2019: Where bold ideas gain traction

December 12, 2018

A blog post by Patrick Henry, Investment Management practice leader, Deloitte & Touche LLP

Picking the right growth options

Will 2019 be different from 2018? For many investment managers, yes! Those firms breaking ground on new developments will likely see contrast afforded by a new perspective. No doubt, most investment management firms still face challenges such as margin compression, regulatory change, rapid technological change, and shifting investor preferences. Just as necessity is the mother of invention, these pressures are driving firms to find avenues for growth, improve operational efficiency, and develop elegant customer experiences.

In order to achieve growth, capabilities have to improve, because the competition is stiffer in both emerging and traditional markets. New technologies, such as artificial intelligence, are being increasingly deployed in search of a competitive edge.

Many firms will choose to grow their current products and markets, but this is not to be confused with business as usual. They still have to refine, if not revamp their investment operations. While some firms might pursue incremental improvement strategies, others are expending considerable effort to improve their core investment capabilities. Since the markets are always pricing in more information—never less—active investment management firms should consider looking for ways to build deeper insights into the investment process, just to keep up.

Keeping up is important. For mutual fund managers in particular, many of the large advice-driven distributors are trimming funds from their shelves. More than 4,900 funds have been dropped from the shelves of leading distributors over the past two years.¹ This shelf-space dynamic demonstrates that competition for distribution is stiffening. Differentiation and innovation help investment management firms from being left out.

To get ahead, many firms are considering expansion into China, and joint ventures and acquisitions are often part of that strategic decision. At its current double-digit growth rate, China will become the world's second largest market for investment in the next decade.²

Running efficient operations

Recent technological advancements are enabling efficiencies across the investment management value chain. Firms are realizing efficiency opportunities by streamlining information throughput for portfolio managers and analysts. Artificial intelligence in the form of natural language processing (NLP) and natural language generation (NLG) can be deployed to read, summarize, and prioritize information for these decision makers. Imagine the time saved and the robustness added to investment decisions in an office where the analysts are focused on just the most impactful reports. Sometimes the biggest barrier to achieving these gains is getting the people involved comfortable with the new process.

Regulatory changes can also impact operational efficiency. Recent US tax law changes at the state and federal level are causing firms to consider moving headquarters locations within the US Brexit, scheduled for March 29, 2019, has firms considering the fund management and registration locations for products offered in the UK and across Europe. In each case there are likely multiple viable approaches, each with its own pros and cons.

Private equity firms are also reevaluating deal structures based on the changes in US tax law. One of the points under consideration is the level of debt used in financing, based on new ceilings for interest deductions. In addition, deals structured as asset purchases may see an uptick in 2019, based on changes in the deduction schedules.

Delivering the next level of customer experience

Choosing the right digital transformation plan is dependent on growth and operational efficiency strategies, with some bold growth strategies needing greater levels of transformation. Existing customer segments are important to continuing operations and generally require only incremental investment. Serving customers in new demographics with different preferences, however, typically requires a leap to new capabilities. Some of these strategies lead to competition with new entrants that possess digital DNA. Incumbent firms with profitable customer bases and legacy systems may require transformation to satisfy customer experience expectations. Incumbents may have a tougher road to create function-rich new services, such as digital voice assistants. They do, however, have large stable operating models that currently satisfy those customer segments that own the bulk of investable assets. Will incumbent firms develop customer experience capabilities in line with Millennial's expectations in time to win their relationships?

Ready for action

The industry has faced the same pressures for a few years running with no abatement expected. In the coming year, some firms will likely embark on projects that both delight their current customers and lay the groundwork for winning emerging segments in the future. How long will it take to modernize your operating model? How does the future look from your firm's perspective?