It has long been said that the asset management industry’s keys to success were grounded in Product, Price, Placement and Performance. The firm that consistently hit on all could expect to win in the marketplace while delivering increasing value to its shareholders.
These four fundamentals still apply. However, we are at the beginning of a sea change in the way people invest, which ultimately affects the asset manager’s operations. At Accenture, we call it the “rotation to the NEW,” where firms must anticipate and plan to remain competitive in years to come. The NEW is about combining technology and business transformation to write the next chapter in an enterprise’s history.
Many asset management firms are adapting to these trends by finding novel ways to manage risk, engage customers and achieve growth. For others not yet on this path, there’s still time … but the time is now.
In “rotation to the NEW,” predicting prospective portfolio preferences proves problematic
What are the changes from the “traditional” to the “rotation to the NEW” with a focus on technology and operations?
Source: Accenture Research. View the image.
Product
Retail investors used to avail themselves mainly of mutual funds in three broad types: equities, bonds and cash. Today, investment options have expanded and vehicles are diverse. The talk is about “outcome-oriented investing” and the use of alternatives as an integral part of the mix. ETFs provide easy access to a variety of investing strategies. Institutional mandates continue to be highly sought-after targets, as their assets can be onboarded quickly, serviced at scale and tend to be stickier.
The operational impact of the NEW is widespread. Portfolio managers need to view positions and exposures across all products in near real time. Technology and operations teams are meeting this challenge with the investment book of record – IBOR. The focus on winning institutional business requires a higher level of operational sophistication to satisfy the highly customized requirements on which many institutional clients insist. Most importantly, technology and operations must incorporate a comprehensive data management strategy, which supports decision-making, analytics, regulatory mandates and client reporting.
Price
Expense ratios always have been important to investors. In the NEW, distribution cost structures are changing. Low-cost ETFs are the main beneficiaries. Morningstar is calling this era “Flowmageddon,” as one-third of the top open-ended mutual funds followed by Morningstar have had outflows of 10% or more in the last year.[1]
Management firms are responding by bending the cost curve. They are conducting outsourcing suitability exercises and reviewing the cost benefits of the cloud against the potential security risks. Technology and operations teams also are launching “digital” initiatives aimed at automating many of their core processes.
Placement
The Department of Labor fiduciary standard has changed the way retirement investments are sold. This could be the tip of the iceberg, as expansion of the standard by the SEC to all investing could force firms to reconsider how their retail funds are distributed. There are several operations and technology implications. Many firms are rolling up share classes and discontinuing 12b-1 fees. Others are launching hybrid robo products, which combine automation of the robo advisor with the personal attention of a traditional investment advisor.
Finally, as many recognized brands only exist on mobile apps, firms are rotating to the NEW and deploying technology to become better fiduciaries and enhance their clients’ mobile experiences to provide simple, yet elegant views of their investment results. The same holds true for mobile-enabling the sales force.
Performance
In a low rate environment, institutional and retail investors are seeking higher returns from a variety of sources. This is why alternatives now form an important part of investor portfolios. In the past, performance was attributable to “star” portfolio managers – today investment committees and quantitative analytics are more likely to drive alpha. Asset managers are going global, buying boutique firms that have delivered successful performance. Each of these strategic paths to growth has an impact on operations, from the valuation process to integrating the acquisitions.
Now is the Time
All of the changes above will permeate the industry progressively and a successful future will be a measure of a firm’s ability to adjust ─ or not ─ to the evolving landscape. Cost containment initiatives can only take a firm so far. The “rotation to the NEW” requires asset management firms to use technology and transformation strategies to ensure its Product, Price, Placement and Performance are preferred by investors.
[1] It’s Flowmageddon!, Russel Kinnel, Morningstar Blog, 04-07-16