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The six biggest ‘gamechangers’ for asset managers
by Robert St George on Feb 10, 2014 at 14:29
PwC has identified six ‘gamechangers’ facing asset managers wishing to dominate an industry that will be worth $100 trillion by 2020.
Consultancy group PwC has predicted that global assets under management will pass the $100 trillion (£61 trillion) mark by 2020, up from $64 trillion (£40 trillion) in 2012.
To capture a greater share of this fortune, PwC has identified six ‘gamechangers’ that will fundamentally change the face of the global funds industry.
‘Amid unprecedented economic turmoil and regulatory change, most asset managers have not had time to bring the future into focus. But the industry stands on the precipice of a number of fundamental shifts that will shape the future of the asset management industry,’ said Rob Mellor, a partner at PwC.
‘Strong branding and investor trust in 2020 will only be achieved by those firms that avoid making mistakes that attract the ire of investors, regulators and policymakers. Asset managers must deliver the clear message that they deliver a positive social impact to investors and policymakers. The efforts required to satisfy investors and policymakers cannot be left to others.
‘The coming years will bring the industry higher volumes of assets than ever before which places more responsibility on firms to manage these assets to the best of their collective ability. Asset managers must clearly outline the value they bring to customers while being fully transparent over fees and costs.’
Alternatives become mainstream and ETFs proliferate
Traditional active management will continue to be at the core of the industry, as the rising tide of assets lifts all strategies and styles of management. But traditional active management will grow at a less rapid pace than passive and alternative strategies, in PwC's view, as the overall proportion of actively managed traditional assets under management will shrink. PwC estimates that alternative assets will grow by 9.3% per year between now and 2020 to reach $13 trillion (£8 trillion).
PwC estimates that most global fund managers will have significant ETF offerings by 2020 to cater for growing demand. These offerings will encompass both passive and active strategies, and will also service the need for swift market access to alternative strategies. They will likely provide higher margins to firms, given that ETFs have much lower operational costs.
It is expected that alternatives will become part of the tool-set employed in retail products, as investors seek strategies with the prospect of alpha and protection against downside risks. However, a blow-up in illiquid assets that affects retail investors could lead to a backlash and a retrenchment of this trend. Regulators in Europe and Asia are already watchful.
The industry will provide more education on alternatives to convey the message that the time horizons for such investments are generally long and the natural progression of performance is sometimes slow and not as visible as traded investment, PwC predicts.
Apple to enter asset management?
Asset management operates within a relatively low-tech infrastructure. By 2020, technology will have become mission critical to drive customer engagement, data mining for information on clients and potential clients, operational efficiency, and regulatory and tax reporting. At the same time, cyber risk will have become one of the key risks for the industry, ranking alongside operational, market and performance risk.
In a recent PwC survey, more than a quarter of asset managers were not sure whether the use of mobile technology for distribution or communication would play a critical role in their business. PwC expects that the expectation gap between customer needs and asset managers’ slow take-up of technology could provide opportunities for further new entrants to come into the industry.
The most likely source of disruption will come from social media or technology companies, which may combine their reach, knowledge and influence with banking alliances to provide compelling asset management propositions. PwC suggests that a social media firm like Facebook or Twitter or product providers, such as Apple (through iTunes) or Amazon could, for example, provide front-office services. They could also partner with, or even buy, a back-office servicing firm to create an integrated AM structure.
Fee models transform
By 2020 virtually all major territories with distribution networks will have introduced regulation to better align interests for the end-customer, PwC said. Most will be through some form of prohibition on payments to distributors as evidenced in the UK’s Retail Distribution Review (RDR) and MiFID II. This will increase the pressures of transparency on asset managers and this will substantially impact the cost structure of the industry.
Regulators may push on from RDR and regulate fees in their entirety. In India, a cap already exists and in the UK, the Financial Conduct Authority is currently carrying out a review of fee levels. The European Parliament recently suggested creating a pan-European observatory of fund fees. While regulators are already starting to compare and co-operate, PwC forecasts that by 2020 there could be full-scale ‘contagion’ and a global regulatory consensus could well be underway. With the unbundling of the value chain for products, asset managers will see decreased margins, placing the emphasis on scale and operational efficiencies.
Regional and global platforms dominate distribution
By 2020, four distinct regional fund distribution blocks will have formed which will allow products to be sold pan-regionally. These are: North Asia, South Asia, Latin America and Europe. As these blocks form and strengthen, they will develop regulatory and trade linkages with each other, which will transform the way that asset managers view distribution channels.
Asset managers will require boots on the ground because a rapport will have to be established with policymakers and standard setters in every jurisdiction of operation. Although there will be greater linkages at a regulatory level between many countries and regions, due to pressure from international standard setters, regulators will remain idiosyncratic in some areas.
The types of employees required by asset managers for these roles may be different from those currently operating in foreign jurisdictions. The soft skills of diplomacy and cultural knowledge and understanding will be as important as traditional functional skills.
A new breed of global managers
2020 will see the emergence of a new breed of global managers with highly streamlined platforms, targeted solutions for the customer, and stronger and better trusted brands. These managers will not only emerge from the traditional fund houses but also among the ranks of large alternative firms too.
The drive to achieve scale will be given further impetus as fee unbundling is rolled out across the world, PwC said. Many regions will see a decline in the number and power of intermediaries who rely on commissions, so asset managers will have to develop or expand their own distribution capabilities through alliances with fee-only distribution channels. This will also allow the asset manager to be closer to the end-customer.
Branding will play a major role in the desire to achieve greater scale. Brand will not just be important for asset gathering, but also for their own capital raising. The mega-managers of 2020 and beyond, as well as those firms that aspire to be mega-managers, will need to regularly tap capital markets to fund their expansion. In order to do this, they will need brands that are recognised in all the major markets.
Emerging from financial crisis
The regulatory and public backlash following the great financial crisis exposed how weak the asset management industry was in effectively communicating its position and distance from the tainted banking sector. It is only in the last couple of years that we have seen asset managers outside the US invest in teams focused on policy and societal usefulness.
Many firms remain hampered either by under-investment in such teams, PwC said. The industry by 2020 will increasingly focus on articulating its purpose, with broader messaging and PR campaigns. This will help the public to view the industry as part of the solution rather than the problem.