Three areas of focus for investment managers
Challenging—this is perhaps the most used word across my client conversations as I discuss their plans for 2018. Indeed, there are a number of challenges facing investment management (IM) firms: margin compression, shifting consumer preference, regulatory changes, tax reform, and technological advancements.
January 3, 2017
A blog post by Patrick Henry, Investment Management practice leader, Deloitte & Touche LLP.
At Deloitte, we continue to collaborate with clients so that they can thrive in any environment. Three key questions kept cropping up among clients across scale, geographies, and product categories:
- How do we continue to grow our business?
- How do we run our business more efficiently?
- What changes could we incorporate to service our clients better?
Let’s look at how investment managers can address these areas for 2018.
Growth through action in 2018
In the face of skewed fund flows and rising operating and regulatory costs, investment managers’ quest for growth becomes more difficult. In such an environment, IM firms should bolster their organic and inorganic growth strategies with targeted action plans. IM firms could rely on the combination of unlocking some of the benefits of scale and sharpening skill for pursuing growth in 2018.
Operating on a larger scale provides an investment manager with factors contributing to growth, such as greater distribution reach, a more diverse talent pool, broader product portfolio, and cost efficiencies. IM firms also require new skills to stand out among the competition, and mergers and acquisitions often provide the ability to acquire these new capabilities quickly.
Another approach includes focusing on creative ways of alpha generation. Hedge funds have taken the early lead in adoption of advanced analytical techniques (including artificial intelligence and machine learning) in combination with alternative data sources (including satellite imagery, consumer transactions, online reviews, and web-crawled data) to generate alpha.1 Investment managers pushing the envelope by utilizing different technologies, analytical capabilities, and alternative data sources for generating alpha may be positioned for sustainable growth.
Run more agile operating models
Chief operating officers (COOs) of IM firms are battling unique challenges to attain better cost efficiency and improve profitability. Operational agility is the need of the hour, especially with regard to talent and technology. COOs can focus on “renting” talent and technology, to achieve the desired level of agility and efficiency, while retaining control of proprietary processes.
On the talent front, investment managers are increasingly relying on third-party full-service providers for middle- and front-office activities to reduce their fixed operating costs.2,3 While managed services and staff augmentations are some of the options to achieve this, IM firms also need to optimize the control of outsourced operations, as the ultimate responsibility rests on management’s shoulders. Establishing long-term partnerships with these third-party service providers is essential for continued success.
Investment managers now require agile and flexible technology systems for lowering operating costs and developing a scalable infrastructure. IM firms are investing in cloud-based delivery models and systems (including software as a service) to achieve better scalability and transform current processes. These transition steps can help investment managers better position themselves for greater operational flexibility as well as competitive differentiation.
Incremental or quantum change to digital service
Investment managers currently facing a conundrum regarding changes required to their digital customer service modes: Will incremental changes suffice, or is quantum change required? The answer perhaps lies with the target customer segment.
IM firms targeting legacy client segments may need only incremental change to stay aligned, but even these existing clients are demanding more complete and timely access to information. On the other hand, firms that target millennials may require a quantum change in relationship approaches, advice delivery, and product portfolio.
These changes, incremental or quantum, should align with corporate strategy. The difficulty here is that few firms have strategic planning horizons that extend far enough in the future to account for the vast pool of wealth that will be controlled by millennials in the next 15 to 20 years.4 When is the right time to start targeting this segment, if relationships with them when they are wealthy will be important?
Looking ahead, 2018 might be a busy year for investment managers, as they look at introducing changes (incremental or quantum) across business functions. For a more detailed look toward the coming year, please read our 2018 Investment Management Outlook, or reach out to us to schedule an in-person discussion. We believe that IM firms executing on these three focus areas with renewed vigor will be better positioned to meet their long-term goals. What do you think? What are your firm’s focus areas for 2018?
1 Doug Dannemiller and Rohit Kataria, “Alternative data for investment decisions”, Deloitte, August 2017
2 “Three More European Buy-Side Clients Select Thomson Reuters Award-Winning Know Your Customer Managed Service to Complement Their Due Diligence Processes,” Press release, Thomson Reuters, August 10, 2017.
3 “Outsourcing: The New Normal?” Blue River Partners, Eaton Partners, 2017.
4 G.C. Kane, D. Palmer, A.N. Phillips, D. Kiron, and N. Buckley, “Achieving Digital Maturity” MIT Sloan Management Review and Deloitte Insights, July 2017.
QuickLook is a weekly blog from the Deloitte Center for Financial Services about technology, innovation, growth, regulation, and other challenges facing the industry. The views expressed in this blog are those of the blogger and not official statements by Deloitte or any of its affiliates or member firms.