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Marie Garnier, Partner, Exton Consulting

A new revolution coming in Asset Management ?

On the 07/19/19 at 6:48AM

by

Marie Garnier

For Marie Garnier, Partner at Exton Consulting, a strategy and management consulting firm specialising in financial services, asset management companies need to drastically reposition their business models in the coming years if they want to maintain their profitability.
Marie Garnier - Exton Consulting
Marie Garnier - Exton Consulting

The Asset Management market is in a transition period

Good results of global management companies in recent years should not hide the challenges which this industry is facing.

While their assets posted solid growth, sometimes in double digits, driven by good market performance and external growth, profits did not keep the same pace.

 

Exton Consulting 

 

In a more difficult market environment, with less room for manoeuvre (while some of the pressure has already been shifted to distributors), asset management companies will have to significantly change their model to maintain their profitability.

Lack of market visibility and the development of passive management/ETF with lower margins will continue to weigh on revenues, while the growing need for personalisation, transparency and services from clients and the ever-increasing regulatory and tax pressure, which will not ease, will still require high costs.

On top, Asset management is not immune to the tidal wave of new technologies that are disrupting working methods and opening the door to new players by breaking down any barriers to entry that may exist. To understand how quickly old models can be put at risk, it only took four years for Ant Financial, AliBaba's management subsidiary, to establish itself as one of the world's leading money market managers

 

Business models need to be adapted

In this context, it is essential for asset management companies to tackle several issues:

First of all, their strategic positioning: two models predominate and are intended to strengthen. One based on the added value provided by active management, which allows more personalized management with higher costs, and the other one based on volumes, with industrial management, which allows to benefit from economies of scale.

However it appears that many players remain "stuck in between" and therefore they need to choose their model or they will suffer from market share and profitability decrease.

Linked to the chosen model, the value proposition - product range, pricing, services, segmentation of customers is to be adapted, but also customer journey and adjustment of distribution networks - must also be aligned.

Then diversification initiatives may help to unlock growth potential on the income side. Environmental, social and governance (ESG) criteria and impact investing appear to be essential strategic axes to shape tomorrow investment policies and support the transformation of the industry beyond simple diversification.

Further reflection is also needed on the operating model to reduce the operating ratio. All solutions must be considered, with a clear analysis of the business lines considered as core businesses and those that could be shared with other Group management companies, or beyond, through common hubs or be even outsourced.

Various levers can be used to do so, digital and new technologies (artificial intelligence, blockchain...) impact all the steps in the value chain and make it possible to reshape it thoroughly.

This transformation can be accelerated by targeted acquisitions but also with agile partnerships, in distribution, delegated management or even for customers interface. Relying on Fintechs may be interesting to consider, but this means it is also necessary to master "fintegration".

Asset Management companies can overcome those challenges by facing this major transformation globally and quickly. Tools developed by Fintechs, if properly selected, can help accelerate this in-depth overhaul.