Alteris LLC tracks trends in our client’s industries. We work with firms in the Investment Management or Asset Management industry and therefore track trends there.
Many firms in the Investment/Asset Management industry are experiencing substantial pressure on their margins and profitability.
A factor pressuring cost reductions is consolidation among firms in the investment/asset management industry. This started before the pandemic and continues. Some industry observers expect that up to 20% of the mutual fund firms that are independent today will be acquired or go out of business in the next five years. This consolidation will largely impact smaller firms.
The largest US mutual fund managers will see the most growth. It is predicted those firms will manage 68-70% of Assets Under Management (AUM) in the next five years. As of 2019, the largest firms managed about 50% of AUM.
The popularity of, among other things, index investing has put downward pressure on the fees that active managers can charge.
Difficult economic conditions challenge existing business models, create rising costs, and harm margins also.
All together this puts pressure on these firms to increase margins and reduce expenses.
They have reacted to this. We are seeing that most of these firms plan to reduce total costs by 11% to 20%.
This level of cost reduction may be difficult. Many costs are fixed and current conditions result in higher costs than normal.
A stereotypical way to reduce costs is to reduce workforce/personnel costs. During the summer of 2020, this was a focus. Despite this, the US Bureau of Labor Statistics reports employment in the investment management industry increased overall in 2020. Instead of layoffs, some investment management firms preferred using strategic reductions in bonuses to reduce personnel costs. Furloughs (unpaid leaves of absence, not a permanent firing) were more widely used than before the 2020 pandemic.
But as experience has repeatedly shown, layoffs and furloughs only go so far. That approach is never a solution.
So what is an investment management firm to do?
Firms are, in part, adapting by increasing technology development. Internal projects are being adjusted and strategic goals adapted to the current circumstances – reducing cost and competing more effectively.
Technology is a major way the industry is reducing expenses. Technology and digital strategies are being changed so that reducing costs is the key goal. The way these are being implemented has changed too. Outsourcing technology development is now common. Developing technology internally is not as popular. Outsourcing is more typical among American firms. Those located outside the USA continue to support internal technology development.
Cybersecurity and data privacy are areas seeing the most investment. This is to be expected given all the data breaches, hacking scandals and that so many people from these firms are working remotely. In fact, over 90% of firms are working on secure technologies that allow workers to be located anywhere. This is coordinated with the outsourcing trend.
Cloud computing is popular as it allows work to be conducted in remote locations simultaneously allowing for high-security standards.
Technology projects not related to remote work, cybersecurity, and cost reduction are being reduced. One area where there is a reduction is Artificial Intelligence. While AI may have a long-term significant effect, the focus is more on projects that can have an immediate impact.
From a marketing perspective, now may be the time that technology capabilities will become as important a factor for investors choosing an investment firm than the financial/investment products that a firm offers. Investors seem to think that advanced technology in a firm signals investment management skills. This belief isn’t misplaced. Advanced technology has the potential to improve portfolio returns.
During the Covid-19 crisis, many firms were caught unprepared. This covered everything from small firms to central banks. Some had to manually input new data into their financial models. That process came to be called “nowcasting.” The whole process has been automated and supposedly a nowcasting capability has been implemented in 53% of hedge funds.
Technology transformation is accelerating mostly due to the cost reduction/margin pressures but also other factors. Now might be the time that those firms that are slower to implement technology may suffer.
It’s very possible that technology will become part of the ‘branding’ of many investment/asset management firms. Beyond just customer interfaces and remote work capabilities, technology capabilities may signal a firm’s investment management capabilities.
For investment management firms large and small, technology is going to become even more important in the years to come.
