Redesigning the asset management operating model

As we look forward across the next five years, operating margins across all firms will continue to face pressure. Alex Birkin - EMEIA Industry Leader and Global Advisory Leader, Wealth & Asset Management, Ernst & Young LLP - discusses why asset managers need to embark on unprecedented strategic transformation programs, addressing multiple dimensions of the business.

The combination of the following drivers and the growing momentum of change will transform the industry over the next five to seven years:

Increasing fee compression

Increased sophistication on behalf of both institutional and retail investors, as well as regulatory, political and public awareness over value for money, will continue to drive fees lower while increasing risk transparency.

Rising value of brand and trust

Global brand recognition of pure-play asset managers will dominate both retail and institutional channels to drive flows.

Macroeconomic factors drive product development

Product innovation over the next decade will be driven by the confluence of lingering low interest rates in countries with major capital markets, aging populations in developed countries, the need for asset protection and the continued shift of retirement from employer or the state to the employee.

Acceleration of the barbell effect

In 2016, net new assets (NNA) flowing to the top 10 represented 69% of all NNA. This winner-takes-all phenomenon is accelerating the barbell, with managers concentrating on passive products at one end, and a new breed of alternatives at the other end.

Asset owners as competitors

Asset owners will increasingly move away from using professional sub-advisors to manage non-complex asset classes themselves.

Blurring of the distribution value chain

The asset and wealth management value chain will converge as manufacturers with primarily intermediated distribution models develop direct channel capabilities and large-scale wealth firms launch their own registered products to more effectively control product costs.

Talent

Automation in all post-execution and some pre-execution processes will eliminate human intervention in operations. Firms will continue to invest in talent and higher-level capabilities to enable a model where technology addresses repetitive operational activities, and highly skilled individuals focus on tasks that deliver competitive advantages.

Outsourcing

Outsourcing the middle and back office to global custodians and non-traditional, specialty managed service providers is gaining traction as the operating model for both commoditized accounting functions, and increasingly more complex capabilities.

Technology

FinTechs and other non-traditional technology providers are viewed by wealth and asset managers as a source for technology infrastructure and solutions via acquisition. In addition, the evolution of top asset managers as technology providers suggests that the major technology disruptors will be traditional firms that acquire or improve on ideas from FinTech or consumer product firms.

A holistic transformation

Asset managers must address every core function of the enterprise if they are to successfully transform:

1. Distribution, sales and marketing

Firms are redesigning their distribution and adopting technology to address rapid shifts in product demand and service levels across institutional, retail direct and intermediary channels. From a product perspective, firms are adopting lifecycle views and engaging resources from investments, operations, finance, risk, compliance and distribution to thoughtfully assess the end-to-end impact and cost of new product or mandates.

2. Front office

The front office of the future will be driven by data flows and technology environments that are highly integrated from front to back. Streamlining the number of duplicate applications, reducing the number of market data vendors and assessing renegotiation strategies will be high on the data agenda.

3. Middle office

The middle office is being transformed as managers increasingly demand outsourcing providers address the need for data management and oversight solutions. Firms are deploying technology to drive value on three dimensions: operational efficiency, data quality management, and big data analytics. Middle-office operating models are being designed to enable smarter segmentation of content, enhanced digital experiences and more responsive service.

4. Back office

The technology investment required to support top-tier firms as they approach or breach the trillion-dollar AUM mark forces a strategic decision on sourcing. Firms have optimized the 24-hour clock with smart location strategies while also enhancing functionality surrounding the core accounting platforms. Large global custodians with asset servicing offerings are key to the next generation of investment firms’ back offices. In addition, there are clear incentives to adopt automation in the back office and redeploy skilled resources to higher-value roles.

The bottom line

The winning asset management firms of the future will be those with:

• Focused operating model strategies
• Well-designed infrastructure investment plans
• An understanding of how to harness data and enable analytics to inform decisions across the enterprise
• Forward-looking views of new individual and institutional expectations and how they shape investor experiences

Collectively, these attributes will result in organizational and operating models that are designed to proactively change on a continuous basis and in line with market opportunities, rather than just reacting to change periodically and defensively. To learn more, contact us or read this year’s EY report on the new asset management global operating model.