The challenges facing asset management industry are huge. Not only is there pressure on fees, but there is also rapidly changing global demographics, increasing regulation, technological disruption, changing distribution models and a war for talent that means asset managers must think differently about how they attract, retain and develop talent. Existential questions are being asked about what predictable value managers can add and the days of being able to trade on the past – in the form of historic performance numbers alone – may be gone. And the pendulum of transparency is swinging strongly away from the opacity and mythology the industry has to some extent relied on.

Fee Pressure & Increased Regulation

The pressure on fees in asset management has been mounting for years. The introduction of RDR (retail distribution review) in the UK in 2012 with the aim of creating a ‘fair deal’ for retail investors and to provide greater transparency on fees to consumers. Similarly, MiFID II was introduced to offer greater protection for investors and inject more transparency into all asset classes: from equities to fixed income, exchange traded funds and foreign exchange.

The asset management world has had the luxury of levying ad valorem fees on (potentially) growing asset values for some time, never having to convert basis points to clear cash values. But now there is a laser target on costs and charges and making them crystal clear to investors. This clarity has brought awareness – and the awareness has led to few pressure – DOWNWARDS!  Ally this with ready access to cheaper, commoditised passive management solutions and suddenly asset managers have got to work had to justify active management fee margins. Hence, asset management firms are having to focus much more on their costs.

One of the most high-profile aspects of the MiFID II legislation was how asset managers pay for the research they use to make investment decisions. What we have seen so far is that European asset managers are absorbing those costs which further eats into profit margins. More transparent fees with more included in them – margins fall. Of course, worldwide economic conditions have paid a big part here – when investment return potential is low, every basis point looks a disproportionate share of the yield achieved.

This trend of increased pressure on fees and transparency will continue to drive down profits in the asset management space for years to come. Indeed, just last month IPE reported that Japan’s Global Pension Investment Fund (GPIF) has introduced new fee structures and drastically cut the base fee paid to in order to align the interest of its asset managers.[1] Investors are suddenly prepared to query fees and negotiate hard – capped fees or cash value fees are starting to be seen. And this is a one way street – consumers of asset management service are unlikely to return to the lax ways of the past.

Changing Global Demographics

According to PWC by 2020 Assets under management in the SAAAME (South America, Asia, Africa, Middle East) economies are set to grow faster than in the developed world in the years leading up to 2020, creating new pools of assets that can potentially be tapped by the asset management industry. However, the majority of assets will still be concentrated in the US and Europe.[2]

What this means is that asset managers will need to focus more efforts on growing assets in SAAAME economies while at the same time maintaining service levels for European and US clients. This will create challenges in both distribution models and client relationship management but at the same time will create opportunities for both global and boutique asset managers to create new products and services that will appeal to these markets. Our guess is that the solutions to both growth in SAAAME and client management in the US and Europe will be technology driven.

Technological & Distribution Disruption

FinTech, or more specifically blockchain technology could hold the key to transformation of the asset management sector.  Yet so far it appears that asset managers have done little to embrace the technology. However, despite this Santander InnoVentures [3] have claimed that blockchain technology has the potential to save the asset management industry $20bn a year in costs.

Technology will also change distribution models. In the developed world we now all have smart phones which can do so much more than anybody ever imagined possible. Therefore, it is inevitable that distribution will become much more digital focused.  We will also see more sophisticated robo-advise, artificial intelligence will increasingly influence portfolio management and speech recognition capabilities will take over customer support. And let’s not forget the impact big data and improved cloud-based analytics will have to allow detailed data crunching to occur seamlessly.

The war for talent in asset management

The war for talent in the asset management space is raging and attracting, retaining and developing talent is at the top of every asset management CEO’s to do list. However, according CFA Institute chief executive Paul Smith believes that the industry will have to pay people less in the future.

““We will have to pay people less,” he asserts. “Automation will bring

more consistent advice to people at a cheaper price. This is a very fat

industry. But the good news for young people wanting to work in it is that

there is still a very good standard of living and you’re not down a coalmine.”[4]

 

If this is the case, then asset managers really need to concentrate on how the attract and develop staff in order to retain them. They may need to go back to the drawing board to work out exactly what type of talent they need – conventional asset management recruiting might not work.  This is a real challenge for an industry where traditionally recruits have been white, middle class males. CEO’s of asset managers know they need to do more to attract diverse talent. For those interested in diversity then please see our other blogs Women in Asset Management: Are women put off applying for executive positions in Asset Management? And Why board diversity matters

 

Conclusion

This blog highlights several the key issues facing asset management firms – the solutions, however, will be particular to each firm and its vision of the future. Given the unique set of circumstances facing each individual asset manager it is nigh impossible to offer off the peg solutions that are likely to succeed. Instead, Talent management needs to be fully woven into business strategy setting, thus the earlier a talent specialist is involved in shaping the HR side of matters, the better. However, what is clear is that the asset management industry faces numerous challenges and it will have to change quickly if it is to continue to flourish

[1] https://www.ipe.com/news/asset-managers/japans-gpif-strengthens-manager-performance-link-in-new-fee-structure/10025155.article

[2] https://www.pwc.com/gx/en/asset-management/publications/pdfs/pwc-asset-management-2020-a-brave-new-world-final.pdf

[3] http://santanderinnoventures.com/

[4] https://www.top1000funds.com/featured-homepage-articles-2/2018/05/21/cfas-smith-on-rebuilding-trust/