Extraordinary global factors continue to change the world’s financial landscape, including the effects of a once-in-a-century pandemic, instability and uncertainty from European conflict, and surges in inflation not seen in decades, to mention a few. Against this backdrop, asset managers are facing greater challenges in identifying which themes truly portend major, lasting changes within their industry.
Which current significant themes in asset management will prove most durable and impactful in the coming years? And among those, which will most urgently require resources and action? All managers must ask these questions at frequent intervals. While every potential answer carries unpredictability, looking at the themes that asset managers across the globe are prioritizing to maintain or gain competitive advantages can provide critical clues.
Boosting efficiency and driving growth
“Primarily, we see asset managers focusing on three key themes – cost savings and efficiencies, data capabilities, and new products and distribution channels,” says Jon Mann, Global Head of the Banks, Broker-Dealers and Insurance segment within BNY Mellon Asset Servicing. He notes that a growing number of asset-management firms are prioritizing initiatives that will cut costs and streamline processes, generate new products and revenue opportunities, and increase their client base. To achieve these goals, he adds, they’re leveraging advanced technologies, increasing outsourcing, and making strategic consolidations and acquisitions.
Theme 1: Leveraging technology to cut costs and add capabilities
As fee pressures continue and the competitive landscape intensifies, asset managers are eagerly looking to drive growth by lowering costs and expanding their capabilities, says Mann. Fortunately, technology is providing unprecedented advantages in achieving both objectives. Recent leaps in the computing power of data science, information discovery, and modeling via artificial intelligence are empowering firms to find novel, cost-effective ways to boost efficiency and add value. As other firms take note and incorporate similar innovations, business models and client expectations are raising the competitive bar across the asset management industry.
“Those asset management firms that are sitting on the high volume/lower price side – such as those with ETFs and all products that require scale – will be looking to create efficiencies and scale,” predicts Mann. “On the other side, alternatives-focused firms are looking to acquire capability to establish differentiation in their offerings, in areas involving risk management, quants, or other interesting permutations in how they do what they do. BNY Mellon has also seen a fairly large wave of M&A activity and a boom in fintech outsourcing, and we expect those trends to continue.”
Theme 2: Outsourcing technology needs to build data capabilities
While gathering and using data effectively has long been a pivotal competitive area for asset managers, the widespread acceleration of digital transformation spurred by the pandemic has quickly raised standards across the industry – leaving many firms struggling with outdated systems that can no longer meet daily needs.
To avoid this fate, asset managers that had long delayed comprehensive technology upgrades are now forging ahead with these initiatives to gain cutting-edge data capabilities and stay competitive. But instead of relying on internal teams and resources, says Mann, firms are increasingly engaging service providers with specialized expertise to assist with these technology transformations.”
“Asset managers recognize that data is the connective thread across the front, middle, and back office, and they must harness digital technology to support a data-centric, agile model for growth,” Mann notes. In a recent study conducted by BNY Mellon, entitled Asset Management: Transformation Is Already Here, a survey of more than 200 asset managers globally found that 96% currently use cloud computing technologies across their front-to-back offices, and 67% expect to increase their reliance on core financial service providers by 2024.
“This tells us that cloud transformation is already well under way across the industry, and that over half of asset managers will rely on outsourced providers for capability expansion to meet growing needs,” Mann explains. As for specific areas in which asset managers intend to leverage this external expertise, nearly all survey respondents (97%) say they would apply it to data management infrastructure, followed by back-office needs (90%), data operation (78%), middle-office processes (61%), and front-office activities (41%).
Theme 3: Attracting retail investors with new products and direct-to-consumer distribution
Several factors are driving asset managers to introduce new products and client services. First, advancing technologies in data science are opening new possibilities in equity selection, portfolio management, risk modeling, and other fundamental tasks. Additionally, asset managers are responding to the ongoing “retail revolution” by creating new products for private investors –which is also spurring product development for traditional institutional clients.
“Technology creates opportunities, in terms of using it to create new products and allow access to new and more complex products, providing much more transparency to the end investor,” says Mann. These products include alternative investment funds that can be sold to retail investors – such as the European Long-Term Investment Fund (ELTIF), for just one prominent example.
“With more retail investors, investments increase – but with lower amounts and a higher demand for transparency and information,” Mann continues, noting that BNY Mellon Asset Servicing is dedicated to helping asset managers navigate this new terrain to achieve their most pressing objectives. “We are part of that ecosystem and we connect buyers and sellers, providing a digital platform that connects all processes and activities, front to back, which allows us to coordinate and facilitate all client needs.”
As investors increasingly expect asset managers to offer an ever-wider menu of services, as well as ongoing innovation, asset managers know they need to meet these expectations to survive. In the BNY Mellon survey, 43% of respondents say that restructuring and rationalizing their product offerings is among their top strategic priorities.
Further, distribution standards are changing, as constant improvements in digital and mobile technology are making it easier for clients to access both new and existing products. “Direct online distribution using smartphones is the way forward, as that is what the next generation expects,” Mann explains. “New technology is changing the way asset managers distribute and extend market share by facilitating innovative, customizable, and scalable solutions. To best capture the growing retail investor base, they need to rethink their distribution model to include direct-to-consumer access.”
In BNY Mellon’s survey, 80% of asset managers say they expect to see growth in direct-to-consumer distribution by 2024 (with 100% noting that they currently distribute their products through fund platforms). Not surprisingly, 64% say they expect service providers to offer distribution support, allowing them to use outsourced expertise to also acquire these essential capabilities.
The asset managers that most effectively embrace these three macro themes with comprehensive, synergistic strategies stand to gain sizable market share in the immediate coming years, and new leaders may emerge. Firms that fail to capitalize on the timely opportunities these trends offer, however, or fail to successfully navigate their risks, may fall irrevocably behind peers that better understood the industry-changing impacts of the rapid evolution currently under way.
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