2018 Investment Management Outlook
Vision and focus to drive success
Narrowing profit margins and stagnancy will put added pressure on asset management companies. Some exceptional companies will rise above the malaise of averageness and will excel in this challenging environment. As millennials grow in importance, winning firms will retool by focusing on three key areas: restructuring product portfolios, streamlining operations, and delivering technology-inspired customer experiences designed for the digital era. Their success will require a vision for the future and a tenacious focus on near-term execution to turn aspiration into strategic advantage.
Topic one: Growth through action in 2018
Given the margin pressure on the IM industry and the potential for economies of scale inherent in managing money, 2018 could be the year that records the highest average M&A deal value for the IM sector and 70 percent of new hedge fund launches globally will likely include investment processes that are supported by computer models, including AI and machine learning algorithms.
IM firms can consider the following action points for augmenting their growth strategies:
1. Firms considering being acquired should also consider mergers with similarly situated firms as a way to achieve scale that may mitigate high-valuation roadblocks.
2. Re-evaluate the current technology architecture to align with growth plans, as a shift to alternative data and AI mat require significantly more storage and processing capabilities.
3. Manage the product portfolio to balance the need for product breadth with the firm’s capabilities and investor and distributor preferences.
Topic two: Run more agile operating models
In a recent Deloitte survey, 81 percent of IM firms cited regulatory risk as a top challenge, and expected this risk to become more important over the next two years. The rising cost of regulatory compliance and margin compression, driven by the popularity of low-cost products, seems to have accelerated the need for operational restructuring. Firms may find that they can rent talent and technology while owning the processes and oversight to help achieve agility, increased efficiency and reduced cost to manage risks at a tolerable level.
Considering the following action steps could help make rent vs. buy strategy decisions with respect to technology and talent:
1. Determine if implementing cloud solutions or engaging external service providers fits with the strategic plans for future expansion or increased capabilities.
2. Consider risk-based resource allocation as part of operating model transformation.
3. Develop management controls around process changes and around the new processes themselves.
Topic three: Incremental or quantum change to digital service
A Fortune 500 firm, IM incumbent, or digital experience leader could offer an intefrated digital customer experience investment platform that raises the bar for customer experience to outpace smaller stand-alone fintech startups in the US and Europe. To keep up with the ever-changing customer service landscape, it is important for IM leaders to plan digital servcie strategy to keep pace with preferences of the target customer segment. Targeting Millennials could demand quantum change in digital sercie as they rewuire more digital trust and online relationships, while targeting other segments such as Baby Boomers may just be an incremental change, calling for an early majority technology adoption strategy. Robo-advice is expected to see continued, but slowing, growth as the base expands.
To monitor current customers and understand new customers, IM leaders should answer the following questions:
1. What is the cost for acquisition?
2. How profitable are they?
3. How does my customer profile differ from key competitors’ customer profile? Is there a customer segment that should be targetd?