We are unquestionably in the midst of a high-change period in asset management, one that has the potential to radically re-shape the industry in the next decade.
Heavy regulation and the need for scale to create a cost-effective business model are nothing new, but the ways in which our clients are approaching these challenges very much are. The era of ‘digital’ approaches.
What does it mean for European asset managers?
Currently the majority of European asset management firms are mid-sized (with assets under management around $10-50bn / $20-100bn dependent on your view) with very few ‘large’ players in the region, which we tend to consider as being any firm over the $50bn mark. The growing cost pressures facing financial institutions have been well-documented, continually driving discussions of industry consolidation.
This is perhaps unsurprising given the unprecedented levels of new regulation coming into force, such as Mifid II sat firmly on the horizon, as another cost to bear. However, looking at the current landscape, very few European asset managers have the scale needed to insource the data management, risk analytics and reporting requirements needed to comply.
A significant number of Europe’s small to medium asset managers will also likely struggle to deal with regulation using their existing infrastructure and legacy systems. So the level of back and middle office outsourcing will likely increase notably over the coming years.
And as new entrants eye the sector, success will likely increasingly depend on technology and data analytics to address the growing demands of clients for more personalised and sophisticated information and investment solutions.
As the pressure to reduce costs and increase efficiencies heightens, so has the hype around the buzzword of 2016, ‘blockchain’. Blockchain distributed ledger models are all the rage with consortiums like R3 and individual efforts by a number of financial institutions (including State Street) all attacking the concept with a range of ideas and approaches. It seems inevitable to us that more of the industry will adopt blockchain models in the coming years, seeking to benefit from its efficiencies. Though early implementations are likely to be on a limited scale basis or in “greenfield” areas where legacy migration issues are not a factor.
Living in a digital era
In wake of the Global Financial Crisis (GFC) institutional investors have become increasingly autonomous with many institutions bringing components of their investment capabilities in-house. Alongside this runs a growing client demand for more personalised and sophisticated information and investment solutions.
One by-product of this change in investor behaviour has been the aforementioned digitisation of the financial industry. While many talk about the exponential growth in data volume, it is the increasing variety of data, fuelled by the connected world of the Internet of Things, that’s likely to have the greatest long-term impact.
As more and more data becomes available some of it is going to have investable value and investment managers will likely need to be able to ingest this data and mine it for value. Identifying the right insights is the greatest challenge, creating an accompanying need for more powerful, automated analytics tools. Meaning there will also likely be rapid advances in analytic tools and capabilities to credibly compete in this ‘new normal’.
This shift to digital will likely help investment firms reduce costs in some areas and create costs in others; but the net effect is likely to continue the increased need for scale, further fuelling industry consolidation; with a number of asset managers overhauling their approach to investment solutions and making strategic acquisitions in an attempt to become more competitive and grow their businesses.
Susan Dargan is head of State Street Global Services Offshore