IM Outlook

Perspectives

Investment management outlook 2020

Crossing boundaries

We begin the new year in a familiar fashion. The bull market in the US equity market continued, yet margins for some investment management firms saw little respite. The cumulative effect of fee pressure, a shift to passive investments, and concentration of success in gathering assets will likely drive many firms to continue to take bolder actions to find growth, operate efficiently, and engage customers throughout 2020.

January 15, 2020

An article by Doug Dannemiller and Patrick Henry

This year many investment management firms are highly motivated to cross boundaries in search of profitable growth. Crossing boundaries often means leaving the comfort zone and performing new activities or doing standard activities in dramatically new ways.

Looking for controversy and recognizing success

How can you tell whether your firm is crossing boundaries? One indication can be organizational tension. Typically, not everyone will agree on the wisdom of crossing boundaries. If a lively debate ensues when considering a strategic growth choice, then it may well be one that appropriately challenges the comfort zone. Not all new ideas are good ones. So, emphasizing the value of developing the good ideas while screening the less-valuable ones efficiently often becomes imperative.

Success can be found by crossing boundaries with purpose—by modernizing business operations, and by upgrading technology infrastructure to capture growth, generate operational efficiencies, and enhance client experiences. In order to realize this kind of success, investment management firms may need to break free of their safe zones. And this is exactly the place where risk management can either be a catalyst for change, or a hinderance, depending on the maturity of the function and its acceptance at the strategy table.

“Success can be found by crossing boundaries with purpose—by modernizing business operations, and by upgrading technology infrastructure to capture growth, generate operational efficiencies, and enhance client experiences.”

Finding growth with markets and products

Investment managers make their growth choices for both the short and long-term horizons based on how they bring products to their respective target markets. There are typically four categories in a market and product view of growth:

  1. Diversification—expanding product offerings and geographic presence. Investment managers continue to rely on mergers and acquisitions (M&A) for this approach, and this trend is expected to continue in 2020. 
  2. Market development—finding new markets and investors for existing products. This important component of profitable growth for investment management firms will largely continue in 2020, as many managers are likely to keep their eye on the major demographic shifts in Asia. New technologies and regulatory changes may also open existing products, such as alternatives, to new investor segments.
  3. Market expansion—refreshing existing products for current target markets. Investment managers are increasingly turning to AI and alternative data to augment investment decision processes in a bid to stay current with expectations and provide compelling investing stories for existing products.
  4. Product development—new product offerings. Many investment managers are crossing traditional industry boundaries to offer new product classes, like active ETFs, and reimagine investment approaches, such as offering thematic funds.

Whatever the category, finding growth calls for new approaches. Embarking on a new approach in an environment with heightened competition and shrinking margins tests management resolve, but not making these tough decisions may also be problematic. Firms that grow their way out of margin pressure in 2020 will likely take action in one or more of these categories.

Creating operational efficiencies

Successful firms in 2020 and beyond will likely re-design their investment analysis and decision-making processes, the core investment operating engine, to incorporate the most recent data. With the growing adoption of digital technologies, many firms are shifting to a “save-to-transform” mindset that marries cost-cutting with strategic enablement.1

Modernization of risk management is expected to go hand-in-hand with operational transformation for firms crossing boundaries to find profitable growth throughout 2020. Firms with a modern risk management framework may be able to drive growth by acting as a catalyst for change while maintaining the tradition role of stewardship. The catalyst role in risk management facilitates change and recognizes the strategic risks associated with complacency in a changing marketplace. Risk management can be a strategic enabler, and a partner for growth, when the risk management approach is modern and robust.

Along with expanding roles for risk management in 2020 comes a shift in the nature of the work. With more emphasis on strategic relationships and the extended enterprise, the first line of defense for risk, operations management, may be external. This shift makes partner selection, oversight, back-up, and replacement valuable components of a risk management approach that may not have been necessary for in-sourced operations. During the drive for operational efficiencies, many successful firms will likely cross the cost-cutting boundary and move into a save-to-transform world.

Is your firm ready to operate differently?

Customer experience and engagement

Consumers across the globe are more mobile, read more product reviews, and buy more online than ever before. Tech-savvy firms provide seamless digital user experiences and anticipate their needs to offer exactly what they want. Customer experience (CX) has become an important factor in the evaluation of investment managers by their clients, retail and institutional alike. CX is a constantly moving target, and it matters in both client retention and acquisition. The truism, if you are not making improvements in CX you are falling behind, fits this marketplace. Technology developments are enhancing capabilities, and client expectations are always on the move. In 2020, mass customized digital reporting is likely to become one of the new capabilities signaling leadership. CX is likely to be one of the beneficiaries of crossing boundaries. Some firms will likely transform their operations in ways that also enable a comprehensive view of data across front, middle, and back-office processes.

What actions will your firm take in 2020 to meet changing customer preferences?

2020: Thriving in new territory

In 2020, the battle for profitable growth is more likely to intensify than dissipate. Investment management firms that develop and execute upon strategies that not only push the boundaries but cross them will likely lead the pack. Even strategies to grow in current markets with current products require revitalization. Firms that have command of data and processing, and keep client relationships at the forefront as they seek to expand their business, run operations with a “save-to-transform” mindset, and delight customers may attract a greater share of asset inflows. Crossing boundaries is harder than incremental change, but some developments can’t be achieved without doing things differently.

How is your firm preparing to face these challenges in 2020 and beyond? You can see further detail on these issues in our 2020 Investment Management outlook, and we welcome the opportunity to discuss these important issues and how they relate particularly to your firm.

What do you think? Please reach out.

Join the conversation on Twitter: @DeloitteFinSvcs.

Endnotes

Aguilar and Shaikh, “Global Cost Survey 2019.”

QuickLook is a weekly article from the Deloitte Center for Financial Services about technology, innovation, growth, regulation, and other challenges facing the industry. The views expressed in this article are those of the author and not official statements by Deloitte or any of its affiliates or member firms.

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