The competitive landscape for asset managers in Europe is evolving ever more rapidly. In order to confront the mounting challenges, but also to capitalise on these new opportunities, firms aiming to succeed in the long run need to be able to adapt, and strike the right balance between customisation and standardisation of the client experience.
Client Expectations Can't Be Met with Traditional Distribution Methods and Products
Private investors everywhere are facing similar challenges. The ageing population in the western world means that state retirement systems rely on ever fewer taxpayers to provide for a growing pool of pensioners. At the moment, four workers are required to provide for one pensioner. By 2050, that ratio will be down to two-to-one. If we want to keep the living standards we're accustomed to, even in our later years, we will all have to do something to supplement what the government will give us. Mutual funds are in an ideal position to fill the gap, and help turn income into future capital. But the old model of teams of wholesalers crisscrossing the country by car to push product to advisors has run its course. Instead, managers will need to deliver transparent and timely information that is compliant with the Markets in Financial Instruments Directive (MiFID) to professional decision-makers. This will require a comprehensive and user-friendly digital service model complemented by a consultative business development team, who do not simply “push product.”
As for the types of funds offered, there can be no denying the fact that the market has to move towards greater outcome orientation. Each client has certain return requirements and a defined level of risk tolerance. Most private investors care precious little whether it’s emerging-market bonds or US small-cap stocks that will get them to where they need to be, as long as the end result fulfils their needs and delivers returns in line with their expectations.
Clearly, there will still be differences between what, say, a French schoolteacher close to retirement needs as opposed to a young professional couple from Sweden. A global asset manager will be able to standardise certain elements of their offerings, but still provide a significant level of customisation in order to account for those differences, which mainly centre on the provision of an outcome (income or capital growth) for an acceptable level of risk.
This means that flexibility is key, which is one of the main reasons why multi-asset funds have been gaining in prominence over the past few years. But this implies more than bolting together bond and stock portfolios; an integrated investment process with intense collaboration between specialists across different asset classes is needed to deliver client expectations.
Active/Passive Debate Often Starts with Wrong Assumptions
The active/passive debate should not be about which is best. There is clearly a role for both when constructing portfolios to deliver an outcome for clients. Active managers will need to focus on the areas where they can truly add value, and deliver the corresponding products and services to their clients in an efficient way.
The big question is: what sort of investment products are clients still ready to pay for? Certainly not mere market returns, they can get those cheaply from exchange-traded funds (ETFs) and similar offerings. But it becomes a different story when people are faced with having to make investment decisions regarding asset classes, sectors, timing or regions. This is where active managers can add significant value, whether in providing truly active “component part” products for discretionary portfolio managers or in the provision of products that meet client-required outcomes.
Transformation Will Lead to a Better Industry, Providing a Better Client Experience
Those asset managers which fail to adapt and give investors what they need will struggle to survive. But those houses which have the necessary resources and innovative mindset will thrive. This, in turn, will mean that private investors throughout Europe and beyond will have access to better services and products, which, again, is a positive outcome for all.
Jamie Hammond is Head—EMEA Client Group; CEO—AllianceBernstein Limited at AB and will be taking part in the panel discussion 'Resetting Europe's business model around the end customer's investment outcome: challenges and solutions in the light of Mifid II' at the upcoming FundForum International in Berlin, 12-14 June.
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