In the face of costly regulation and a low margin environment asset managers are increasingly recognizing the need to overhaul the current industry model in order to stay profitable, according to investment software and fund accounting provider Multifonds’ Every Fund Survey 2017.
The survey, conducted among more than 200 professionals in the global asset management industry, found that disruption in the industry may now be inevitable after almost two thirds (65%) of asset managers believe profitability will decrease in the next 12 months. As a result, more than 9 in ten (92%) respondents to the annual survey, believe asset management is entering a new era of innovation, as the industry’s focus on cost cutting and disintermediation through direct-to-consumer (D2C) capabilities intensifies.
With the industry in a state of flux, more than three in five (61%) survey respondents now think there is a threat of a game changing disruptor entering the market. Yet, it is uncertain whether disruption will come from outside of the industry, as the majority (69%) believe that the complexity and cost of complying with the tsunami of regulation could be an insurmountable barrier for new market entrants and start-ups.
While the regulatory burden stifles the opportunity for external disruption, there is an increasing sense of momentum driving change from within the asset management industry itself.
Digital innovation ranked second highest of all innovation priority focus areas among survey respondents and points to increased disintermediation across financial services, which may prove disruptive to existing business models. Where it is often assumed that digital channels and technological capability are an opportunity for external entrants to the market, almost three in five (57%) surveyed believe these digital solutions will benefit existing managers developing D2C capabilities the most.
When asked which digital innovations will have the greatest impact on the industry, the majority (55%) pointed to big data analytics, artificial intelligence and robo-advice – all of which could have a dramatic effect on customer segmentation and, ultimately, D2C distribution models.
Innovation in operational efficiency is also highlighted as a critical battleground for the industry, and was the most common area of focus among asset managers, with almost two in five (38%) citing operations as the primary focus for their business’s innovation over the next 12 months. If the barriers to entering the market are too great for new entrants to bring change, then the critical importance of cost cutting and facilitating seamless integration between end investors and back office processes may be enough to force existing businesses to change the game themselves.
Keith Hale, Multifonds’ CEO, said: “Asset managers are facing a real profitability squeeze as the cost of regulation continues to go up while investors expect fees to go down. How much further can the margins be pushed before the industry recognises that it needs a complete overhaul? Asset management is in the digital ice age compared to many other industries. Some players are testing the digital waters with direct-to-consumer distribution and robo-advice, but this is often window dressing on a model that is plagued with legacy issues. The wider industry is now in a position where it must replace fragmented functions and systems with highly efficient processes using scalable modern technology, or risk being disrupted into the history.”