Publications
Partners
Cape Town - Turbulent financial markets in the past year have hampered the ability of asset managers to achieve revenue growth and increased revenue margins, which compel them to develop new disruptive investment capabilities, according to a report by the Boston Consulting Group (BCG).
BCG, a global consulting firm advising companies on business strategy, has conducted an extensive benchmarking survey into fees, products, distribution channels and costs to determine the asset management industry’s profitability.
The most recent report showed that the global value of assets under management rose by a meagre 1% in 2015, compared to an 8% growth in 2014.
This means asset managers that have depended on financial market performance to grow the value of assets will have to turn to alternative means, Adam Ikdal, senior partner at BCG, told Fin24 by telephone.
These include new, disruptive technologies such as machine learning, artificial intelligence, natural-language processing and predictive reasoning.
In addition, asset managers will have to become much more focused and concentrate to a much larger extent on data and new technology to add value.
“Although the term big data has become a buzzword,” Ikdal said, “it really has the power to bring about positive change for asset managers.
“If you’re a retail customer you’d expect your asset manager to have real-time information and to be able to execute your instructions quickly. You’d also expect them to have a complete view of you as the customer and to keep your personal information safe and secure.”
Data and analytics the way to go
These increased demands and expectations from customers will force asset managers to invest much more heavily in data analytics - both from a cost and a client demand perspective.
Recently, passive products that make use of data and analytics have become much more effective than active management. “So, it’s become much more difficult for asset managers to justify the high fees they’re charging for actively managed products, as customers realise it’s much more difficult to outperform financial markets,” Ikdal said.
According to him, asset managers’ long-term competitive advantage lies in becoming much more focused than before. “What we see today is that companies are trying to be everything to everyone. Rather say you can beat the market in a particular way, for example with consumer goods. This is what we call alpha shops – those that provide superior returns, because they’re extremely focused.”
Alternatively, asset managers could become beta factories, focusing on passive investments that track the market, but at a much cheaper fee.
“A third way of having a competitive advantage is through distribution power where a company is for example excellent at customer service and advice. Another way is to provide specific solutions through tailoring investments in a package with exposure to equity, real estate bonds and so forth,” Ikdal said.
However, becoming more focused to gain a competitive advantage is only half the solution. Asset managers will have no choice but to harness new technologies and invest heavily in data analytics.
“Traditionally asset managers have been following their intuition when piecing together information when predicting how the markets will perform. Today there are many data sources available that can help them make decisions on how to invest,” Ikdal said.
“Today, machines can deal with this information much quicker at a fraction of the cost – and probably better than humans.”
According to Ikdal, asset managers who embrace the power of big data and other technology, such as machine learning and artificial intelligence, will be able to analyse millions of units of data faster and more efficiently.
“Yes, there will be an initial cost to invest in these technologies, but going forward it’s going to work out much cheaper, as they don’t have to hire people to do the data analysis.”
