Make, buy, partner or collaborate – is this the new normal in investment management?

The day-to-day for wealth and asset management firms is changing along with the evolving economic landscape? Make, buy, partner, or collaborate? Hermin Hologan, EMEIA Wealth & Asset Management Leader, EY, shares his observations and vision for the future.

I was talking to a client the other day about ecosystems in investment management and they said, “Yes, we’ve heard that word a lot, but isn’t it just a piece of consulting jargon?”

A few years ago, maybe that was the case. Wealth and asset management companies were doing fine on their own and entering into partnerships wasn’t something they needed to contemplate.

But in recent years, the landscape has become more challenging. Factors such as the speed of technological change (and the cost of keeping up with it), clients’ demands for more immediate and personalized investment advice, and the difficulty of achieving growth in a crowded market, are forcing wealth and asset managers to think about how they can develop a unique selling proposition that will make them stand out from their competitors.

In the past, the decision would essentially come down to “make or buy”: Expand the capabilities of the company organically or use mergers and acquisitions to bring in existing capabilities from outside. Today, the decision is “make or buy or partner,” and it’s those partnerships that are forming ecosystems.

This is happening in all sectors, not just wealth and asset management. An EY-Parthenon study of more than 800 business leaders that are leveraging at least one ecosystem business model revealed that ecosystems make up, on average, 13.7% of their total annual revenues, drive 12.9% in cost reduction and generate 13.3% in incremental earnings.

Complementary skills

The companies that are forming these ecosystems of strategic partnerships are largely those in the tier below the major players of the investment management world; the organizations that don’t have the scale to offer all of the solutions today’s clients want, the capacity to build those capabilities in-house, or the funds to acquire companies that can provide them. For them, partnering with complementary specialists is a great way to remain competitive.

Having said that, even some of the big industry players are joining in. For example, one of the largest global asset managers has partnered with a specialist data-as-a-service company to leverage its expertise in optimizing data capabilities. I don’t think that would have happened five years ago.

Filling gaps

So, which gaps are companies using partnerships to fill? Technology is an obvious one, given the relentless pace of change, and many wealth and asset managers have teamed up with fintech and regtech companies. Another common example is managed services — which is often where the EY organization comes in, helping manage internal functions such as risk, finance and tax operations, compliance and reporting on behalf of clients.

Indeed, as well as being an ecosystem partner to companies we work with, the EY Wealth and Asset Management team often act as conveners of ecosystems ourselves. We work with a wide range of trusted service providers, and the fact that they’ve been through our stringent review system gives clients confidence in them. This is one of the principles behind EY Nexus for Wealth and Asset Management, a business transformation platform that leverages the power of an extensive, curated partner ecosystem.

Relationship issues

If you’re thinking of exploring partnerships, there are a few issues to consider. First and foremost, is your potential partner compatible with your company’s values and goals? The chances are that you won’t see any tangible results from the partnership for a while, so you need to enter into a contract with a duration of five to 10 years. It’s a bit like getting married, in a way, only with built-in legal mechanisms to break the partnership if something goes wrong.

Another consideration is how you present the relationship with your ecosystem partners to the end client — if at all. And to whom do those end clients belong if they’re being serviced by multiple partners? Who owns the client and the related relationships? Then there are other third-party risks, such as the potential for costly data breaches. All of these risks need to be carefully evaluated before entering into a partnership.

Nevertheless, as I assured the client I was talking to, ecosystems are definitely a reality, and I expect to see more of them developing over the coming years. For reasons of strategy, cost and overall competitiveness, it makes good business sense.

For more insights, check out the EY Reframing the Future of Asset Management report which examines the benefits of "leveraging external opportunities" in combination with 5 other focus areas to help Asset Managers generate sustainable, profitable growth through greater focus and efficiency.

The views reflected in this article are the author’s and do not necessarily reflect the views of the global EY organization or its member firms.