The convergence of lower interest rates, unpredictable and underperforming markets, and increased consolidation and competition in today’s fund industry has left asset managers scratching their collective heads and wondering how to navigate this endless wave of challenges.
Not only must their navigation of the obstacles be flawless, they must best the changing landscape to enable their firms to not only survive, but thrive.
A recent Forbes Insight survey, published with assistance from SEI and E&Y, states that 83% of asset managers and wealth managers feel that they are facing significant competitive pressures. These factors range from market dynamics like increased fee pressures from investors, to the need for more complex investment strategies to meet investor demands, to the distribution of investment products to various markets around the globe. Looming large over all three challenges are the regulatory pressures faced by the asset management industry every day.
Pressure to remain competitive by maintaining low fee expenses makes it much more difficult for asset managers to maintain a healthy and sustainable operating margin. Investors simply do not want to pay as much and in many instances, regardless of the performance of that fund–even when outperforming its index or applicable benchmarks–investors see only the size of the fees they are paying and want to pay less.
With regards to complex investment strategies, there are many competing products and investment structures available. Asset managers must make strategic decisions about whether to offer certain types of products, but not others. The options today are multiplying and it is a challenge for asset managers to navigate the complex sea of alternative structures.
To make matters more complicated, many countries are putting rules and restrictions around the types of products and investment vehicles they feel are appropriate for their country and markets. In some cases, these rules require asset managers to have a minimum number of people located within their domiciles, thus requiring firms to think about the cost and opportunity to maintain a local presence.
Regulation continues to be one of the most onerous and expensive challenges that asset managers face today. Regulatory reporting is expanding across fund structures and across domiciles, increasing not only the amount of additional work to meet each regulatory requirement, but also the cost of compliance–from technology, to research, to just plain manpower. The cost of regulatory compliance increases the overall cost of operations, which in turn must be passed on “somewhere” to maintain a sufficient operating margin for the organization.
Despite these challenges, the asset management industry is poised for future growth. Asset managers must look to embrace the changing landscape. Maintaining status quo will not be a viable option with the nature of regulation, investor demand and fee pressure constantly exposing themselves in asset managers’ day to day operations.
Increased capabilities in such areas as data analysis, analytics, automated client integration procedures, and more on demand data reporting for clients provide opportunities for value-add services and information to end consumers and more complex investors. Asset managers can use these capabilities to differentiate themselves and go above and beyond their competitors to meet the increased level of demand of today’s sophisticated investors.
The current environment for asset managers is a sea of uncertainty with increased pressure from a number of angles. Effectively alleviating these pressures and finding differentiators in a crowded marketplace, while embracing the changing landscape provides an opportunity for growth for strategic firms. Those who nimbly adapt to the fast pace of change and increased level of demands from regulators to investors can thrive in these uncertain waters.