By Luuk Jacobs
As the new financial year is upon is, it’s time to look at the year ahead. The pace of change has historically been slow in the financial services sector, but several key themes are emerging. These are gradually reshaping asset management businesses and the way they serve their end clients, while others are more disruptive. Here’s what they are and what you can expect from them this year.
Regulation Asset managers have had to deal with a raft of new regulation in the last few years, and would no doubt welcome a period of stability without yet more changes to the rules this year. We can confidently say this is not going to be the case.
While Brexit will bring uncertainty around passporting, and questions over which aspects of EU legislation such as and questions over which aspects of EU legislation will still apply, rumour and discussion will rumble on throughout the year.
What’s more pressing is MiFID II (due in 2018, before Brexit negotiations are complete) which for asset managers, is both opportunity and burden. According to the FT, complying with the EU’s far-reaching financial reforms will not be cheap or easy. The projected €2.5bn cost of Mifid II has rattled asset managers who will be uniquely affected because they will encounter many regulations for the first time. With the countdown now on, the industry needs to acquaint itself very quickly with MiFID II and gather together the necessary skills and tools to handle it.
This is not the first time the industry has been ‘rattled’. The Retail Distribution Review (RDR) which came in to force under the auspices of the then regulator, the FSA, at the end of 2012, was a game-changer for the industry, and is widely acknowledged to have reshaped financial services for the better. We think MiFID II will eventually be viewed in the same way.
Margins The Asset Management industry is feeling squeezed and in July last year, the FT accused the industry of actively failing. Then came In the November 2016 FCA interim report on its Asset Management Market Study. According to Deloitte, the FCA’s proposed remedies are likely to increase awareness and hence scrutiny of fund charges and investment performance, which may in turn put pressure on margins and accelerate the existing trend towards passive investment strategies. If 2016 was the year of navel gazing and existential angst for Asset Managers, 2017 should be seen as the year of reinvention and innovation.
Pressure on active management charges has been intensified by the wave of smart beta passive products that have hit the marketplace, and a race to the bottom on price between the biggest ETF and index tracker providers. Meanwhile, mediocre returns from hedge fund-type products in recent years have made investors less willing to pay performance fees. Many Asset Managers have been rationalising their product ranges to get rid of small, underperforming funds and focus on their core offerings, as well as trying to reduce their operating costs more generally. But, in future, what they want and need to charge and what clients will accept could continue to diverge.
So where does the industry go now? Top of the list for Asset Managers wanting to increase margins is to use technology as a way to reduce costs specifically in both client relationships and the investment process. According to the KPMG ‘Investing in the future’, “client profiling, data analytics and operational flexibility will be increasingly critical to effectively target and service an increasingly diverse client base”. Additionally, disrupting the existing status quo will create new and exciting opportunities – the newly The Asset Management Exchange which aims of simplify process in a cost efficient way is a perfect example of this.
Digitisation When we think about the move to digital in financial services, we tend to focus on things like online banking and apps or new developments such as bitcoin. With huge investment in technological innovation for the end consumer, from mobile, and apps to fingerprint recognition and Apple Pay, it’s safe to say the adoption of digital has been much slower across the back office with systems integration a big issue along with security and data breach concerns.
Investment in technology boosts capabilities and gives companies access to the tools they need to responds to increasing client demands for better performance and more transparency. The industry has not been first off the block by any stretch of the imagination when it comes to technology adoption but it is playing catch up. EY published the Wealth and Asset Managers Awake to the new Digital Age report in 2015 and while much of what’s outlined inthis still stands, there are new and emerging trends to be aware of in 2017. PwC set its stall by Blockchain late last year but that’s not the only trend to be aware of ‘robo-advisers’ and data visualisation are the big wins for 2017 according to FX-MM magazine. The overall message with digitisation is that it’s now the imperative rather than just the nice to have for companies who want a competitive advantage.
Stewardship and sustainable investing The old adage about choosing between principles and profit is still widely believed, and makes many Asset Managers steer clear of impact investing. But shareholder engagement is back on the agenda. Investors today don’t just want to avoid those companies with questionable environmental and social business practices, they want to support those which aim to bring about positive change. Some Asset Managers, such as Hermes Investment Management, have dedicated stewardship teams which actively engage with the companies in which they invest. But there are ways fund houses can support better business practices without doing the actual engagement themselves. Companies such as FutureFit can play a valuable role here, helping firms incorporate ESG principles into their business models. With young investors in particular becoming more discerning about where they put their money, only the companies which support sustainability will succeed.
Millennials According to Goldman Sachs, millennials are poised to reshape the economy; their unique experiences will change the ways we buy and sell, forcing companies to examine how they do business for decades to come. Millennials have come of age during a time of technological change, globalization and economic disruption giving them a different set of behaviours and experiences than their parents. They’re the first generation of digital natives, their affinity for technology helps shape how they shop and they’re used to instant access to price comparisons, product information and peer reviews.
This has far reaching implications for Asset Managers in the years to come and will be evident in the new generation of employees and customers.
Facebook’s Millennial Survey showed millennials don’t trust big financial firms, and they want their investments to reflect their principles. As well as being the investors of the future, they use new technologies such as mobile banking and embrace crowdfunding.
Millennials will make up around 75% of the workforce by 2025. They will not fit the traditional mould, demanding flexible working practices and a new challenge every couple of years. Another issue is the diversity problem in financial services. There is still low participation of women and minorities, especially in the most senior roles. This will mean the industry has trouble attracting young people who will want to see the diversity they are used to reflected in the company they work for. To draw and retain the best talent, Asset Management will need a shake-up – a tough ask for a conservative sector with a deeply ingrained culture.
To attract a millennials as a customer base, Asset Management will need to harness the power of fintech which is proving a much more attractive proposition for this tech-savvy generation. To attract millennials as employees, our advice is to take note of trailblazing campaigns such as Aviva’s which threatens to cut ties with companies without active diversity policies and challenge existing norms.
Busy times are ahead for Asset Management and with new regulation and trends coming in 2018, we expect a whole new tranche of trends to write about next year.
By Rory McMillan
Understanding what motivates Millennials is an important challenge for the Asset Management industry. Millennials, classified as anyone born between 1981 and 1996 according to Pew Research, represent a step change in attitudes and technical capabilities.
By 2025, Millennials will make up 75% of the workforce. They will be in charge of their careers, as evidenced by Deloitte’s 2018 Millennial Survey. Loyalty is not a priority – 43% envision leaving their jobs within two years and only 28% seek to stay beyond five years. Failure to engage this technologically fluent generation will risk losing the best and brightest future talent to other industries or standalone FinTechs.
So how can the Asset Management industry continue to attract and sustain the best talent given the very different expectations and habits of this incoming generation? We explore the two ‘make or break‘ factors; motivation and technology.
Daniel Pink’s 2009 book “Drive” describes how the classical ‘carrot and stick’ approach to motivation is outdated. Two separate items of research (Harlow and Deci 1971, Ariely et al. 2017) show that rewards routinely fail to improve, and often even damage people’s engagement with tasks. The consistency of the results stands testament to the fact that whilst attitudes change, the nature of our motivation hasn’t. Pink argues that motivation can instead be derived from three main factors:
Autonomy: the desire to be self-directed. Mastery: the urge to become better at things. Purpose: the aspiration to have an impact.
Applying these three factors to all areas of the workplace has never been more important for the future of the Asset Management Industry. Millennials require a working environment within which there are tangible short-term (as well as long-term) goals which are sufficiently challenging to invoke mastery, but doable enough to maintain autonomy. Purpose is more difficult to engineer as it encompasses a range of ideas which contribute to the aim of changing the world for the better. Encouraging diversity in recruitment is a good starting point but equal, if not greater effort should be channelled into sustaining such a varied community without alienating one part.
Establishing an evolving graduate programme that fulfils the above criteria is vital, and a good one will speak for itself. For a generation that expects instant access to price comparisons, product information and peer reviews when shopping, employee satisfaction surveys and recruitment buzzwords are old-hat, and real reviews via social media and stack exchange websites are the go-to source of insider information. One such community site, The Student Room, estimates that over 70% of all UK students visit the site every year. This kind of community can quickly build enviable or conversely negative reputations around industries or companies but can also be an opportunity in positive brand awareness and positioning for this vital cohort. Social media outlets such as Facebook and Twitter can have massive readership and one well-poised article can completely change the attractiveness of a company to potential future employees. Millennials are surrounded by more viable career paths than at any point in history. An eventual decision is as likely to be made based on online content found on web sites like Glassdoor, written by anonymous users with little to no industry experience, as it is to be influenced by advice from industry professionals, friends, family or careers services.
Millennials have grown up with computers in their homes and smartphones in their hands, so they’re well aware that the Fourth Industrial Revolution is upon us. The very nature of work is changing rapidly and industry 4.0 is characterised by the marriage of physical and digital technologies, such as analytics, artificial intelligence, cognitive computing and internet of things technology.
Asset Managers face a potentially significant drain on new talent at the heart of their businesses. In the context of Asset Management, being FinTech friendly is a big plus. Millennials see market-leading technology as something they both look for and expect in a company. Technology definitely counts in a big way towards the purpose factor in motivation if approached correctly. When it comes to mastery, about eight in 10 Millennials say that on-the-job training, continuous professional development and formal training led by employers will be important to help them perform their best. This engenders the loyalty and longevity which may go some way towards overriding Millennial autonomy.
FinTech, AI and other technological advances are gaining pace in the industry. Asset Management has the opportunity to be Millennial friendly and it must be to evolve and sustain itself.
It’s an exciting prospect to work in a firm which is changing the face of Asset Management as it presents an opportunity to change how the world works. However, Asset Management must first embrace the changing face of its workforce to attract the new generation of talent.