But, while the UK asset management sector is exceptionally robust, it’s also facing unprecedented change and disruption. Highly accessible new investment strategies, platforms, and asset classes like passive Exchange Traded Funds (ETFs) are contributing to a shift in how active asset management and traditional funds are perceived and run.
Active asset management has always carried a cost, but now that investors have the means to easily select and manage investments themselves, that cost is perceived as far higher, despite significant downward pressure on fees. And in a lot of cases, that isn’t merely a perception; whilst many firms are compressing their fees and resorting to M&As to maintain margins, returns from active funds continue to plateau relative to returns and associated ever-lower fees across active and passive ETFs.
Active asset management has always carried a cost, but now that consumer investors can select and manage investments themselves, that cost is perceived as far higher.
Alongside those shifts, continued geopolitical instability and economic challenges are having a profound effect on investor risk appetite. They’re driving consumers towards more liquid and accessible investments that make it easy to pull their money out of underperforming assets — and consequently, away from traditional actively-managed funds.
The UK’s asset management firms can’t afford to stand still and continue with business as usual. If they want to maintain their revenue and AUM, they need to evolve and rise to the new challenges of their shifting sector.
Asset management firms can’t afford to stand still. If they want to maintain their revenue and AUM, they need to evolve and rise to the new challenges of their shifting sector.
How should asset management firms evolve?
To remain competitive against ‘passive’ investment strategies, asset management firms must:
Carefully monitor and optimize their bottom line and cut costs to help sustain margins without passing costs onto their investors
Refocus on high-touch investment experiences and maximize the value that human asset managers deliver to the investors they serve
Embrace digital innovation and explore how to apply leading technologies to further differentiate the investor experience
The good news is many leading firms already recognize the need to transform and are actively investing in the evolution of their organizations, offerings, and strategies. According to PwC, 91% of asset management executives plan to transform their product distribution strategies in the coming years. And a study by Deloitte shows that 86% of firms are increasing their investment in AI and data analytics.
The big question is, how exactly are those firms transforming?
The three pillars of asset management evolution
With demand for high liquidity, low risk investment options rising, firms are quickly developing new services and strategies to give investors what they want. A common example are ‘active ETFs’, which combine the benefits of ETFs with asset managers’ value-adding support, skills, and human insight.
To create and deliver innovative and differentiated offerings like these, most firms will first need to evolve their capabilities.
To create and deliver innovative and differentiated offerings like these, most firms will first need to evolve their capabilities to support three key pillars of transformation:
#1) Increasing productivity
By driving productivity to new levels, asset management firms can keep their costs low while improving returns and outcomes for investors. Today, one of the easiest ways to do that is through new technologies and digital capabilities.
For example, integrating AI into offerings for consumers — or empowering asset managers with it —can have a huge impact on productivity, support the accelerated launch of ETFs, help people capture higher alpha values, and even enable the creation of new operating and business models. As a result, engineering is quickly becoming one of the most valuable skillets for asset management firms.
#2) Personalizing the investor experience
ETFs and consumer-driven investment have democratized access to investing, and as a result, today’s investors expect continuous access to personalized information about their funds.
By capturing data about investors, their aims and motivations, and their engagement preferences, firms can understand exactly what they want and the best ways to deliver it. Using that insight, firms can empower investors with timely, personally-relevant insights which provide peace of mind, foster loyalty, generate interest in new funds, and inspire people to invest more.
By granting access to portals where investors can ascertain their exposure to a sector, a security, a commodity or else across investments, run what-if scenarios, test investment strategies against stress and shock scenarios, firms would reinforce the all-important high-trust aspect of an investor experience, and inspire further investment.
#3) Mastering private markets and alternative investments
Private markets and alternative investments hold a huge amount of potential and unrealized value for asset management firms and their investors. But, with limited historical data available, valuing such investments accurately remains a major challenge for firms who continue to rely on third parties for valuations.
By using insights from AI and analytics, firms can establish their own solid models that self-solve for items of interest in emerging and maturing markets and help increase investor confidence in that market.
A new era of asset management begins with technology evolution
The future of asset management firms in the UK and beyond will be shaped by their technology. To succeed, firms must approach technology as an amplifier and accelerator of high-value trades in a high-touch and high-trust environment.
Thoughtworks partners with firms across highly regulated industries to help them build digital solutions to their industry’s biggest emerging and future challenges. We help asset managers and many other financial institutions harness the power of data, embrace powerful technologies like AI, and create future-ready services and operating models that drive business value, productivity, efficiency, and investor satisfaction.
The future of asset management firms in the UK and beyond will be shaped by their technology. To succeed, firms must approach technology as an amplifier and accelerator of high-value trades in a high-touch and high-trust environment.