In the next decade, asset management M&A will be an important trigger in containing cost growth, but this alone will not create scale and efficiency. Clear operating models and integrated systems are critical to supporting success. Key to providing this are vendors who can take up the role of trusted partners, to expand their services and open up platforms, for long-term scale and AUM growth.
With a spell of new M&A deals already at play, it is safe to predict that in 2020, we will see the consolidation of the institutional investment industry continue at pace, in order to stem outflows and stay relevant in the long term. In February alone, we saw the buyout of Merian Global Investors by rival firm Jupiter Asset Management and US fund giant Franklin Templeton acquire Legg Mason. Meanwhile, Morgan Stanley bolstered its wealth management business by purchasing E*TRADE.
M&A is no silver bullet
While global AUM growth, largely fueled by Asia, may paint a positive picture, global asset management cost growth continues to exceed organic revenue growth, according to recent findings from Mckinsey & Company1. Meaning on the other side, is a tale of falling profit margins, where fee compression and unsustainable operational leverage are joined by a growing assault of market pressures.
Beyond short-term AUM growth, M&A needs to take a good look under the hood, to first rationalize the high operating leverage impacting profit margins. Today, AUM growth no longer guarantees as much revenue as it once did. In fact, according to Bain & Co2, it now takes more AUM to generate the same amount of revenue as it did 10 years ago, squeezing the spread from 15bps in 2007, down to an estimated 8bps by 2021. In this tough climate, the key to protecting margins will be tighter control over costs. Investment operations in particular are increasingly contributing to the overall cost base of an asset manager, with costs in North America growing twice as fast as Western Europe.
While M&A can be considered a good starting point in bolstering a firm’s defenses from these market pressures, on its own it cannot create the scale and efficiency needed for long-term success. To build true scale and address the market challenges standing in the way of future prosperity, will require a fundamental shift. Moving away from the traditional operational status quo, of costly legacy systems, fragmented point solutions and outsourcing, to a clear operating model that can streamline a firm’s architecture, and form an integrated backbone across operations. Ownership of data will be a core element to this, strengthening cost efficiency, scalability, and delivering significant value to a firm, in a way that outsourcing simply cannot provide.
Delivering everything as a service
The bottom line is that asset managers will need to deliver more value at less cost. To achieve this effectively, we will inevitably see a significant shift in the way vendor services are consumed, and while many in the industry play catch up to a front-to-back way of service delivery for their clients, the goal posts are already moving. If we as vendors are to fully meet the needs of asset managers, both today and in the future, it will no longer be enough to simply provide a front-to-back platform in isolation.
While in the past, firms acted as fortified islands when it came to their operations, the future will necessitate open platforms supported by managed services and not tools and technologies alone, to truly aid M&A efforts and solve both industry and firm-wide challenges. Here, vendors in the industry have a significant role to play, demonstrating how greater value can be achieved, by delivering beyond their traditional remit. By forming trusted partnerships, vendors will need to manage a wider footprint of investment management operations, delivering everything as a service. Empowered by the cloud, vendors will need to take over the time-consuming maintenance of the systems, processes, and data owned by the asset manager, while also being more accountable for tangible business outcomes.
Take for example, data management, which continues to create significant cost and a drain on already burdened operations teams. Vendors can support firms in capitalizing on the mountains of data they hold, by utilizing an open platform, augmented by a host of managed services. The combination of which, can rationalize the incredible volumes of market data that presently floods the front office. At the same time, it can liberate firms from arduous and costly data-driven reconciliation. Ultimately, this delivers one source of truth for all processes, enabling clients to move vital resources and manpower away from firefighting data and instead onto alpha-generating tasks.