From reducing margins, increasing complexity and greater regulatory burdens; Asset Management is now under greater pressure to evolve as seismic shifts are altering the paradigm which has kept Asset Management highly profitable for decades.
The challenges for Asset Management as a sector vary by asset class, but across Asset Management as a whole, more traditional managers are facing greater competition from lower fee products. This lower margin environment comes at a time of increased regulatory burden, which further increases the costs and operational risk of doing business.
In an effort to secure revenues, new products are being developed that enable managers to apply more appealing pricing structures. Investment in technology is often required to support these vehicles at sustainable costs.
For more ‘vanilla’ products, systems and processes need to become more ‘standardised’ so operating models are now being reviewed to remove inefficiencies and to allow change to be implemented more quickly and cost effectively. Transformational change is increasingly a topic that is being discussed at every level of the organisation with many firms investing heavily as they regard such programmes as being a possible differentiator in a crowded market.
For smaller players, without the capital and expertise to respond to the latest trends, it can be a challenging environment. However, the benefits of being more nimble (and less bureaucratic) can also present opportunities to innovate more rapidly. An example of this is in the adoption of Fintech, the established procurement practices of large organisations can often limit willingness to work with new vendors as the cost of failure can be significant. However, innovation is often at its greatest in companies that are more willing to partner with Fintech firms to ensure their requirements are met. The London-based FinTech Lab is a great example of this. RegTech, another increasingly hot topic, can provide similar opportunities to respond to challenges that come with regulatory compliance and the FCA Sandbox has fostered innovation as we saw in November 2016.
Whether complex or vanilla, large or small; organisations are looking for solutions where the incremental cost of change becomes less and less. Technology solutions can’t take forever to build and cannot be multi-year so methodology trends such as ‘DevOps’ and other agile management tools are increasingly becoming more mainstream. Also, ‘Software-as-a-Service’ (SaaS), which shifts the burden of managing technology to the vendor, has become the norm as it allows for constant incremental change and moves away from the need for expensive and painful periodic upgrades to core platforms.
Another key change taking place is the end of the patchwork nature of the different platforms that exist within Asset Management. Given the demands of regulatory compliance and governance, remaining sustainable as a “siloed” business has become something of a minefield to orienteer around. Similar challenges are faced when a business starts “digitising”, as this often requires a common data model to ensure data quality can be maintained in a more open and transparent framework.
Notwithstanding changes such as governance and regulatory compliance, when it comes to digital, asset managers have not been at the forefront of innovation to date. How to bring new products to clients becomes the dilemma of whether to create a bespoke in-house digital platform or whether to market products via established digital platforms of intermediaries. Such external digital platforms still need asset management processes to be stream-lined to provide the right digital information for those platforms.
In such an open and transparent framework, how to go about designing such solutions that justify the higher fees – without sacrificing quality whilst continuing to make organisational changes – is becoming even more of a challenge for the asset management sector.
One thing we can all be assured of, everything has changed and while the challenges are significant, it’s an exciting though bumpy road ahead for innovation and innovators. Choose innovation!