The disruptions of 2022 put asset managers under significant pressure to up their game for serving more demanding clients and cut costs to respond to declining revenues, EY said in a new report.
Last year saw falling markets and net outflows of assets under management, driving firms’ revenues downward. At the same time, inflation pushed expenses up, putting asset managers under enormous pressure to make ends meet, and 2023 is not likely to ease that pressure, EY said.
“Asset managers are going to have to take practical steps to reevaluate their work practices in order to meet the increasing demands of clients and differentiate themselves from the competition,” Mike Lee, EY global wealth and asset management leader, said in an interview. “They are going to have to learn to step into their clients’ shoes to see how they think and also simplify their message into digestible language.”
Advisors and asset managers will need to expand to provide a broader level of services and democratize their practices. “They will need to listen to clients better and more often and then focus on following through,” Lee said.
Last year, asset managers continued to invest and upgrade their capabilities in areas like private markets, ESG integration and digital transformation, the report said. The New Year is unlikely to reverse these pressures. “The investment assumptions of recent years have been overturned and, even if current economic headwinds are partially reversed, altered market conditions will have profound effects on asset management,” EY said.
“The inevitable effect was to put average profit margins under significant pressure,” the firm said. “EY modelling shows that the outlook for industry profitability is firmly going to the downside.”
Investor expectations will become increasingly demanding, complex and costly, the report said. That, together with slower AUM growth and increasing competition for business, will put firms’ financial performance under exceptional pressure, EY said.
Asset managers will have to re-orient their practices around their clients by democratizing services and focusing on generational planning for their clients. For instance, managers should consider such things as direct indexing, which has the potential to give more retails investors the kind of portfolio tailoring previously available only to institutions or the very wealthy, Lee said.
Digitalization of distribution will become increasingly important. “Technology will not merely enable investor interactions, it will become central to delivering tailored, value-added experiences, including education and support,” the report said.
Investment propositions will need to be reassessed. “Accelerating drivers of long-term change mean that the exit from current volatility will take us into an altered world, creating new threats, and exciting opportunities. The investment markets of the future will be very different from those of the past” and must be embraced by asset managers, EY said.
In order to participate in the successes of the future, managers will need to concentrate on growth areas of the market, such as alternative investments, including private markets, digital assets like tokenized real-world assets, infrastructure, and international markets such as Asia, the report said.
Outdated business models are holding asset managers back, the report said. The models must be made more efficient while maintaining long-term strategic flexibility.
In addition to improving the internal workings of a firm, managers need to leverage external opportunities, the report said.
“In the past, approaches to external growth were often dominated by a focus on M&A. Deal-making will remain an important response to margin pressure, but the industry will increasingly view flexible tech-enabled collaboration as the leading source of external opportunities,” the report said.
A number of underlying forces are shaping the future of the industry. Deglobalization and nationalism have reversed the worldwide economic integration that occurred over the past 20 years. “A desire for greater strategic autonomy and national resilience will slow cross-border flows and inflate the price of labor, commodities and goods,” EY said.
The aging of populations worldwide will put a strain on retirement plans and make public healthcare unaffordable for many countries and should be taken into account by investors.
Other demographic shifts also will play a role in world finances. “Economic and social changes and family planning are accelerating female financial empowerment. By 2030, studies suggest that 55% of the world’s wealth will be owned by women,” and must be factored in to financial planning, EY said.
Populations will continue to shift to urban areas and world migrations will alter the economic pictures for many countries. By 2050, it is projected that 68% of the world’s population will live in urban areas, and internal migration from the countryside and cross-border economic migration will have a major impact on future infrastructure requirements and personal financial needs, the report said, making it mandatory to consider the effects on world economies and potential investments.
To take advantage of these massive trends and succeed at standing out from other firms, asset managers will need to concentrate on their core expertise and be willing to engage others to bring in more knowledge. “Engaging clients and following through are key to success in the future,” Lee said.