Asset Management: The next evolution of the operating model

Adapting to structural change and disruption
Daniel Hall - Operating model

Daniel Hall
Ernst & Young LLP

About the author

Daniel Hall is a Partner in EY’s global wealth and asset management practice and leads the UK wealth and asset management advisory team. Dan has been advising the wealth and asset management industries for the past 20 years. He has worked with many leading firms to deliver strategic change initiatives across distribution, front, middle and back offices. In particular, Dan’s experience includes operating model design and transformation; customer experience; digital; post-merger acquisition integration; and outsourcing. Daniel Hall is based in the London office of Ernst & Young LLP.
Reema Kotecha - Operating model

Reema Kotecha
Senior Manager, Wealth & Asset Management, Ernst & Young LLP

About the author

Reema joined EY in 2013 and has 10 years of experience advising the wealth and asset management industry. Her focus covers a number of advisory disciplines, including strategy, business model change, operational / cost efficiency and front office technology change. Reema’s clients include global and boutique asset management clients, and security services providers across the UK and EMEIA


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.

How should the industry respond?

Polarization of investment offerings

These structural changes are fundamentally changing the investment proposition. One aspect is the polarization between very large-scale players gathering assets and competing on price versus the niche specialist players who provide a differentiated service at a higher price. This difference has always existed, but the flow into passive investment vehicles is widening the gap and strengthening the large-scale players. At the other end, specialist firms are looking to innovation to provide more differentiated services and including alternative asset classes, like private equity, real estate, infrastructure, and private debt in their propositions, in the continued search for yield. In the scale game, the large players need to focus on price, while the specialist providers need to look to how they can provide these products at a reasonable cost, while meeting client demands for returns. Asset managers who cannot compete on scale or niche offerings must develop their product offering by leveraging multi-asset solutions to provide better returns and secure a better client experience.

This shift in the investment proposition is further challenged by the emergence of new players that are trying to provide a differentiated proposition through a combination of applying new technology in the distribution of their services and cutting out some of the middle-layers in traditional distribution. While this is still not a big threat, it is something that traditional asset managers need to be alert of, as these players aim to gain AUM by providing differentiated investor experience

Recognizing that investor expectations are changing

Institutional investors are no longer just looking at the relative return but also at the end outcome, i.e. how can investments can help meet the goals and the liabilities of the financial institution. Accordingly, asset managers must increasingly consider how they can become much more sophisticated about understanding these new demands of financial institutional clients. Asset managers must act much more as consultants not only from an investment and performance perspective, but also in terms of understanding the client from a servicing perspective.

As an example, the demand for socially responsible investments is increasing, and becoming part of an end client’s consideration when selecting a manager. There is also an increasing expectation that the asset manager plays an active role in these investments. Asset managers offering socially responsible investment product are expected to provide the right governance to ensure that these investments live up to their promises.

Impact of digital

Digital will have a key impact in the asset management industry, which has been lagging behind other financial services institutions such as banks and insurance companies. Although asset managers often don’t have as direct a relationship with the end-users of their services, digital will be an enabler of differentiating offerings to become more competitive. Some asset managers will utilize digital to enhance customer experience and others to provide direct distribution to end-users or offer robo-advisory. Asset managers will also be able to utilize digital across their value-chain to provide more real-time and seamless reporting to their clients, and internally in different parts of their operating model to improve efficiency and robustness.

The broadening ecosystem of partners

Although we are seeing a lot of activity among asset managers when it comes to FinTech, asset managers are divided into the ones who are really excited about FinTech and building relationships with partners in the FinTech ecosystem, and those that are not yet at a stage where they have started exploring the opportunities. However, the best possible way to utilize FinTech has yet to be discovered. Trading, reporting, distribution, and advisory are just some of the areas that are being explored to discover whether FinTech can be applied to achieve a competitive advantage.

Ever increasing regulatory requirements are putting new demands on the operating model. RegTech can potentially provide asset managers with more efficient solutions and help meet the regulatory demand for even better insight and transparency into their businesses. Regulators too are looking to RegTech as the increasing activity caused by new regulations add to the demand for transparency and insight into these activities to find out if it is a fair and competitive market. The challenge for managers is to avoid creating a ‘patchwork’ of solutions for various new regulations and make their operating models even more complicated and less efficient, and instead focus on a strategic approach to meeting regulatory demands

People vs technology and data

Whereas previously asset managers talked about how people and talent, especially in the front office, were the competitive advantage with their businesses; this has now shifted to focusing on building the most efficient and cohesive operating model that empowers and enables the front office to provide the best possible outcome for the end customer.

To achieve this, data is a fundamental part, and is undergoing a continuous evolution. The pace at which real time data (traditional and unstructured), combined with customer and distribution analytics can help provide competitive advantage is increasing. However, before asset managers can look to innovation in the use of data, they need to have core of operating platform around data stabilized, i.e. a robust and coherent data model with appropriate governance in place. These foundations allow asset managers to innovate with data; for example, several asset managers are utilizing proof-of-concepts on how they can utilize alternative sources of information to create additional insights for additional competitive edge.

The operating model must always evolve

A key theme for asset managers is to become leaner and more efficient as revenues are pressured by decreasing fees. Operational processes can be streamlined and automated, and third-party provider contracts can be looked at to see if a more cost-efficient setup is possible, e.g. when it comes to insourcing vs. outsourcing.

Technology is the core element of the operating model and many firms are going through transformational processes, moving from a myriad of best-of-breed processes to a more robust integrated model without need for reconciliation and manual process. Managed services and cloud are also looked to as a way of driving down cost.

As already established, our industry is undergoing a period of significant change and disruption. We see a low interest environment with a pressure on fees that is only going one way, This situation is not likely to change which means that value propositions need to be reconsidered and operating models must be revisited to drive out competitive advantage. Rather sooner than later, asset managers must make this exercise a regular part of their business review to stay competitive.

1. For more detail around how to optimize the operating model