Asset management firms are worried about external and internal threats to their businesses but many aren’t responding to those perils like they should, according to a study by Northern Trust and Coalition Greenwich, a data and analytics firm for the financial services industry.
Even though 84 percent of managers expect that they will grow, just 22 percent plan to make changes necessary to their operating models to achieve efficiency and cost savings.
“While many asset managers expect to stay on their growth course, our research indicates that there is a gap between how firms ought to be preparing and the actual level of preparation. Significant changes are coming, and these changes should create a sense of urgency within the asset management community,” the report said.
The companies conducted and analyzed interviews with 151 senior asset management professionals this spring across North America, Europe, and the Asia-Pacific regions — all working at firms with assets under management ranging from $250 million to over $150 billion. They found that many asset managers are concerned about the same outside challenges: financial market volatility, keeping up with regulatory changes, and the shifting demands of investors.
While there might be fewer wild price swings in the future, other challenges are expected to persist, according to the study.
“While extreme volatility will hopefully diminish, the reality is that regulation and shifting client demand will lead to more lasting structural changes that could affect the ability to grow assets, performance, and client expectations,” the study said.
Traditional active managers are in an especially tough spot, needing to respond to passive investing and other competitors such as hedge funds and private equity strategies. Although those challenges are well documented, only 10 percent of respondents highlighted these competitors as a threat to their business model.
“When combined with only 19 percent of respondents also acknowledging competition from other long-only managers, the relative lack of attention on competition could lead to some surprises down the road, as convincing asset owners to stay in long-only funds may become more difficult,” according to the researchers. “Competition will continue to increase, and firms will need to differentiate their offerings from both traditional and non-traditional strategies.”
Meanwhile, asset managers are also facing internal challenges: investment performance, managing talent, and rising costs.
Despite performance challenges managers do not plan to make significant strategy changes to address these concerns, according to the report. Worried about talent, asset managers are considering more employee-friendly policies, such as hybrid work, and some firms are relocating to more popular locations. “Talent is key to scaling to demand, but hiring and retaining is difficult,” the report said.
At firms managing less than $10 billion — the vast majority of managers — rising costs are also a top internal concern.
Chaotic markets in recent years are partly to blame for some of the slow footedness by asset managers to evolve their businesses. But Northern Trust and Coalition Greenwich argue that managers need to reexamine themselves to keep up with or stay ahead of peers.
“The confidence asset managers have in their status quo may be misguided,” the report says. “The depth and breadth of structural shifts in the investment landscape that have been somewhat obscured by market chaos suggest the status quo won’t work for much longer.”
