What lies ahead for asset managers in 2018? We see several headwinds that firms will need to navigate. The industry will experience an ongoing shift to passive products in response to inconsistent performance, fee pressure and the movement to advisory business models. Also, the costs associated with adjusting to new regulations, such as MiFID II and the push for a best interest standard, will mount. Finally, firms will have to adapt to the new abnormal in distribution as shelf space continues to shrink and new nontraditional competitors enter the market.
Regardless of where and how firms are in responding to these macro trends, one thing is clear:
Profitable growth is more difficult and elusive than ever before.
Our recommendation? Asset managers should explore “The Big Three”:
#1 Journey to the Cloud
Technology could not only enable business growth, but also change how to achieve it. The cloud is playing a crucial role in that because you pay as you go, technology is always up to date, and no offshore infrastructure team is required.
Cloud adoption in the capital markets has been slow, hindered by data concerns and legacy applications. What’s the way forward? Devise a clear strategy that prioritizes control over critical assets. The proper cloud strategy fosters cost reduction, top-line revenue and cyber resiliency because:
- For cost—it could dramatically reduce the firm’s technology footprint and shorten the development lifecycle.
- For revenue—it could promote the creation of new business models, which helps firms adapt timely and frequently to offer better client and employee user experiences.
- For cyber resiliency—it could increase the ability to combat threats because the right partner has greater technology resources. Of course, firms still need other defenses and a robust cyber security strategy.
Kudos to the cloud: It could help firms change and strengthen their business and provide an opportunity to add value. As such, it drives growth and profits.
#2 Cognitive Technologies
In 2018, firms will accelerate efforts to examine their workforce strategy. Our projection: they will add a range of integrated automated technologies to their resource mix. Two stand out: robotic process automation (RPA) and artificial intelligence (AI).
RPA increases efficiencies, reduces risk, lowers costs, enhances accuracy and improves employee experiences. It can be applied across the middle and the back-office as well as corporate functions. There are several real examples of how firms are using robotics: anti-money laundering processes, reconciliations, reporting, onboarding and resolution of unmatched trades. Another plus provided by RPA: when implemented at scale, it could offer rapid ROI.
AI technologies and applications are powering analytics and businesses in new ways—they help users realize, comprehend, act and learn. This, in turn, can unlock an abundance of economic possibilities that were previously concealed or inaccessible. AI could transform an asset manager. It could optimize distribution strategies, streamline compliance practices, drive down operational risk and lead to richer client and employee experiences. In all, AI has tremendous potential to impart value.
#3 Operating Model
Delivering the same products or services for less cost or more for the same cost is a core tenant of business. In today’s profitability squeezed scenario, operational efficiency is a must for asset managers.
There are various ways to realize operational gains—outsourcing, business process redesign, and new platforms are just some of them. Regardless of the means, one thing is clear:
The operating model needs to change.
Transforming the operating model by itself might be the most difficult tactic firms can pursue to improve efficiencies. It also has the longest fuse in terms of payback. Current functions, activities and roles may have been established more than 25 years ago. Thus, implementing changes can be a herculean task—and the right model is not always straightforward.
What’s the solution?
- Realize the industry is changing
- Adopt a firm-wide long-term, holistic view, guided by an executive vision of the future
- Build a new “greenfield”-based operating model that is forward-looking and not overly influenced by the past
Change and challenges can morph into abounding opportunities. In 2018, firms will need to embrace foresight, resilience, agility and innovation. To evolve, wise asset managers should wrap their strategy around the Big Three.