How can managers successfully transform their operating models to meet the challenges of the next decade?
The existing operating models of asset managers are under pressure from a number of industry trends – margin compression, the opportunities and threats from new technology, and a shift in investors’ knowledge, sophistication and behaviours. How managers can successfully transform their operating models to meet these challenges and enable them to remain competitive into the next decade was one of the key debates at BNY Mellon’s Consultants Conference, which was held last week in London.
Margin compression is being felt across the investment industry. The squeeze on fees – illustrated by the shift to passive investment and driven by increased competition, greater transparency and more focus on getting value for money – puts pressure on revenue. Other factors – including increased regulatory costs, investment in updating and enhancing operating systems, and a growing focus on risk management – are adding to the cost side of the equation.
To stay ahead in an increasingly competitive market, asset managers are embarking on strategic transformation programmes to address multiple aspects of their business. They are focusing on initiatives that can ensure sustained growth momentum while at the same time carefully manage their margins. This is in part about operations, but it also involves wider consideration of business alliances, intermediary relationships, product innovation, client engagement, brand management and future sources of talent.
The shift to digital processes, enhanced by robotic process automation and data analytics, provides new opportunities to improve efficiency, lower error rates and reduce costs in the middle and back office, and has a growing role in the front office for driving new investment ideas and alpha generation. Managing data is key; gaining more insight through the merging of existing data sets and integrating unstructured data and ESG data to create new datasets.
While cost is an important factor, asset managers are also looking for models that are sustainable. Constantly staying on top of technological innovations and having the right tools and solutions to improve efficiency and effectiveness is a major burden and rarely a core competency for asset managers. The attractions of outsourcing processes to providers with suitable scale, focus and resiliency are considerable.
Overall, asset managers have recovered well since the financial crisis. But the industry’s vulnerability was demonstrated by last year’s troubled investment markets, which prompted investment outflows and put additional pressure on revenue. This, combined with regulatory costs and the secular shift towards passive products, puts the need for a sustainable operating model that addresses all the dimensions of running an asset management firm – revenue growth, expense control and risk management – into ever stronger focus.
The views expressed herein are those of the author only and may not reflect the views of BNY Mellon.
