The asset management industry faces an inflection point in 2023, as shifts in markets, technology, market competition, and client expectations put the operating model at asset management firms through a stress test. Fortunately, with an efficient operating model and robust investment management system, asset managers are able to scale their businesses cost-effectively, deliver highly differentiated client services, and increase their profitability—or potentially face the prospect of failure.
Substantial changes in four factors–markets, technology, competition, and client expectations–now bring asset managers to an inflection point that calls for a reassessment of the current and future operating model of asset management firms.
Markets, whether public equities, fixed income, or alternatives, have become increasingly volatile and fragmented. In search of greater returns and diversification, investors and their managers increasingly seek to invest in a broader universe of prospective investments using an array of institutional-grade investment instruments such as exchange-traded funds, institutional funds, and mutual funds, among others. In response, managers are called to develop investment strategies and select assets in a more dynamic and complex environment. Doing so requires managers to master increasingly vast amounts of data on markets, companies, investment vehicles, client accounts, regulations, and other matters.
The good news: Technology in the form of platforms-as-a-service can provide data and analysis for investment decision making, reporting, and compliance across markets, geographies, and jurisdictions. And the application of artificial intelligence to asset management may soon offer next-generation solutions that can disrupt the investment industry further. Investment management data and technology are also widely available as services and accessible to people who aren’t software engineers. Accordingly, multi-year IT projects and lengthy development timelines may give way to brisker deployment of first-rate data and technology solutions in the years ahead.
As markets become more complex and technology development accelerates, competition among asset managers for new clients and larger portfolios becomes increasingly fierce. And despite rising interest rates, well-funded asset managers and private equity firms have continued their inorganic growth strategies through mergers and acquisitions. Asset managers that pursue organic growth are likely to need the ability to scale their businesses aggressively, bringing on new clients and serving current ones with high-touch client service. And amid the stream of M&A, both acquirers and their targets must be prepared to operate as a scalable, well-integrated single firm.
Finally, asset management clients have come to expect–indeed, to demand–higher quality service and investment outcomes tailored to their unique circumstances and sources of investment capital. Management teams are wise to ask whether they have the data and understanding to build, manage, and report on portfolios for a large cohort of institutional accounts, each of which expects excellent service and professional investment counsel. Do they manage assets in highly differentiated ways for their unique clientele? Can they do so in ways that are scalable and will support the expansion of their client base and AUM? Will they be able to attract the top talent required to serve demanding institutional clients? Can they position their firms as acquirers or valued acquisition targets? And ultimately, can they achieve all this while growing and scaling their firms?
The answers to these and other questions are tied to the efficiency and effectiveness of an investment management firm’s operating model–that is, the combination of systems and processes that it uses to acquire and serve its clients in a high-value, long-term, fee-for-service relationship. Put more simply, an “efficient” operating model is a means through which asset managers can scale their business while maintaining or improving their competitive position and financial performance.
While every asset management firm is unique in its strategy, offerings, and clientele, an efficient operating model is supported by a “fit-for-purpose” platform that has three core attributes:
- It must flex like a muscle. Investor requirements and market dynamics require asset managers to assess strategies, portfolios, and investment vehicles with speed and confidence. Accordingly, an investment management system must capture all workflows in the process–including onboarding, asset allocation, investment research, trade ideation, client and regulatory reporting, and all others. An ideal system can capture all instrument types and strategies and support workflows for assets in public and private markets. Risk management, accounting, and collateral management are also essential capabilities.
- It must enable managers to deliver unique investment outcomes for demanding clients. Unique client outcomes rely on great investment decisions, which require timely, accurate data provided through real-time APIs. But to deliver such strong performance at scale, an investment management platform requires client-specific workflows that are readily configurable by investment professionals and advisors, not coded into a system “by exception.” Such systems also require a consistent model for operations processing that allows the flexibility to outsource or insource specific activities, thus allowing asset managers, for example, to pivot custody relationships as needed, particularly in times of market stress or in response to counterparty credit risk considerations. With this flexible combination of real-time data served from the cloud and client-specific workflows that can be readily configured by tech-savvy business users, asset managers can be empowered to deliver on their promise of bespoke, client-specific outcomes in ways that make their offerings inimitable.
- It must work reliably–now and in the future. A robust investment management system provides mission-critical capabilities to the investment team, and without fail, supports business operations continuously, as needed, all over the world. With this in mind, firms are well advised to seek a technology provider with a trusted implementation track record and verifiable performance criteria and service level agreements. Additionally, the system needs the flexibility to grow and evolve in parallel with capital (and private) market innovations–that is, new instruments, data sources, regulatory concerns, and client requirements. Markets are not static, nor are client requirements. A truly efficient investment management platform mustn’t be so, either.
As asset managers wrestle with how to improve their operating models, they are wise to consider the potential business impact of deploying a robust investment management platform. Four metrics offer an especially useful framework for assessing the financial and operating impact of a highly efficient, recast IT platform for managing clients’ assets:
- Technology and operations spending. How much can the firm save by lowering middle- and back-office costs? Such savings may include the licensing and staff cost of decommissioned out-of-date systems and data feeds, along with the future costs avoided by relying on an existing platform provider’s development team rather than just in-house resources.
- Front-office productivity. How much time and attention can be freed up among front-office staff and other top talent? How much time and money are saved by having client-facing staff focus on high-value activities such as client engagement and asset allocations rather than, say, reconciling cash balances?
- AUM growth. How can a more productive front-office allow the business–that is, number and size of accounts–to scale dramatically? How can a new technology platform support the firm as it brings new offerings to market? How can the technology platform deliver analytics for managers, new funds, securities, and investment vehicles?
- Operating margin. How can a new platform contribute to EBITDA margin by lowering third-party spending and internal costs? Similarly, how can it contribute to topline growth and client fees?
Investment management has been through a revolution in recent decades. While the basics of any investment process–expressing a sound hypothesis through one or more instruments–remain steadfast, the underlying mechanisms by which firms make decisions and manage money have evolved substantially and will continue to do so at a rapid pace. Consider, for example, the timeline across the emergence of the internet, high-speed trading, ETFs, model portfolios, artificial intelligence, and, more recently, distributed finance and tokenization.
While each of these elements is transformative at the macro level, these and other opportunities become reality for investors through swift execution at the individual firm level, which requires the right underlying mechanism–robust technology and data–to support the firm’s process. Asset managers with such investment management systems are well positioned to scale their businesses, provide the unique investment outcomes that clients seek, and may prevail over their less nimble competitors.
What does scale mean for asset managers?
Meera Jessa and Victoria Kent discuss current conditions that asset managers face and how technology can support growth amidst volatility, uncertainty, and change.