by a continued global expansion of the middle classes, increasing global prosperity, and more assets being actively managed despite the competition from passive management.
However, there are a number of downwards pressures on this; more institutional asset owners are looking to reduce costs by managing more of their assets themselves rather than turning to third-party managers, and in particular there has been an outflow of assets from sovereign wealth funds as the pressure on oil prices continues.
Moreover, asset growth does not automatically translate into revenue growth. According to estimates, global revenues fell by 5% in 2016, and are predicted to stay flat over the next three years, which is a significant challenge to the industry. The main contributor to this is scrutiny over value for money and increased competition impacting the traditionally high fees our industry has previously benefited from, which in turn has a significant impact on the underlying margin.
Structural changes require a different response from asset managers
Today, the market is characterized more by structural shifts compared to the cyclical phases of the past. One of these shifts is the change in responsibility for long-term investments and savings from governments, to institutions/employers, to the individuals themselves. This shift has a large impact on who are the clients of asset managers and in turn, which solutions are demanded.
Another demand for change is spurred by the question posed at many levels over active management and whether it is delivering on its value proposition – is the price justified by the returns delivered? Increasingly, asset managers need to demonstrate the value delivered against the fees demanded and the risk taken by their clients.
In addition to addressing the value for money question when considering their operating model, asset managers need to look at the changing needs of clients not only in terms of what they need from a solution perspective, but also in terms of the availability of new technology. Particularly, embracing digital is crucial, in terms of distribution and providing clients with simpler and better access to the investment market than ever before. As a lot of confusion exists about digitized services, asset managers need to pay attention to helping their clients navigate through this challenge.