Russia’s war in Ukraine, worldwide economic stagnation and the continuing global disruption related to the COVID-19 pandemic have contributed to a sobering environment for asset management firms. The ongoing regulatory burden and increasingly complex technology landscape also have created challenges.
The modest rebound on stock markets this first quarter, following a dismal performance having plunged to near double-digit rates in 2022, has meant growing anyone’s investment portfolio is still extremely difficult. In The Grant Thornton International (GTI) Business Report, in the second half of 2022, one percent of asset management firm respondents reported optimism about their own economy. That’s the lowest optimism mark in the past five semi-yearly GTI surveys.
In the face of the current economic uncertainty, asset management leaders have been refocusing their attention on core business issues and assessing the key risks to continued growth. They are employing targeted strategies that react to investors’ demands, ensure a resilient operating environment and streamline operations to focus on revenue generating activities.
These strategies are helping asset management firms adapt, build resilience and succeed during these difficult times.
The GTI Business Report reveals that during the second half of 2022, for mid-market companies the percentage of asset management respondents expecting to increase profitability fell by double digits; however, fifty-six percent of these respondents still predicted that their profits would rise in the next 12 months.
Asset managers are now at an inflection point, leaving a long-extended bull market and realigning their business in the short and long term.
As part of this realignment, asset managers are taking a strategic approach to tackling potential risks and building resiliency.
First, they recognize that top-quality talent is scare, so they are doubling down on their people and retention strategies, increasing their efforts to keep key employees. They are also making strategic investments into technology, with a particular focus on improving their cybersecurity protections. When it comes to operational efficiency, they are evaluating the pros and cons of outsourcing areas such as compliance, risk reporting, financial reporting, valuation and more. At the same time, they’re making tough decisions about reducing less profitable business segments and the corresponding workforces that support those segments.
Operational resilience is a key priority for all organisations right now because of regulatory pressure and client expectations. Organisations have to ensure they can identify and adapt to potential operational disruption. This forward thinking approach requires coordination between risk management, business continuity and disaster recovery; third-party risk management; and cybersecurity. Currently, firms are grappling with uncertainty in macroeconomic climate, disruption in the form of democratisation of distribution networks and the rise of digital assets. Organisations need to be actively scanning the horizon to predict how these changes will affect their business and how best to react when they occur.
However, by thinking strategically about talent and resourcing, investments in technology and cybersecurity and consolidation opportunities, asset managers will be better prepared to cope with changes and challenges as they arise.
Globally, the demand for talent continues to rise, so firms reinforcing their efforts to attract and retain key employees. Three of four asset management respondents in the GTI survey identified labour costs as a key constraint as firms in the industry continue to face an extremely competitive staffing environment. Consequently, firms are struggling to retain and reward talent at the appropriate levels.
For the foreseeable future, flexible working will remain an issue for workforce managers. Many asset management duties can be performed largely remotely, but there’s a price to be paid for providing employees with the flexibility they crave. Collaboration, cultural cohesiveness and engagement can suffer when people are separated.
As a result, in recent months, many companies in all industries have increased their focus on getting people to return to the office — with mixed results. Some employees have chosen to leave their roles after being required to come back to the office. However, for those who remain, engagement has increased and team culture has been enhanced.
These experiences have caused many asset management firms to adopt hybrid working arrangements that permit a large amount of flexibility while also bringing people together to build morale and facilitate teamwork. Hybrid work is here to stay, and when managed properly, it has proven to be a win-win for organizations and their people.
Focusing on sustainability is another strategy for engaging employees. Asset management firms are winning the loyalty of their employees by addressing their desire for belonging and purpose in their work and focusing on environmental stewardship; diversity, equity and inclusion; and community and social initiatives.
Firms are also looking at the broad horizon to deploy optimal target operating models. A large move, particularly in the private markets area, is to outsource activities through traditional administration support and also through identifying non-core activities and using specialist providers to get best-in-class solutions through partnerships rather than in-house only solutions. This strategy is helping the most talented people at firms increase their focus on core business duties.
Lastly, firms are balancing their needs to grow talent both at home and abroad. Some firms have found that offshoring can create knowledge gaps over time, so they’re focusing on developing talent at home. Meanwhile, global firms continue working within their global footprint to grow talent in different marketplaces.
Across virtually all industries, investing in technology can improve efficiency and customer service while creating strategic advantages.
Because asset management firms face fee pressures and a challenging market, their spending on technology will need to be strategic and targeted. Sixty-seven percent of the asset management respondents in the GTI survey reported that economic conditions are a key constraint for their business right now, so they are managing their budgets carefully.
Organisations recognise that they need to invest in technology to remain relevant, but they have to be smarter with their investments.
While the drive to automate is still at the top of the agenda, some firms recognise these investments might not deliver top-line cost savings that are as dramatic as intended. However, automation will ultimately create more robust processes, streamline internal operations and drive higher value-add activities.
Firms will continue to focus on technology investments to react to regulatory demand and changes, such as sustainability reporting, as well as operational resilience and other pain points in the process, such as client on boarding and reporting.
The prevalence of digital business today makes it impossible to talk about resilience without mentioning cyber resilience. Asset management firms are responsible for protecting their clients’ assets and sensitive personal data in addition to the firms’ own processes and systems.
As client interfaces become increasingly sophisticated and firms use more automation, the SEC is expected to issue new regulations with cybersecurity requirements that asset management firms will need to follow. Compliance is one objective; earning clients’ trust by protecting data and systems is another.
As clients and regulators demand more transparency and enhanced risk management across the board, asset management firms will need to consider and assess cybersecurity in the wider context of firms’ overall operational resilience.
Assessing cyber risks can be a huge challenge at complex organisations with global footprints and networks of third-party providers, especially with many operating in a hybrid working environment. Meanwhile, cyber insurance providers are demanding that certain controls be implemented before they will agree to provide coverage. In some instances, however, stronger controls can lead to reduced cyber insurance premiums.
Mergers and acquisitions remain a prominent focus in asset management as scaling operations through acquisition has proven a successful way to survive and thrive in the uncertain environment.
Consolidation helps firms spread risks and opportunities across a larger client base, opening doors to new geographies and presenting opportunities to diversify products.
We continue to see a trend of vertical integration in which organizations are expanding the breadth of services and products they can offer across the life cycle and supply chain, from advice through to distribution of services and beyond.
Of course, consolidation as a strategy comes with its own risks. First, a transaction is only successful if integration is carried out thoughtfully and skilfully. Merging talent, processes and systems can increase efficiency and effectiveness, but creating strong alignment within the first 90 days after a transaction is critical for success.
Second, mergers can lead to increasingly complex operational structures that can bog down operations in bureaucracy. Therefore, constructing optimum operating models and determining how operations will be integrated either in-house or in partnerships with third-party providers is important for maintaining efficiency.
Across the industry, we see common areas for outsourcing being those that are either highly technical and require deep specialist expertise, such as cybersecurity, or highly voluminous activities that can be resource heavy, such as AML, finance and reporting. Outsourcing is also common for non-core activities, such as vendor management or procurement activities. There is no one-size-fits-all approach to outsourcing, and each organisation is tailoring how it works with third parties to best serve its client base and take advantage of broader market expertise and talent.
This trend will continue in the coming years as talent shortages continue and cost reduction remains a key focus. Where appropriate, consolidation can provide strength in numbers as organizations in asset management continue to display the resilience needed to succeed in challenging times.