The future of Asset Management
The asset management industry is going to change substantially in the coming years. Regulatory and demographic trends have already transformed the sector and the advance of technology is only speeding things up.
During the past decade, the asset management industry was mostly occupied with regulatory changes dictating costly compliance procedures. The increase in regulatory burden was mainly felt by small asset management firms. In addition to increased regulatory costs, fee pressure has had a large impact on the industry as well. In the coming years we believe these two forces will remain top of mind, but they have different drivers now.
Technology has entered the asset management industry. This will add costs because asset managers have to live up to ever-increasing demands of customers, who require immediacy, connectivity and ubiquity in a simple and transparent service offering. At the same time, this leads to an increase in fee pressure due to growing transparency, comparability and competition from non-financial companies. We think the asset management pie is still growing strongly, but not everyone is invited to take a piece.
To incumbents, the control over the customer relationship is at stake. They will have to make a strategic choice between spending on technology to offer satisfactory services to their clients, or losing the customer relation and becoming the very efficient infrastructure to the newcomers from the technology sector.
Plenty of threats to incumbents
Next to the broad thematic changes within technology, regulation and demographics we observe some changes that are more specific to the asset management industry. Index funds are gaining popularity and make up almost a third of assets under management in the US. This has led to the separation of alpha and beta, which in turn is impacting fees. Partly due to the low fees and ETF opportunity we also observe a growth in demand for multi-asset solutions and liability-driven-investment solutions.
Next to changing products we also see changing customer profiles. As a result of regulation, low commodity prices and central bank policy we observe a shift from the institutional client towards the retail client. Most asset managers have optimized their sales effort on the institutional side, while retail investors require different methods of engagement. We also think the role of the middle-man (wholesale) will be re-defined in the coming years.
Customer centric multi-asset scale required
Contrary to doom-thinkers, the odds are not necessarily against traditional asset managers. Demographic trends combined with a diminishing role of governments in pensions and social security bode well in terms of demand for asset management services. By means of incorporating technology, the customer relationship that was built up during many decades can be preserved and new customer groups can be served.
We think the impact on the asset management industry can be summarized as higher costs, lower fees and a battle for the customer relationship. We think the first two impacts will lead to consolidation because scale is essential in this new environment. The customer relationship requires a complete mind shift and perhaps even alliances with the technology sector. Not all asset managers will be able to develop the required skills in-house. Strategic alliances between technology providers and asset managers are very likely, but the stability of those alliances boils down to a prisoner’s dilemma. When both sides cooperate, the payoff for society is largest and the pie is divided efficiently. However, the prospect of a bigger piece of the pie is very tempting to some. Not every asset manager will be able to adapt to this changing mind-set. We look for asset managers with scale, multi-asset solutions and integrated technology. Companies that offer investment advice face a more challenging environment.
The full white paper by Jeroen van Oerle and Patrick Lemmens is attached.
WHITE PAPER
April 2016
For professional investors
The future of asset management
| 0
The future of asset
management
Jeroen van Oerle
Patrick Lemmens
The future of asset management
| 1
TABLE OF CONTENTS
Executive summary
2
Introduction
3
What is driving change in the asset management indu
stry?
4
How will this influence asset management?
12
Winners and losers
18
Appendix A: Regulatory changes in asset management
19
The future of asset management
| 2
Executive summary
During the past decade, the asset management indust
ry was mostly
occupied with regulatory changes dictating costly c
ompliance
procedures. The increase in regulatory burden was m
ainly felt by
small asset management firms. In addition to increa
sed regulatory
costs, fee pressure has had a large impact on the i
ndustry as well. In
the coming years we believe these two forces will r
emain top of mind,
but they have different drivers now.
Technology has entered the asset management industr
y. This will add
costs because asset managers have to live up to eve
r-increasing
customer demands regarding immediacy, connectivity
and ubiquity.
At the same time, this leads to an increase in fee
pressure due to
growing transparency, comparability and competition
from non-
financial companies. We think the asset management
pie is still
growing strongly, but not everyone is invited to ta
ke a piece.
Plenty of threats to incumbents
Next to the broad thematic changes within technolog
y, regulation and demographics we
observe some changes that are more specific to the
asset management industry. Index
funds are gaining popularity and make up almost a t
hird of assets under management in
the USA. This has led to the separation of alpha an
d beta which in turn is impacting fees.
Partly due to the low fees and ETF opportunity we a
lso observe a growth in demand for
multi-asset solutions and liability-driven-investme
nt solutions.
Next to changing products we also see changing cust
omer profiles. As a result of
regulation, low commodity prices and central bank p
olicy we observe a shift from the
institutional client towards the retail client. Mos
t asset managers have optimized their
sales effort on the institutional side, while retai
l investors require different methods of
engagement. We also think the role of the middle-ma
n (wholesale) will be re-defined in
the coming years.
Customer centric multi-asset scale required
We think the impact on the asset management industr
y can be summarized as higher
costs, lower fees and a battle for the customer rel
ationship. We think the first two impacts
will lead to consolidation because scale is essenti
al in this new environment. The customer
relationship requires a complete mind shift and per
haps even alliances with the
technology sector. Not every asset manager will be
able to adapt to this changing mind-
set. We look for asset managers with scale, multi-a
sset solutions and integrated
technology. Companies that offer investment advice
face a more challenging environment.
The future of asset management
| 3
Introduction
The asset management industry is going to change su
bstantially in
the coming years. Regulatory and demographic trends
have already
had a transformative impact on the sector. In gener
al, the direction of
these two trends is clear and the pace of change is
slow. However,
the technology dimension is putting speed into the
transformation
equation. Customers require immediacy, connectivity
and ubiquity in
a simple and transparent service offering. These re
quirements are
more often being fulfilled by non-traditional playe
rs. To incumbents,
the control over the customer relationship is at st
ake. They will have
to make a strategic choice between spending on tech
nology to offer
satisfactory services to their clients, or losing t
he customer relation
and becoming the very efficient infrastructure to t
he newcomers from
the technology sector.
Not necessarily bad for incumbents
In this paper we limit the scope of the asset manag
ement industry to the service of actually
managing money for end clients, which does not incl
ude insurance companies and
pension funds that manage mostly internal money and
are in our definition therefore
more customers than competitors to the asset manage
ment industry. Contrary to doom-
thinkers, the odds are not necessarily against trad
itional asset managers. In general it can
be concluded that the pie for asset management is s
till growing. Demographic trends
combined with a diminishing role of governments con
cerning pensions and social security
bode well in terms of demand for asset management s
ervices. By means of incorporating
technology, the customer relationship that was buil
t up during many decades can be
preserved and new customer groups can be served.
Not all asset managers will be able to develop the
required skills in-house. Strategic
alliances between technology providers and asset ma
nagers are very likely, but the
stability of those alliances boils down to a prison
er’s dilemma. When both sides cooperate,
the payoff for society is largest and the pie is di
vided Pareto efficiently. However, the
prospect of a bigger piece of the pie is very tempt
ing to some.
Three central questions
In this white paper we try to answer three question
s:
1.
What is driving change in the asset management indu
stry?
2.
How will this influence asset management?
3.
Who will win versus lose?
The future of asset management
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What is driving change in the
asset management industry?
In answering this question, we will look at a broad
range of
categories which we believe to be indicative of cha
nge in asset
management. We start by looking at the overarching
themes of
demographics, regulation and technology. Several of
these themes
are not just relevant for the asset management indu
stry, but rather
for the financial sector as a whole. After addressi
ng these themes we
will zoom into three trends that are changing the a
sset management
industry in particular, namely the popularity of in
dexation, the shift
from institutional to retail money and the growth i
n demand for
multi-asset solutions.
Demographic tailwinds expected...
Most drivers of the demographic category are well k
nown and documented. In our paper
about the future of pensions
1
we highlighted the most important trends, and figu
re 1
summarizes these again. The blue outer circle repre
sents the demographic changes that
will have an impact on the asset management industr
y in the coming years. In general it
can be concluded that all of these trends are posit
ive for asset management. The pie is
growing. The demographic trends combined with socia
l security provide an additional
tailwind, given the fact that more and more people
need to take care of their own pension
(shift from defined benefit to defined contribution
) and can rely on government funding to
a lesser extent.
...but social dynamics can spoil the fun
The orange inner circle represents the social trend
s. These trends can either magnify
certain demographic developments, or counter their
positive effect. An example of the
latter would be the increasing influence of the dev
eloping world on asset management in
combination with social, political and cultural dif
ferences. In itself the asset shift towards
developing countries is positive for asset manageme
nt, because both on the retail side
and on the institutional side there will be new cli
ents that are currently not served.
However, in several emerging markets the attitude t
owards investing is very different from
that in the developed world. Investing is sometimes
seen as gambling and to a lesser
extent as a way to accumulate long-term wealth. Mos
t of the social trends require
investments by the asset management industry. Immed
iacy, transparency and high levels
of personalization are impossible without the right
technology.
1
Getting old and staying wealthy, van Oerle (March,
2015)
The future of asset management
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Figure 1. Socio-demographic trends impacting asset ma
nagement
Source: KMPG, Robeco internal resources
Generational differences require agile processes
An additional complicating factor is the problem th
at
the social trends as shown in figure 1 are a cross-
section of the entire population. Generational
differences play an important role and lead to very
different outcomes. This requires agility from asse
t
managers in order to cope with differences in
customer expectations. Being simple and transparent
to one, while creating a complex but personalized
approach for another, is an organizational challeng
e.
As we will discuss later on, technology is an enabl
er
to cope with this challenge. The fact that current
wealth is with the baby boom generation is not a
good reason to tailor to this generation’s needs on
ly. In the coming years, assets from the
baby boom generation will be passed onto younger ge
nerations. If current asset managers
have alienated this group of future investors, they
will have a hard time regaining their
trust. The investment style also differs a lot. The
baby boom generation is focused on asset
preservation (most of them are retired or will reti
re soon), while younger generations
require asset accumulation. Different generations h
ave different thoughts about using
technology, trusting advisors and managing money. T
hey also have different risk profiles.
All in all, demand for customization increases.
The future of asset management
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Digitization versus digitalization
Technology is the fast changing element in the tran
sformation
equation, but it is wrong to generalize technologic
al progress.
It is very important to differentiate between digit
ization and
digitalization. Referring to the definitions as des
cribed in the
Oxford dictionary, digitization is the process of m
aking
analogue input digital. Digitalization, on the othe
r hand, refers
to the process of using technology to better intera
ct internally and externally (with clients).
The asset management industry in particular is at t
he forefront of digitization, but is far
behind in terms of digitalization.
Trends in digitization don’t pose a threat to incum
bents, but do cost money
One of the competitive advantages of asset manageme
nt versus technology companies is
their abundance of decade-long customer data. Contr
ary to popular opinion the growth of
data as well as the introduction of tools such as b
lockchain
2
is in itself not a disruptive
threat to the asset management industry. Software a
nd capabilities are readily available to
many companies. Both internally developed and exter
nally generated tools are used to
optimize the process of storing and transferring da
ta. Although not a threat to
incumbents, it is costly to maintain records and im
plement new technologies. Companies
that are only focusing on costs will have a hard ti
me making the crucial strategic
investment decisions.
Trends in digitalization should be more worrisome t
o incumbents
Whereas the asset management industry is on top of
developments in the processing of
data, it is lagging far behind developments related
to the interaction with clients.
Customers that were previously not interesting to s
erve (low-wealth individuals) are now
becoming a new market because technology allows ser
ving them at low costs and in large
volumes. The emergence of robo-advice is one of the
most recent results. These
technology companies step in between the asset mana
gement industry and their clients.
The threat of losing the customer relationship is a
real one in our opinion. In order to
counter this threat, asset managers as well as fina
ncial planners need to invest heavily in
technology and form strategic alliances with techno
logy providers.
New technology, new opportunities, new players, new
threats
The key difference between the technology trend and
other trends is the fact that it allows
for non-traditional players to enter the market. Wi
thin asset management the most
notable introduction has been that of robo-advisors
. These companies did not emerge
from the asset management industry, but from the te
chnology industry after which
strategic alliances with companies in the financial
sector were created.
Most robo-advisors are not offering alpha creation,
but focus on the unmet need for beta
allocation. By combining the need for beta with low
-cost technology, it has become
available to a group of people that previously were
not servable. In a survey, 70% of US
financial advisors indicate they want more digital
investment oriented advice from their
asset managers
3
. Besides robo-advisors we also see initiatives of
technology companies
entering the asset management market. A good exampl
e of this would be Tianhong Asset
management, which has gathered 81bn dollars in asse
ts under management (AUM) in the
nine months’ time after Alibaba announced a partner
ship. Figure 2 shows that the most
likely impact of non-traditional players is on advi
ce and wealth management.
2
Blockchain is the underlying technology behind Bit
coin and has potential to revolutionize back office
s.
3
CaseyQuirk, 2015
The future of asset management
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Figure 2. Entrance of non-traditional players in th
e asset management industry
Source: JP Morgan, Oliver Wyman November 2014
No end to regulatory pressure
In the aftermath of the financial crisis, regulatio
n dealt with the over-the-counter market,
wholesale and derivative trading. After these first
patches, focus shifted to the banking
sector, followed by the insurance sector and is lik
ely to return to the investment
management sector again in the coming years, with a
focus on retail client protection.
It was long thought that the definition of ‘systemi
cally important’, as seen in the banking
sector, would be used in asset management as well.
Under the originally proposed
definition of systemically important, a balance she
et of USD 100 billion or more, or AUM
of USD 1 trillion or more, were set as qualifying c
riteria. This would imply only US asset
managers would qualify. Although it is less likely
that asset managers will be designated as
systemically important, regulatory focus on capital
, liquidity and market stability has
grown. As shown in appendix A, the amount of regula
tory change that will be fired at the
asset management industry in the coming years will
be substantial. This is estimated to
increase compliance costs by an average of 1-5 perc
entage points
4
. All costs added up, the
operational margin impact is estimated to be betwee
n 50 and 100 basis points. This
burden will most likely hit smaller asset managers
hardest, because the large asset
managers have already been preparing for regulatory
compliance for a long time. The
biggest allocation of costs goes to complying with
trading capabilities, collateral
management and risk management regulation.
Europe and the US take a different approach
We have already seen that the US and EU took a diff
erent approach to regulating money
market funds. In an effort to reduce systemic risk
of money market funds after 2008 (due
to the dry-up of liquidity as a consequence of mone
y market funds’ holdings of synthetic
products like CDOs), the EU and US imposed stricter
regulation. However, the focus
differed substantially. The US focus was on the rep
resentation of ‘true value’, represented
4
Morgan Stanley, 2015
The future of asset management
| 8
by a floating NAV as opposed to the stable USD 1 NA
V prior to 2008. The EU took it a step
further with the introduction of a prescription of
eligible assets, diversification and liquidity
requirements as well as a higher level of disclosur
e and stress testing. In a broader
perspective we see the same. In the US the Volcker r
ule had the biggest impact and we
expect to see only incremental changes to regulatio
n going forward, although this is far
from certain. In Europe MiFID II and UCITS V (Undert
akings for the Collective Investment in
Transferable Securities) are the most important reg
ulatory developments. The introduction
of MiFID II, however, has been delayed until Januar
y 2018. The long-term implications for
global asset managers are increased costs to comply
with different local standards.
Regulation has pushed liquidity to the buy-side
Regulatory change has impacted the market structure
. The US Volcker rule caused many
banks to stop proprietary trading activities. This
has driven capacity out of the sell-side.
Quantitative easing on the other hand has been good
for buy-side assets. The end result
has been a shift in revenue towards the buy-side as
shown in figure 3. This also implies a
shift in liquidity (risk) to the buy-side. Combined
with rapid flows in passive products this
might be an additional factor that leads to a prolo
nged period of high volatility.
Figure 3. Liquidity shift from the sell-side to the b
uy-side
Source: Morgan Stanley, 2015
Index fund growth continues
A trend more specific to the asset management indus
try is the popularity of index funds.
The US regulator hinted towards the introduction of
ETFs in the early 1990s to increase
transparency and reduce costs for investors. Exchan
ge traded funds are currently a USD 3
trillion market with 6,780 products traded on 60 ex
changes
5
. Total AUM were estimated
at around USD 74 trillion in 2014. Although the cos
t component is often assumed to be
the main reason for switching from active to passiv
e, this is not complete. The reason why
people are looking for lower cost solutions is that
the alpha and the beta component are
being separated. A lot of institutional portfolios
are not willing to pay for the alpha
component anymore and therefore search for the chea
pest way to get beta exposure. 69%
of asset managers use ETFs primarily for core alloc
ation in their institutional portfolios
6
.
5
Bloomberg analysis, 2016
6
Greenwich Associates, 2014
The future of asset management
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When combining the separation of alpha and beta wit
h a greater focus on risk and the
lower expected returns on the fixed income side, th
e rise of index funds becomes more
than just a cost consideration. The high liquidity
and flexibility of core index funds also
offer an easy route to obtain and rebalance tactica
l asset allocation. Figures 4 and 5 show
the US is leading in absolute and relative index fu
nd flows. Index funds concentrating on
bond markets were long out of favor, but have also
gained a lot of attention lately. An
important side-note to the popularity of index fund
s is that illiquidity in niche products can
lead to a brake-down of the pricing mechanism. We e
xpect regulation to intensify in the
form of required capital buffers for large ETF prov
iders if this risk increases.
Figure 4. Equity and bond index funds over total AUM
Europe and USA
Source: BofA Merrill Lynch, 2015
Figure 5. Money flows index- and non-index funds
Source: Morning star, 2014
The future of asset management
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The growth in passive has consequences for active
Since alpha and beta can now be separated, the cust
omer is only willing to pay for true
alpha creation which implies ‘benchmark hugging’ is
no longer acceptable. Going off-
benchmark to add alpha can work against portfolio m
anagers that use a benchmark to
calculate relative performance though. ETF flows cu
rrently represent 35 percent of the US
equity market and it is estimated index funds will
make up between 40 and 50 percent of
global equity flows in the long run. Add to that th
e portfolio managers (or mandates) that
increase active share by means of selecting differe
nt weights within their benchmark,
instead of going off-benchmark, and somewhere betwe
en 60 to 80 percent of fund flows
are concentrated on benchmark stocks only. This has
a big impact on off-benchmark stocks
and on the fundamentals of investing because benchm
ark inclusion becomes a primary
driver of stock performance instead of fundamentals
. This could lead to an over-
investment in benchmark stocks if remuneration is d
ependent on relative performance and
will also make it harder for off-benchmark companie
s to find funding for growth.
Client base shifts from institutional to individual
Another strong and very important trend observed in
the asset management industry is
the shift of power from institutional investors to
retail investors. There are several drivers
for this development, but they all come back to a d
eclining role of the institutional side,
with as a natural result that retail becomes more d
ominant. The declining role of
institutional clients is a result of pension withdr
awals by retirees, sovereign funds that are
no longer growing (some oil related sovereign funds
are even withdrawing institutionally
managed assets) and the insourcing of asset managem
ent capabilities by large asset
owners such as insurance companies. As we discussed
under regulatory trends, the
regulator is mostly focusing on retail client prote
ction. With an increasing piece of the pie
allocated to retail we think it is likely that the
regulatory environment continues to be
challenging.
Figure 6. Global asset management industry net new flo
ws by investor type
Source: Casey Quirk Analysis
Multi-asset solutions offer high value at low costs
Changing demographics require a change in asset mix
. Pension changes across the world
are increasingly supportive of liability driven inv
esting (LDI) and low-volatility solutions.
Both require a mix of equity, fixed income and alte
rnative investments. However, the
growth in demand for multi-asset solutions does not
only come from aging. The fact that
multi-asset product solutions have become available
at very low costs is also contributing
to their popularity. Compared with active equity pr
oducts, the fee for the average multi-
asset product is much lower, as can be seen in figu
re 7.
The future of asset management
| 11
Figure 7. Fee margins (bp) by product
Source: BofA Merrill Lynch, BCG
Growth in multi-asset driven by multiple pillars
The three largest contributors to multi-asset growt
h are shown in figure 8. Shifting pension
schemes lead to higher demand for target date solut
ions. The combination of equity and
fixed income in order to reduce risks at low fees d
rives the demand for core multi-asset
solutions. The biggest growth comes from the inclus
ion of alternative asset classes such as
real estate and private equity to form outcome-orie
nted multi-asset solutions. Multi-asset
strategies are not easy to implement though. Manage
rs need scale and a very highly
skilled team that can handle the complexities that
come with combining multiple asset
classes. There are only a few asset managers that c
an offer these services in a cost-efficient
way. GARS (Standard life) and Amundi are examples o
f successful multi-asset managers.
Figure 8. Demand for multi-asset solutions from differ
ent sources
Source: Morgan Stanley and Casey Quirk, 2013
The future of asset management
| 12
How will this influence asset
management?
We believe the trends as described above will impac
t several layers of
asset management. We look at the general impacts on
the industry,
the impacts specific to institutional and those spe
cific to retail clients.
The informed reader might notice that we left out w
holesale. We
think the introduction of technology and the shift
of client demand
will overhaul the wholesale proposition and put mor
e focus on retail.
Asset management consolidation likely
We think the general impact of the trends in asset
management will be on three themes.
First, there is a need for scale. When adding the t
rends of fee pressure, regulatory cost
increase and demand for multi-asset solutions, the
importance of scale becomes clear. Fee
pressure is likely to continue. Not only has compet
ition from within the industry increased
by the introduction of low cost passive solutions,
the competition from non-traditional
companies is also growing. Increasing regulatory co
st is another reason why scale is
important. Compliance costs are simply too high for
small asset managers in order for
them to be cost-competitive. We think this will lea
d to consolidation within the asset
management industry.
Sales force needs rethinking
The second general impact from the trends we descri
bed above is in our view the re-
organization of the sales force due to the shift fr
om institutional to retail. Currently many
asset management sales teams are focused on creatin
g cost-efficient ways to target
institutional clients. These processes are generall
y efficient in terms of ‘sales effort per unit
AUM’. The sales process to retail clients is very d
ifferent and in many cases less efficient if
described as the effort per unit of AUM. The only s
olution to this is to use technology and
standardize.
Wholesale will change dramatically
The final general impact is on the changing role of
wholesale. We believe we will end up
with two customer groups for asset managers, either
retail or institutional. We think the
retail client is either going to be approached dire
ctly by asset managers that use customer-
centric technology, or will search aggregator platf
orms for solutions. Paying a hefty sum of
money in order to receive fund advice is likely to
become a less appealing proposition,
given the abundance of comparability enabled by tec
hnology. The potential for aggregator
sites and robo-advice to cut out business from whol
esale is large. Figure 9 shows the
execution-only model is likely to shrink with discr
etionary management proposition
demand increasing. We believe the growth in advisor
y will not be through traditional
wholesale, but rather through online platforms.
The future of asset management
| 13
Figure 9. Change in engagement model preferences
Source: JP Morgan, Oliver Wyman November 2014
Institutional requires cost efficiency and alpha ge
neration
The effect of the trends on the institutional side
of asset management is mainly
concentrated in cost efficiency. Fees are coming do
wn while reporting costs are increasing.
Institutional asset managers will have to add alpha
(after fees) in order to remain
competitive versus index funds. Although that sound
s logical, only a small percentage of
active managers have been able to generate positive
returns after deducting fees. Figure
11 shows that Eurozone active equity managers have
a bad long-term track record . The
performance of active managers in 2001 especially w
eighs down heavily on the 15-year
performance numbers. If we were to add 2014 and 201
5 to figure 11 and exclude 2001,
the picture would look a bit better, but still more
than half of the active equity managers
are underperforming their benchmark before fees in
this period.
On the fixed income side the underperformance in th
e long run is even worse. In the past
this relative alpha underperformance was accepted b
ecause investing in active mutual
funds was a way to generate international diversifi
cation in a cost-efficient way. It was
often the best way of beta allocation versus intern
al direct investment strategies. With the
introduction of exchange traded funds this has chan
ged. Beta exposure is available at low
costs and the ‘true’ added value of active manageme
nt in terms of generating alpha is
becoming a focus point. Please note that not all be
nchmarks are investable through an
exchange traded fund alternative.
We believe the focus on performance will grow furth
er on the institutional side.
Establishing alpha will increasingly be measured ve
rsus investible ETFs rather than ‘un-
investable’ benchmarks. We think transparency and i
mmediacy in terms of reporting will
become the standard. This all implies institutional
asset managers have to become lean
and mean alpha generating machines.
Blockchain technology can facilitate required cost
savings
Although we will not go into much detail on blockch
ain technology in this paper (we will
dedicate a white paper to this topic), it might be
one of the best possibilities for cost
savings in the long run. It requires legacy system
replacement and a high level of
investments at first though.
The future of asset management
| 14
Figure 10. Relative outperformance versus benchmark fo
r active managers (before Fees)
Source: Morningstar, 2015
Figure 11. Relative performance active equity and fixed i
ncome until 2013 (before fees)
Source: Citywire, 2013
Retail requires customer centricity
Costs on the retail side are of lesser importance i
n our view. The average retail client does
not view a couple of basis points fee difference as
material. The complexities that come
with managing individual investments versus aggrega
te institutional investments are
large. For the retail client the focus is on differ
ent areas such as transparency of fees and
the investment process, advice and customer centric
ity. Also thinking in terms of solutions
instead of pushing products is an import difference
with the institutional side, where this is
already more common. This all requires investments
in technology which add to the cost
base. There are not many asset managers that can ef
ficiently service both institutional and
retail clients because of the difference in require
d operational costs. We think the majority
of asset managers will have to choose which clients
to service and rethink their strategy if
they change focus.
The future of asset management
| 15
Revenue opportunities are within certain pockets of
the retail side
As we described in the trends above, we expect reta
il to become a more dominant part of
the asset management client basis. As figure 12 sho
ws, especially the American and
European retail investor are expected to grow in im
portance. The shift of pension money
towards defined contribution is seen as institution
al growth in figure 12 but we think that
with the increase of financial planning tools more
people will start to invest their money
directly. In terms of assets under management the i
nstitutional side is still larger, but fees
are larger on the retail side as figure 7 already s
howed. As was shown in figure 6, the retail
side might be smaller in terms of AUM, but the fees
are about double as high throughout
the asset classes. We expect retail to become the d
ominant revenue driver.
Figure 12. Global revenue opportunities by client se
gment, 2016-2020E
Source: Casey Quirk, November 2015
Technology investments are essential for retail
In order to serve the retail client, asset managers
need to invest in technology. Not only
must they become more transparent in terms of the i
nvestment process and the
associated costs, but also provide financial advice
services. The risk for the asset
management industry is that if they do not invest i
n technology and platforms, they will
lose the relationship with their clients and become
dependent on the allocation of those
who own the customer relationship. A short period o
f good or bad performance can lead
to large flows in such a scenario, which can be cos
tly.
The asset management industry is lagging behind in
terms of introducing new technology.
Customization of products as well as thinking in te
rms of solutions versus pushing products
is not common yet. There are, however, examples of
asset managers that are recognizing
the need to invest in technology. Most of them do s
o via strategic alliances, but it is
interesting to observe the lack of true customer kn
owledge. We think there is a great
opportunity for asset managers to use technology to
deepen their customer
understanding. Competition is not sleeping though,
and partnerships might be a good
strategy that allows for a quick roll-out.
The future of asset management
| 16
The unreachable reached by robo-advice?
During the past years a lot of so called robot advi
sors were launched in the US and the UK.
These are online platforms that, in their current f
orm, offer personalized asset allocation
advice which is mainly used for pension investing.
Motif, Nutmeg, Betterment and
FutureAdvisor are examples of companies that have l
aunched advice solutions. Since
actually advising people on investments is strictly
regulated, these companies are not truly
advising, rather ‘informing’ clients. In that way t
hey do not have to comply with all
regulations within asset management yet, but we exp
ect regulation to pick up quickly.
Most robot advisors use ETFs in their product offer
ing because of the costs. Companies like
FutureAdvisor use extensive checklists to create ri
sk profiles of their clients and provide
easy to understand and transparent information on p
roduct solutions. As these tools can
be customized, yet are low cost compared with the h
uman advisor, they offer the
opportunity to service the previously unserved lowe
r income customers.
Figure 13 shows the different market segments. Wher
eas prior to the introduction of cost
efficient technology only the high- and ultra-high
net worth individuals were being served
by customized financial advice, robo-advice allows
for basic services to be offered to the
less wealthy segments. This implies the total poten
tially addressable market for robo-
advice could be as large as USD 10.8 trillion curre
ntly. Global AUM of automated services
was USD 20 billion in 2015 and is forecasted to gro
w to USD 450 billion in 2020
7
.
Figure 13. Robo-advice targets the mass market
Source: Enst & Young, 2015
Robot or Cyborg advice?
We do not think pure robot advice is the future. We
believe there will be a mix between
human advice and pure robot advice which we would l
ike to call Cyborg advice. This hybrid
really represents a paradigm shift in the path of c
hange in the asset management industry.
As figure 14 shows, the bottom of the pyramid can e
asily be served through internet
solutions, while the top of the pyramid requires a
human touch. The Cyborg advice market
is estimated to be a USD 3,700 billion market in te
rms of assets under management by
2020 and USD 16,300 billion five years later
8
. This implies the Cyborg advisor would
represent about 10 percent of total investable weal
th. Pure robot advice is expected to
represent no more than 1.6 percent of global wealth
in 2025 and will represent only the
advice to the lowest asset individuals. The average
break-even AUM of current robot
7
MyPrivateBanking, 2015
8
MyPrivateBanking, 2016
The future of asset management
| 17
advisors is about USD 20 billion
9
which implies that scale advantages will rather le
ad to a
winner takes all scenario. We expect consolation in
this area too. Strategic alliances
between large asset managers and robot advisors are
already happening. Blackrock
bought FutureAdvisor, Schwab has started its own ro
bo-advice unit and Schroders took a
stake in Nutmeg.
Figure 14. Product bifurcation driven by internet tech
nology
Source: CREATE research, 2015
Asset management’s ‘job to be done’ still intact
Although we described a lot of changes for the asse
t management industry, the core
business has not changed. Understanding the risk-re
turn relationship, allocating assets,
generating alpha, integrating smart beta and manage
pensions are all examples of
services that belong to the core capabilities of as
set managers. New industry entrants have
been nibbling on the borders, but have not yet reac
hed the core activities. Winners will
recognize their strategic advantage and will either
develop the missing capabilities
internally or acquire them.
9
Morningstar research, 2015
The future of asset management
| 18
Winners and losers
There are three possible scenarios to deal with the
trends we described.
1)
Asset managers keep customer connection through tec
hnology integration
2)
Asset managers become infrastructure and lose custo
mer relationship
3)
Cooperation between the asset management industry a
nd technology
companies
We think it would be best for the eco-system as a w
hole if scenario 3 were to unfold.
However, this outcome boils down to a prisoner’s di
lemma. Cooperation is indeed the
Pareto-efficient outcome, but the incentive not to
cooperate is large as it is still not clear
how the current market potential will be divided. T
aking the entire market is better to
some than having to share it with others.
Figure 15. Characteristics of winning asset management
proposition
Source: PWC, 2015
Non-alpha generating asset managers and advisors ar
e challenged
ETFs enable the separation of alpha and beta. Incre
ased transparency combined with
aggregator technology will expose non-alpha generat
ing asset managers. In addition, we
expect asset managers to integrate advice capabilit
ies into their platforms. This is likely to
have an effect on fees for advisors. Although we ex
pect Cyborg advice, fee pressure for
human advice is likely to continue. We believe the
integration of technology is vital for
asset managers, which implies that those managers t
hat have not invested in their
technology capability (both internally and external
ly focused) will be challenged.
Winners have scale, integrate technology and can of
fer multi-asset solutions
In our view, winning companies excel at the five fo
cus points shown in figure 15.
Important characteristics of companies that are abl
e to implement the steps from figure
15 are scale and investments in technology. The win
ners will convert digital into a
competitive advantage. A better understanding of th
e client can be created by
implementing platforms and omni-channel communicati
on. We mentioned that cost
efficiency is key for institutional clients. The in
tegration of technology is also essential here.
Automatic market monitoring, report generation and
a high level of customization can for
example only be implemented if the right technology
investments have been made. We
believe Schroders is well advanced in integrating t
echnology, multi-asset solutions and
robo-advice capabilities. Next to Schroders we thin
k Fidelity is well advanced in
technology, Standard Life in multi-asset solutions
and Hargreaves Lansdown together with
Schwab in robo-advice.
The future of asset management
| 19
Appendix A: Regulatory changes in asset management
Overview of global regulatory initiatives specific
to the asset management industry
Source: IMA, 2013
The future of asset management
| 20
Jeroen van Oerle
Patrick Lemmens
Trend analyst at Robeco
Trends Investing
Portfolio
Manager Robeco
New World Financials
Important Information
Robeco Institutional Asset Management B.V., hereaft
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Additional Information for investors with residence
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This document is distributed in Australia by Robeco
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The future of asset management
| 21
for your information and may not be reproduced, for
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Additional Information for investors with residence
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Robeco Institutional Asset Management B.V. (Dubai O
ffice), Office 209, Level 2, Gate Village Building
7, Dubai
International Financial Centre, Dubai, PO Box 48206
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(Dubai
office) is regulated by the Dubai Financial Service
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al Clients and
does not deal with Retail Clients as defined by the
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Additional Information for investors with residence
or seat in France
In remuneration for its advisory and distribution a
ctivities in respect of the group's UCITS, the pare
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ll the rules laid down by the Robeco Group with reg
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- equivalent to 1/3 of the management fees applied
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the management fees of the underlying UCIT. RIAM is
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s an investment firm since 28 September 2012.
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stered with the Spanish Authority for the Financial
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Additional Information for investors with residence
or seat in Switzerland
RobecoSAM AG has been authorized by the FINMA as Sw
iss representative of the Fund, and UBS AG as payin
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agent. The prospectus, the articles, the annual and
semi-annual reports of the Fund, as well as the li
st of the
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uring the financial year, may be obtained, on simpl
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ore management and/or performance fees; the fund
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tioned in this publication is the one stated in the
fund's
latest annual report at closing date of the last ca
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