Asset management trends don’t neatly begin or end with each calendar year. Some of the challenges investment firms faced during the past 12 months are going to spill into 2024.
No asset manager will be surprised to hear that these phenomena are persistent: Asset owners will continue to chip away at fees; mergers and acquisitions are going to happen; and the costs of doing business are going to go up. However, some relatively new trends will be prominent next year.
Investment managers have soured on the prospects for their business growth. For the third straight year, an increasing number of them said their revenue would deteriorate. In 2021, 78 percent of managers said revenue would decline and, in 2022, 65 percent said the same thing, according to a survey of firms by Deloitte. This year, asset managers are less positive. Only 38 percent think their revenue will grow and 41 percent expect revenue will be worse.
For its outlook report, Deloitte surveyed 600 senior investment management executives around the globe in June and July. All of the investment companies included in the report had at least $50 billion in assets under management.
“Since current revenue models are tied to assets under management, in a down market, revenues at many investment firms are expected to drop. Looking at this year’s and the last two years of our proprietary survey data, we see growing pessimism in how respondents feel about their firm’s revenue prospects over the next year,” Deloitte consultants wrote in their 2024 investment management outlook.
To feel more pessimistic about next year is saying something. In 2022, fund outflows and market declines caused the AUM of open-ended funds to decline 15 percent — the largest single-year, year-over-year drop experienced by active mutual funds in the U.S. since 2008 (assets plummeted 36 percent that year). U.S. active mutual funds have had net outflows for nine consecutive years and reached $1.2 trillion in 2022. Deloitte suggested the reason is that asset managers are well aware that investors are disenchanted with actively managed strategies.
“The narrative about active funds’ ability to better navigate market downturns seems to be fading over the last few years, an ebb that is replicated in fund outflows,” Deloitte’s report says. The exception to this is alternative investment firms, which have flourished.
Another tough reality asset managers will face in 2024 is that regardless of whether their revenue is down and margins are thinned, clients will expect more of them.
“In investment management, investment performance is important, but it’s not the only factor in developing customer experience. When performance wanes, the other elements of the [customer experience] can make the difference,” Deloitte says.
Investors want more choices when it comes to packaging, pricing, strategy, theme, and operational approaches to investment offerings. Actively managed ETFs and direct indexing are two examples of new products Deloitte gave that are gaining traction heading into 2024.
Clients will also expect more personalized and timely interactions and asset managers need technology (see: artificial intelligence) to stay aware of and meet those needs. Customer experience is “one of the areas that generative AI will likely transform over the next few years,” according to Deloitte.
AI can, at least in theory, take customer segmentation, past interactions, and portfolio information and make them collectively useful more quickly and accurately than a human can. If the front, middle and back offices of investment firms can coordinate and commit to AI tools in 2024, they could have an advantage over peers. Although, AI might soon be a necessity to remain competitive — in an EY survey of asset management industry leaders, 99 percent are either using or planing to use generative AI at their firm.
“Generative AI can help transform the timeliness and clarity of customer interactions. Imagine a customer asking the names of top drivers of alpha in their portfolios’ funds over each of the prior four quarters, showing how each performed compared to their industry sector peers. A fully developed, generative AI capability could perhaps answer that question in a matter of seconds, which might be hours faster than pre-generative AI processes could generate,” Deloitte says.
