The pressure is on asset managers to demonstrate value. The industry is facing new competitors, changing client demographics, needs and expectations and more regulation. As the same time, diverse investors are looking for asset managers who look and think more like them.
The demand is rising for more transparency, better risk management and new insights for finding alpha. After years of robust growth, the industry is at an inflection point, and the landscape will transform. Consolidation will create larger asset management firms that can invest in needed technologies, cyberdefense systems and increasing a global footprint.
“The entrepreneurial spirit of the industry will always encourage agile newcomers who are willing to rewrite the rules,” explained Michael Patanella
, Grant Thornton LLP’s Asset Management national sector leader. “Inflection points mean change, but they also create new opportunities for growth for a new breed of asset manager, one who is more diverse, transparent and savvy at finding ways to help investors manage their wealth and risk.”
Fees are under pressure for more restriction
New competitors, new hedge funds and new fund managers are changing traditional industry fee models to suit investors who are dissatisfied with existing fee structures. The SEC is scrutinizing private equity firm fee allocations and partnership agreements. Mutual fund investors are moving from the higher fees of active management to lower-cost funds and trading. And robo-advisors are reaching the lower end of the market, including young investors who can become someone’s lifelong customers.
The regulatory burden is heavy
There is no relief is in sight as regulation continues its steady increase. A greater burden is falling on both global growth, but also on current position, with new SEC rules on liquidity risk management, regulatory agency focus on cybersecurity, and multiple challenges from tax authorities.
Technology offers some answers
Technology will help in meeting the new demand, but it can’t be the only answer. As capable as it is, technology in many cases is held back by the tendency of asset managers to operate many different platforms that don’t interact. Connecting data systems could provide the intelligence and insights on the correlations between lagging and leading indicators of risk and performance. This would benefit investors, regulators and asset managers.
Asset management firms are investing in critical tech solutions to perform the increasing number of compliance tasks. In financial services, the solutions — sometimes called regulatory technology, or RegTech — are designed to manage data to meet these challenges. The rush to RegTech has escalated since the financial crisis.
Asset management firms of all sizes have an opportunity to improve how they comply with regulations. There is even greater opportunity to change the way asset managers think about the underlying data in their risk, treasury and finance functions. They can transform an overhead function into a significant competitive advantage.
Connecting with the emotional needs of investors is as important as meeting traditional measures of success. Greater transparency is one factor in building trust. New technology platforms are changing the rules in delivering accessible and transparent information and insight that today’s investors demand.
Understand the changing landscape to meet its challenges
Asset management is becoming essentially a zero sum game — certain sectors will benefit to the detriment of others. Passively managed index and ETFs are growing at the expense of actively managed funds. Private equity is also growing as larger firms move downstream for deals and managers become more comfortable with add-on acquisition strategies. After decades of dramatic growth, hedge funds face the challenges of a persistent low interest rate environment and a bull market for equities that has raged since 2009. For now, it seems best to go with the flow.
Consolidation is creating a divided market. Large funds have the financial resources to invest in the technologies needed to address regulatory and risk concerns. Small funds can carve out a strategic niche to serve specific investor needs. This creates a squeeze on midsized funds, which are deciding if they can make it on their own.
Managers of the best-run firms will understand the changing landscape and strategically position their firms to deliver value based on their unique strengths. They will create the transparency, insights and fee value that connect with global investors in innovative ways. They will understand all asset classes and guide investors with effective technology platforms that cross multiple asset classes. In some cases, that will mean finding new efficiencies. In others, it will mean partnering with entrepreneurial competitors. Most importantly, they will have the courage to follow through with promising innovations that will provide reliable results for clients, and perhaps redefine their industry.