Accenture’s latest research – our Capital Markets Vision 2022 report – reveals that asset management is one of the most profitable sectors in capital markets. Despite, and partly because of, this success, we expect the next few years to be challenging. The economics that have led to this profitability, combined with the constant threat of disruption, are likely leading the industry into a squeeze scenario causing margins to decline despite a continued growth in volume. Consequently, the pressure for change is building. Shareholders, regulators, and customers are all looking for asset managers to deliver higher value at lower cost. To do so, asset managers will need to seek and obtain scale, the most significant obstacle to sustained success.
This is not only a reality for asset managers, but it applies to other capital markets firms as well. All industry players will have to abandon the “lucrative inefficiency” that they’ve enjoyed for so many years. In fact, we believe that all firms could expect their business model to be challenged in the years ahead. Productivity will need to rise and cost structures will need to be reformed. As expense ratios decline and product commoditization is on the rise, efficiency gains will be the focus – and will need to be obtained through end-to-end industrialization.
Consider that only about half of asset managers’ cost bases are devoted today to their core functions of manufacturing and distributing their investment products. That’s an unsustainable reality that will not last – and it makes the sector highly vulnerable to disruption.
Digital disruption is already reshaping the industry
Disruption is no longer a hypothetical threat. Technology-led innovation is shifting the balance of the industry core, and asset managers need to be fully aware of the risks and opportunities it creates. Two technologies in particular – artificial intelligence (AI) and distributed ledger technology (DLT) – have profound implications for the sector.
AI will drive significant change, both in generating and extracting alpha for clients and in making the back office more efficient. And, although still in its infancy, DLT could bring significant opportunities in areas like updating reference data and creating digital asset vehicles. It could significantly ease the operational burden asset managers face of constantly reconciling multiple different views of the same data.
In fact, digitalization will expand to cover the entire capital markets value chain, creating new sources of revenue and making others obsolete. Will current leaders in the industry be ready? Will smaller competitors invest to compete? Or, will industry outsiders disrupt from the outside?
Planning a journey to the new
To adapt, asset managers must look beyond their near-term situation and current profitability and start thinking about their own change journeys. They must ask themselves these key questions:
- What will our operating environment look like in 2022? What opportunities does it create?
- How do we need to adapt to thrive in that environment?
- How do we do so given resource constraints and profitability pressures?
At Accenture, we’ve been talking to players across the capital markets industry, and we’ve developed a framework of 17 key strategic decisions to help firms find their own answers to these questions.