Shaping the future - fewer funds, lower fees, and FinTech

Meaningfully tackling such a broad subject as ‘shaping the future of asset management’ was the unenviable task facing the panel at Tuesday morning's Business Leaders Forum at FundForum 2016 Berlin. How can asset managers achieve a sustainable business?

Product development, along with understanding client needs better, coping with margin pressure and embracing the challenge of FinTech were all challenges that the panel felt asset managers had to address.

More customised products

"Increasingly, it's not going to be a one-size-fits-all approach," explained Jamie Hammond from AB, the first to weigh in on these thorny issues.

"When you think about meeting the needs of end investors, I think what we're going to see is more customisation requirements," he said. "Really understanding end investor needs and concerns, and setting realistic expectations based upon those, and ultimately, delivering products that meet those expectations."

"Since the financial crisis you've seen a radical change in products that succeed with clients," added Jim McCaughan of Principal Global Investors. "The fastest growing category in the US market is multi-asset products."

Of course you can't have a conversation about products without touching on the debate of active-versus-passive.

"I think we're only halfway through the move from active to passive," said Jim.

"I think that in large cap, core strategies - active has generally proven not to work in very efficient markets. I expect to see further moves towards passive indexation, and passive liabilities-driven investing. The good news for active is that there are lots of somewhat illiquid, inefficient markets around it, where active managers can continue to add value."

Overcapacity?

"We need fewer funds," stated Euan Munro, of Aviva Investors. "When I took over as CEO there were 3,000 funds. We've still got 1,500, and I haven't got a clue why we need so many different strategies - so there will be further pruning.

"Client needs are not endless; clients need to generate a decent return, to generate an income, to beat inflation or, in an institutional space, to beat liabilities. We as an industry have been putting too much effort into product innovation instead of thinking about how we make our income fund work, how we make our growth fund work. If we do that we will be selling a much smaller number of funds focussed on the critical client needs."

There's death, there's taxes and there's margin pressure

"As an industry we've got to be absolutely transparent. If we don't make that decision it will be imposed on us," stated Euan when the discussion turned to the subject of fees. "We're complaining about margin pressure; we should be thinking about value for money for the end client.

"A really obvious example is, if you have owned investment grade corporate bonds, you cannot take the same amount of money if the expected return is 1% compared to 7%. That's why, quite correctly, nobody gets paid for beta these days. If it's genuine alpha, you will be able to charge for that."

Jamie added that on the product side, he had seen more of a focus on net-of-fees performance, and more flexibility in terms of what clients were prepared to pay for certain products: "There are clients that will be prepared to pay a premium price if they perceive it's going to add value."

Andreas Utermann from Allianz suggested that there was more than one way to counter margin pressure: "You need to be ruthless at reducing platform costs, to move towards more flexible fee models, to accept a much more volatile revenue stream, but ultimately the best antidote is growth. If you have a growing bus you can handle margin pressure - that's why there is a premium on generating value for money," he said.

Opportunities

Commenting on one of the biggest opportunities open to asset managers, Robert Higginbotham from T. Rowe Price said "One of the features facing society is funding for retirement – the world is catastrophically underfunded today. The opportunity for an industry like ours is enormous. We have to engage now as we never have before, and that will test us as an industry - but it's also a real opportunity."

... And one that requires investor education

"The real challenge is getting investors to realise they need the product," explained Jamie. "When I talk to the so-called millennials, unless there is some sort of Government tax incentivisation, people don't really get up and start thinking I must save for my long term future. Our challenge will be: how do we engage with that and meet that need?"

But Robert was positive on this role for asset managers, adding that: "This is the age of asset management. There are so many societal challenges around retirement that asset management is going to be centre stage in solving them."

The impact of FinTech

Jim was emphatic in his view that FinTech is an opportunity: "We have millions of 401k members in our platform, who have balances typically of US$50k. We can't economically sit in front of them with an advisor for an hour. The use of FinTech can actually fill that gap in a way that for many of those people is natural now; they do all sorts of stuff online.

Robert agreed, but added that: "The biggest stress is not the technology per se, it's around tidying up your data. I think FinTech is a huge opportunity to extract value from data."

Jamie concluded that one of the areas his company is keen to spend time on is the building of brand and trust around the company itself: "We will move from an older model of advertising to: how do people and investors of the future make their decisions, and how do we shape their decisions? Is it social media? Is it Tripadvisor for mutual funds? How can I make sure AB is a trusted brand that is accessible through various outlets, and one with which people want to interact?"

Finally, where will the panel be spending their money going forward?

Two conclusions were resounding winners: talent and customer service.