Fund Administration: Asset management CEOs have several headaches, as the industry faces a growing number of challenges.
From regulatory change to fee compression, shifting client profiles to sustainability requirements – huge demands are being placed on investment organisations. These have raised serious and often existential questions about business structures and corporate strategies.
To gain, or even maintain their current level of success, asset managers must streamline their operations and explore both vertical integration opportunities and external partnerships. This can help to improve their margins and upgrade their technology platforms.
In short, they must adapt to survive in future. But here also lies their opportunity to thrive.
Headache 1: Fee compression
Front of mind for many asset management CEOs will be the relentless downward pressure on fees.
In its latest annual US fund fee study, Morningstar reports significant growth in interest from investors in low-cost passive products such as exchange-traded funds (ETFs) and index-tracking funds in recent years. This has helped to slash the cost of investing overall for US investors – and drag down asset managers’ fee income too (Morningstar 2020 US Fee Study, August 2021 https://www.morningstar.com/lp/annual-us-fund-fee-study).
Management fees have been falling gradually but consistently for several years. Between 2012 and 2017, the proportion of managers charging more than 70 basis points for active mutual funds fell from 60% to 43%, according to research by PwC. The average active fund fee fell by five basis points in that time, from 59bps to 54bps (Asset & Wealth Management Revolution: Pressure on profitability, PwC report, October 2018 https://www.pwc.com/jg/en/publications/asset-wealth-management-revolution-pressure-on-profitability.html).
Further compounding this reduction, is that investors are putting more and more money into cheaper funds, too. Morningstar’s research illustrated that cheaper active funds have tended to attract inflows over the past five years, whereas more expensive products saw outflows on a collective basis – more than $200bn a year in each of the last six years.
Meanwhile, newer financial services players are using technology to offer low-cost personalised services, accessible through smartphone apps, appealing to a tech-savvy audience more than traditional mutual funds.
These pressures require increased efficiencies at all levels for asset management companies. This could include automation of repetitive processes or introducing new technologies such as artificial intelligence (AI) for processing customer communications, to enable improved focus for managers on their core specialities.
Headache 2: Regulation and compliance
National and international regulators are also giving asset management leaders plenty to think about.
For example, legislation introduced this year by the European Union around sustainability standards and definitions has forced asset managers to review how they market their products to ensure they comply with stricter rules about what is considered ‘green’.
In the UK, the Financial Conduct Authority (FCA) has been scrutinising the delivery of value for money from asset management products to clients – a process that is also gaining traction in Europe and Australia.
Elsewhere, regulators are also increasing their focus on specific asset classes. Market shocks from Brexit and the Covid-19 pandemic caused particular liquidity issues in UK property funds, triggering a formal review of the sector’s rulebook. Money market funds have also been subject to a regulatory overhaul in the wake of the global financial crisis of 2007-09.
Added to this, asset managers are not immune to secondary regulatory effects – those that directly impact clients but that can also result in greater reporting requirements for service providers.
There is little sign of this regulatory pressure reducing, meaning asset managers will have to respond through improved reporting of performance, costs, and other data.
Research by Deloitte conducted last year found that half (51%) of asset managers it surveyed were concerned about having to enhance their systems and processes “to meet new or revised regulatory requirements” as well as increasing resources dedicated to compliance(‘Struggling with the asset management compliance puzzle?’, Deloitte report, 2020 https://www2.deloitte.com/content/dam/Deloitte/us/Documents/financial-services/rfa_2823943_im_compliance_pov.pdf).
Headache 3: Agility
These challenges will require asset managers to be far more nimble in the future. As new technologies emerge, they will have to be prepared to embrace them to stay ahead of the game.
For example, new distribution channels could emerge that would require asset managers to restructure or repackage strategies or launch new ones in a relatively short amount of time. A flexible and adaptable solution, that can potentially be split into various components – such as that provided by microservices architecture – would be crucial to this.
Equally, new information sources will spring up that will inform investment decision making. This is already evident in the sustainability space, where new metrics on environmental and social considerations are being developed at a rapid pace. With standardisation of these sources still some way off, adaptability and corporate agility will be vital.
Operating across a diverse range of clients, jurisdictions and asset classes also requires a nimble approach, flexibility and efficiency in reporting and processing data at all levels. Individual investors are used to being able to access their finances at the touch of a button or tap of a screen – and asset managers’ systems need to reflect this new reality.
A scalable, adaptable technology platform
What is the cure for these headaches? While there is unlikely to be one solution for the myriad problems asset managers face, having a scalable, adaptable technology platform as the foundation on which to build your business is a crucial factor for success.
Cloud-based systems with API functionality that can scale as a business grows will position asset managers for success in the future by facilitating a flexible approach to the changing nature of the industry, its regulation and clients.
Bravura’s asset and wealth management services include our administration platforms Sonata and Rufus, which support a wide range of fund and wealth management structures. They are designed to give asset managers a full-service, front-to-back office technology system that can integrate with existing systems and external data sources using API connectivity.
This technology helps speed up the transferring and processing of data through the investment cycle. Streamlined, efficient and automated processes mean quicker response times to client requests, from the smallest investor to the largest institution.
Upgrading technology isn’t always about one ‘big bang’ transaction, however. At Bravura, we recognise that some asset management companies will prefer to make incremental upgrades to their systems to minimise disruption and phase in changes. Standalone microservices using the latest API and event-streaming technology helps here, too, ensuring seamless integration with existing systems.
For example, Bravura’s messaging and orchestration system, Babel, facilitates streamlined communications and information transfer within the back office. It is compatible with all the major other industry-standard message infrastructure providers systems including Calastone, Clearstream, Euroclear, DTCC, BBH, SWIFT and SuperStream.
As the asset management industry modernises, technology plays a key role in how companies adapt to serve the changing needs of their customers. A clear strategy and a nimble, adaptable IT system will be crucial to the success of the asset managers of tomorrow.