Asset managers’ operating models will “need more than cost-cutting”, according to EY, if they are to remain profitable going forward.
In the consultancy’s report The Future of Asset Management, which interviewed chief financial officers (CFOs) from 21 major asset managers globally, including Australia, it said asset managers have had to become more intentional with their target clients and how they wish to serve them in order to compete.
For the world’s 38 largest asset managers, EY data found assets under management (AUM) has increased at a compound annual growth rate (CAGR) of almost 5 per cent between 2020 and 2024. Revenue grew by a CAGR of 4.6 per cent during the same period but failed to outpace costs, resulting in thin operating margins and revenue pressure.
As well as this, tougher regulation, investor expectations for a digital and customised experience, cross-border divergence on matters such as digital assets and sustainability, cyber threats and geopolitical conflicts are all pushing up costs.
When asked about their top strategic priorities, CFOs at asset managers cited three goals:
- Growth via new markets, geographies and distribution channels.
- Efficiency via cost reduction, process redesign and workforce simplifications.
- Technology enablement via automation, digitisation, data and AI.
While some CFOs “clearly understood” the centrality of technology and talent when it came to achieving profitable growth in the future, other firms were struggling with inertia and obstacles. Few leaders had a distinctive vision for their long-term future, EY said, and were pursuing gradual improvements in a reactive way.
The report stated: “The ultimate goal is an integrated, whole-firm model that leverages automation and external ecosystems — based on a clear understanding of where efficiency can be maximised by outsourcing to trusted partners and where it is beneficial to retain operations in-house.
“Firms will need more than cost-cutting. The goal is scalable, lean operations that use managed services, smarter location and talent strategies, and strong partnerships to stay future-ready.
“Leaders know that perennial rounds of redundancies and cost-cutting will not generate future-ready operating models. A fundamental rethink will be required to develop scalable, lean and future-proof operations.”
With headcount reductions, particularly for junior staff, being cited as a major focus for asset managers, appointments are instead being made in areas such as AI, cyber and product development as well as private market specialists. Firms are also investing “significantly” in senior hires, especially in their sales function.
For existing employees, talent is being retained through KPIs that align with a firm’s vision, a culture of trust and transparency as well as allowing them greater movement between teams internally.
“Future workforces will be leaner and more specialised, skilled and creative. Asset managers will attract new types of talent, carry out firmwide re-skilling and empowerment, redefine revenue generation roles and augment human staff with AI tools and training.”
Products
When it comes to new products, EY said firms are rationalising existing and underperforming funds while active asset managers are narrowing in on the products that give them an “unfair advantage” in the market and doubling down on where that revenue is coming from.
While active strategies remain in demand, firms are experiencing underlying fee pressure as equity and fixed income assets gradually shift toward ETFs and index trackers with firms expected to provide a range of low-cost, liquid offerings.
All leaders surveyed also said they are expanding their private markets offerings with global AUM in private markets set to surpass US$30 trillion by 2030. In the case of private credit, this could grow from US$1.7 trillion to US$4 trillion, while secondaries are also an area of focus.
Already, there is a convergence between public and private assets while alignment between traditional and alternative asset managers is growing.
“Partnerships and acquisitions are key to new product capabilities, especially for industry leaders seeking to develop a full range of in-house products. All the leaders we interviewed emphasised a growing focus on private markets. That is not only altering product offerings and revenue profiles, it is also pushing firms beyond registered fund wrappers and driving innovation in product and distribution models.
“Slowly, but surely, asset managers are shifting their focus from amassing AUM to improving profitability and cultivating a distinct unique selling proposition (USP) to gain a competitive edge.”
Finally, it noted the private wealth channel will continue to prosper as well as the demand for retirement-friendly products to meet an ageing demographic.
Future practical tips
Going forward, EY shared seven practical tips that asset managers can utilise when transforming their business:
- Reorientate around the client by engaging closely with them and providing tailored solutions especially in Asia-Pacific where clients have differing needs and values from older investors.
- Accelerate digitalisation to transform the investor experience and create fully digital operating models with a transformation of speed, service, compliance reporting, product innovation and data governance.
- Reimagine investment propositions to better manage investor capital in a range of asset classes and investment techniques to provide investors with stronger performance and specialist products.
- Maximise areas of growth such as private markets and digital assets with a shift from asset gathering to value generation.
- Transform business models to implement scalable business models that allow asset managers to turn fixed costs into variable ones which will drive efficiency and profitability as well as reduce risk and increase flexibility.
- Leverage external opportunities such as partnerships and cross-industry collaborations to maximise growth and enhance capabilities.
- Use AI as a strategic differentiator for investment research, automated portfolio strategy, stock picking and stress testing.
“In the era of differentiation, the most successful firms will be the most adaptable, the most connected and the most effective in communicating brand strategy and impact.
“Asset managers must overcome the industry’s instinctive reluctance to change, challenging themselves to define a unique, distinctive vision that clearly articulates their DNA. The ability to pivot in search of new revenue streams, new operating models and new routes to market will be the defining feature of the industry’s future winners,” it concluded.
