People have been talking about the “do or die” transformation imperative in the asset management industry for a long time. But death isn’t really on the agenda. The sector is way too successful for that.
In fact, asset managers are some of the most important and profitable players in the entire capital markets space. Accenture research found that for the one trillion dollars of revenue generated by the capital markets industry in 2017, 90% of the economic profit came from the buy-side.[1] It also showed that buy-side players are amongst the most profitable, keeping 10 to 15 cents per dollar of revenue as economic profit, with illiquid alternatives managers registering a blockbuster year in 2017 and breaking the 20-cent mark on this metric.
But which firms are driving this result overall? From an economic profit perspective, we know that bigger isn’t always better. The largest players are not yet able to systematically translate scale into profitability. That’s another empirical fact from our research.
So, what is the key to success from now on?
What’s needed today is to look beyond current profitability and recognize that the future is going to be very different from the past. And it’s a future that’s going to be defined by three powerful and irresistible shifts – drivers that are challenging players to think, act and be different:
- New economics: from product supermarket to niche supplier
- Business model evolution: new focus on both existing and emerging client bases
- Digital evolution: human and machine working together
Three irresistible shifts
First, new economics
The shift to passive products at the expense of active management – and a fundamental rotation to broad alternative investments – is driving an industry-wide product rationalization effort, as players evolve their operating model and pick their targets carefully. The days of being all things to all people – a product supermarket marketed as an advice provider – are over.
These new economics today have extraordinary implications for the business model. We see that many asset managers have a smaller number of products generating most of their profitability. Assuming these products have their fees greatly reduced, what does this mean to operating costs and future investment?
Second, firms clearly need to evolve their business models with a focus on the customer
Client preferences and expectations have changed. Players need to evolve to manage the ongoing shifts in customer behavior, ongoing regulations and technology innovation.
The “old” ways of working forgave midsized firms with no competitive advantage; but today consistent performance can usually no longer mask a firm’s structural challenges. In the past, captive midsize to large players could rely on their parent bank or insurance company’s distribution network to drive sales; no more in today’s world.
Current and potential clients have more choices at their fingertips than even three or five years ago. Asset managers must develop deeper, more meaningful customer relationships to deliver the right offering to the right client, and at the right time. Any enhanced competitive positioning will need to be driven by strong client relationships.
Third, this is where digital will play a pivotal role
The industry is on the cusp of unprecedented change, with a blizzard of technological breakthroughs taking place and new fintech and other competitors hungry for a share of that $50 billion economic profit pool uncovered by our research.
Applied intelligence, analytics and cloud could be driving very significant cost savings and disproportionate market share gains through digital acquisition and servicing of clients. Selected players have also been moving forward with the adoption of some DARQ technologies.[2] Firms that can truly harness the potential of these technologies could see a superb advantage.
Defining the industry’s future
Two DARQ technologies in particular will define the future of the industry; shaping nearly everything from prospecting to selling and distribution. The key here is to move beyond conventional perception and change the narrative to fit the industry.
- Distributed ledger technology (DLT) has tremendous potential and will likely cause larger changes over the long-term than artificial intelligence (AI) as its ability to bend the cost-curve is extraordinary. But it’s not yet a permanent solution. Players need to continue working within the legal, regulatory and ethical guidelines to move aspiration to reality around DLT.
- AI has evolved to “applied intelligence” as there’s nothing artificial about intelligence: it’s humans and machines doing things together that they were not able to do before. Algorithms can power investment ideas; but it is a human who ultimately makes the investment decision.
We are seeing additional results from AI realized in two specific areas: alpha extraction and product generation. The early impact of AI also shows promising results in monetizing transactional data and services, coupled with intelligent automation of knowledge intensive tasks like risk, automating the Investment Banking division and research.
AI is also driving a demonstrated increase in client relevance. For example, asset managers might use social listening to understand what third-party intermediaries are saying about their firm in the marketplace. The importance of this effort can’t be underestimated, as reflected in changing client preferences. For example, millennials now hold 30% of their investments in cash.[3] And over the next 30 years, an estimated $36 trillion of wealth will change hands from one generation to another.[4] But they are wary of financial services due to a lingering hangover from the financial crisis. AI-driven tools like social listening can deliver real-time insight and a platform for asset managers to tweak their engagement model to win within a new client target.
No single silver bullet…
One thing is for sure; the pressure for change is now irresistible. We’ve just released a survey where 40% of the asset managers we spoke to (representing about $15 trillion in assets) believe that technology is the future. But their current business strategy is hindered by legacy operations and technology environment – despite the fact that around two-thirds have made significant investments in technology over the last three years.
The logic is that technology is shifting, constantly moving and the winners will be those who embrace, engage and enable this across all parts of their business, products, services, engagement and value chain.
I’m not saying there’s a single silver bullet here. But what’s clear is that maintaining the status quo isn’t an option. With digital becoming pervasive throughout this industry, the art of the possible is like nothing you’ve ever imagined before. It’s time to turn it into reality.
Where do we go from here and what will technology look like in 2022? More from our research here: https://www.accenture.com/us-en/insights/capital-markets/capital-markets-vision-2022