Are you reframing the future of asset management or is it reframing you?

The COVID-19 crisis is fanning geopolitical uncertainty, and many countries could take years to recover their lost output. Monetary stimuli will keep rates low for now, but higher inflation and increase in rates cannot be ruled out. Financial markets, which diverged from the real economy during 2020, could see a correction or prolonged period of weak performance.

As a result, asset managers are likely to see investors’ demands grow to be ever more complex. Institutional investors will seek a combination of capital preservation, high yields and strong ESG performance. Retail demand for tailored solutions and ESG investing will grow too, along with advice and education. Asset managers will be forced to accelerate diversification, using alternatives to push up returns while making greater use of low-cost options, such as factor investing and enhanced beta.

Firms will also face a growing margin squeeze. Competition and regulation will erode fees in every asset class, and the shift to lower-margin strategies will also reduce income. On top of that, economic and demographic factors will reduce net inflows from historic levels of 3%–4% to around 2% per annum. At the same time, the need to invest in new products and technology will push up spending.

EY modeling shows that these trends will have dramatic effects on profitability. The base scenario for 2021–25, which assumes AUM growth of 15% over five years, expects average operating margins to decrease by 0.8 percentage points. Most firms will see profitability fall faster than this, due to the accelerating “winner takes all” phenomenon. That will make it hard for many asset managers –especially small- and medium-sized firms without a demonstrable source of differentiation – to survive in their current form. Furthermore, EY modeling shows that a pessimistic scenario (with a market correction holding AUM flat over the next five years) would lead to a 7.3 percentage point reduction in average operating margins by 2025.

Asset managers need to make significant changes to their strategies and business models if they’re to succeed in this increasingly fluid and challenging environment. Firms must pursue multiple avenues of growth; invest heavily in data and technology; and take a flexible approach to partnering, collaboration and mergers. There is also an opportunity for firms to offset margin dilution by taking action on strategic cost transformation.

For asset managers, successful transformation needs to start with a clear idea of each firm’s role in the industry of the future. Which clients will firms serve? How will they reach them? What investment solutions will they provide, and in what way?

Firms should then build on the changes already achieved during the pandemic, using a combination of six key strategic components to shape a multitrack growth strategy, enabled by technology and funded by strategic cost transformation. The ability to manage simultaneous, multidimensional change will be crucial.

You can explore the EY multitrack success strategy for asset managers in the graphic below. Select each track to reveal the underlying components: 

Asset managers not only need to transform their medium-term performance. If they are to use the disruption of COVID-19 as a springboard to lasting success, they also need to begin actively preparing for the end of current industry paradigms. Firms should imagine radical but plausible scenarios, identify their strategic implications and begin planning their responses while they still have time.

EY professionals have set out 10 ways in which asset management could be reframed by 2030, depending on the enabling factors and structural features that could develop in the industry over the next decade. Firms should ask themselves, for example, how they would respond if:

1. The industry’s purpose was to provide every adult in the world with the knowledge and opportunity to participate in the growth of capital markets
2. Asset managers’ performance was measured on the long-term value they create for all stakeholders, not just shareholders
3. Every investor knew the impact of the assets they held
4. Index providers partnered with technology firms to become the largest asset managers
5. Reimagining the idea of “work” allowed asset managers to employ more diverse talent in more diverse locations
6. Asset management was transformed from the most fragmented to the most concentrated industry
7. Fractional ownership removed the need for funds
8. A combination of AI and quantum computing could replace human portfolio managers
9. Asset management fees were based on the creation of long-term value
10. “D2C” – direct to customer – relationships were the norm, not the exception

We believe the industry has an opportunity to rethink its future and elevate its purpose to create and protect long-term value. In our view, that means benchmarking success through four lenses:

1. For clients: Solve client needs while providing value for money and exercising fiduciary duties in a transparent, ethical manner.
2. For people: Develop a diverse resource pool, foster an inclusive and equality-driven culture, and implement incentive structures that reward people for doing the right thing.
3. For society: Share the benefits of investing with a wider constituency, deliver accessible investment education and make sustainability and climate change risk management the new standard for investing.
4. For shareholders: Use these six key components of strategy to help optimize financial performance, while preparing for the long-term restructuring of the entire investment value chain.

Global asset management is at a unique moment in its evolution. Incremental change is no longer enough – decisive action is required to build on the advances already made and use COVID-19 as a positive catalyst for change.

The world will recover from the pandemic, but the needs of the future will not be the same as those of the past. Delivering lasting value has never been more important for asset managers and their stakeholders. If ever there was a moment for the industry to reframe its collective purpose, it is now.