Digital transformation, shifting investor expectations will cause historical rate of turnover
One in six (16 percent) asset and wealth managers globally are expected to be swallowed up or fall by the wayside by 2027, twice the historical rate of turnover, says PwC in its ‘2023 Global Asset and Wealth Management Survey.’
The report, based on PwC’s latest industry projections and a survey of 250 asset managers and 250 institutional investors, paints the picture of an industry grappling with a set of challenges – digital transformation, shifting investor expectations, consolidation and ‘retailization.’
As a result, 73 percent of asset managers are considering a strategic consolidation with another asset manager in the coming months in order to gain access to new segments, build market share, and mitigate risks.
Firms are also turning to technology to transform, with more than 90 percent of asset managers already using disruptive technological tools (including big data, AI, and blockchain) to enhance investment performance.
Mutual fund asset control
A direct consequence of these pressures – and the drive to deliver at scale amid cost and competitive pressures – is that by 2027, PwC expects the top 10 largest asset managers to control around half of all mutual fund assets globally, up from 42.5 percent in 2020.
Asset managers faced a tough year in 2022, with global assets under management (AUM) falling to US$115.1 trillion, nearly 10 percent below the 2021 high (US$127.5 trillion). This represented the greatest decline in a decade. The survey finds that inflation, market volatility, and interest rate movements are by far the biggest concerns for both investors and asset managers over the next 12 to 24 months. However, AUM are expected to rebound by 2027, reaching US$147.3 trillion (representing a compound annual growth rate of five percent).
“Existential challenges are sweeping the asset and wealth management industry against a backdrop of social, economic, and geopolitical disruption,” says Olwyn Alexander, global asset and wealth management leader, PwC Ireland. “The choice is simple – adapt to the new context or fail. Firms that effectively leverage technology such as generative AI and robo-advisors, build meaningful inroads to new and existing customers, diversify their recruitment, and deliver exceptional client experiences will be well-positioned to not only survive, but thrive.”
In the report, PwC predicts assets managed by robo-advisers will reach US$5.9 trillion by 2027, more than double the figure of US$2.5 trillion in 2022. Individualized indexing is also gaining popularity, particularly among investors seeking tax optimization benefits, as well as those interested in ESG, factor investing, and algorithmic portfolio construction. Nearly 40 percent of institutional investors are planning to invest in custom indexing products in the coming 12 to 24 months, whereas almost half of asset managers expect to add individualized indexing solutions to their offering.
By 2027, PwC expects direct indexed AUM to have more than tripled to US$1.47 trillion, roughly one percent of total AUM, while active ETFs are forecasted to rise from US$4.6 billion to US$1.1 trillion – accounting for 7.5 percent of the global ETF market by 2027.
Continued innovation a must
For asset managers to remain competitive, continued innovation is a must, says KPMG. Its annual ‘Asset Management Opportunities and Risk’ report shows where Canadian asset managers see the biggest opportunities to grow and improve is through technology and where they’re likely to direct their digital/technology related spending.
Over half the asset managers identify digital transformation and embracing technology enhancements to operational processes as an opportunity ahead, not only for their own organizations, but for the industry overall. Most asset managers have made substantial technology investments over the past few years into digital distribution and customer service and, now that those investments are starting to bear fruit, the big decision is where to double down and what digital assets might warrant decommissioning.
With markets and assets under management (AUM) revenues trending downwards, firms are looking to lower costs in any way they can, says the KPMG report. Digitization and technology are expected to play a significant role in cost optimization and streamlining in the months ahead.
Large pension plans and institutional investors have been innovating, but incrementally, with multi-year digital transformations. They’ve also gone through a lifecycle of insourcing investment to add private strategies to their total portfolios and made corresponding technology updates to their back offices. Today’s new challenges are driving a re-assessment of the speed and scale of digital achievements to date. Many businesses are considering adding more technology to streamline operations and run their organizations.
Half of the asset managers identify legacy systems as a risk to their organizations, and nearly the same number see them as a continued risk to the industry overall. Legacy systems have certain data constraints which can delay, impede, and possibly increase the cost of effective investment into application development or digital experience initiatives. Firms with less mature digital strategies are likely to address any gaps by increasing investments in new technologies. Organizations with more advanced digital strategies and technological capabilities can offer better user experiences, create efficiencies, reduce operational risk, and work more effectively with outsourcing partners.
Consistently, managers identify fund accounting, trade and settlements, and transfer agents as key back-office areas ripe for technology investment in 2023. In the middle office, optimizing customer relationship management (CRM) and creating a single source of truth for investment data will be a key focus in the immediate term. Technology improvements across risk and compliance functions and in the client on-boarding process may also help improve operating efficiency and reduce investment related risks.
Technology for the long-term
With the market as it is, KPMG says asset managers will need to be both creative and patient to weather the storm and deliver the investment performance clients expect. Technology investments will be crucial to both achieve stability and maintain a competitive edge. Better data translates into better products and technology integration brings cost reduction opportunities.
Looking forward, a key consideration is to keep the channels of communication with investors open. Their portfolios will be affected by markets, so helping ensure they are aware and informed is important to maintaining trusted transparent relationships.
“As people dig in for the downturn, the critical question moving forward is: ‘How can I preserve my top line and take cost out of the system without compromising my operations?, ’ says David Bardsley, partner, advisory, management consulting, wealth and asset management, KPMG in Canada. “Today, the best way asset managers can answer that question is with greater digital capacity, strategic technology integrations, and deeper insights from better data.”