The asset management business model after the financial crisis Challenge and opportunity

In August, it was eight years since the start of the 2007–08 crisis, which triggered a global recession that hit every economic sector.

 

The asset management industry was also badly hit, with companies suffering from major outflows and a lower return on their assets. The industry has since recovered, and its assets under management are now at an all-time high; it has thus experienced one of the quickest, most profound transformations that any economic sector has undergone in the past century.

 

New regulation, historically low interest rates, the fiduciary duty to put clients’ interests first, the invasion of passive management, digitalization… all of these factors have triggered big changes in the way that asset managers conduct their business. A lot of work has already been done, but the sheer magnitude of the changes will continue to shake the industry over the next decade. The consequence is likely to be that good firms will survive, but the bad firms will disappear.

 

1.Developed countries are getting older

The ratio of retired people to workers continues to increase, and public systems will struggle to support them. What’s more, most of the workforce are simply unable to save enough money to support themselves in their old age. It is asset managers that are best placed to solve this pension time bomb. The switch from defined benefit to defined contribution schemes is well underway, and asset managers are providing a lot of investment solutions linked to capital protection, income, multi-assets, and convexity. But ageing populations remain a massive challenge that will drive an enormous increase in the assets that the industry manages.

 

2.Proliferation of new regulation

Regulation is always seen as a threat for asset managers, but I believe it is far better to view it as an opportunity. Solvency 2, for example, has created a new paradigm for asset managers to optimize the capital adequacy requirement of insurance companies’ portfolios. More and more solutions for insurers need to be customized on an individual basis, as each company has its own specific approach depending on whether it uses standard or advanced methodology. For instance, convertibles involve a much lower regulatory cost than equities (due to their embedded option to convert to equity), even though they involve similar investment risk and potential return. Meanwhile, MiFID is imposing new rules on retail investors regarding transparency – here as well, it should be straightforward for asset management firms to capitalize by offering products adapted to these requirements.

 

3.Competition from passive managers and ETF providers

Permit me to be controversial on this topic. There is probably no example in any other economic sector whereby a firm could have survived by providing low-quality, expensive products. Unfortunately, this is exactly what has been (and still is today) happening in our industry, with some asset managers charging high fees for products that add little value. Competition from passive products is a clear challenge for such firms and will force them to adapt. If they don’t, they will disappear.

 

While it indeed looks like passive management is set to grow, I think it will only reach a certain level and that there will still be plenty of scope for good active managers to enjoy a large slice of the cake at the expense of poor alpha generators. The winners will be the companies that are ready to take bold active positions and carefully manage their capacity constraints.

 

So is it safe to assume that the asset management industry is safe in this changing world? While there are lots of opportunities for asset managers to embrace, we still need to be mindful of the challenges ahead.

 

First, while costs are increasing, management fees are at best remaining stable. This double effect has forced companies to be more selective in terms of the products they run. We are living in a world in which the winners take it all, so if you choose to manage an asset class you have to do it extremely well in order to grow. If you don’t, you won’t survive.

 

Second, asset management remains above all a people business. You need talented portfolio managers to be successful, and the war for talent is even tougher than beating a benchmark!

 

Third, the technology revolution is now a key factor in an asset manager’s success. Companies need to be able to industrialize their processes in order to limit marginal costs as well as providing the digital solutions requested by a new generation of investors.

 

The tsunami the asset management industry faced following 2008 was brutal in its effects. But the story is not over, as a lot of opportunities have arisen that will enable the industry to continue to grow significantly more quickly than the broad economy. The winners will be the most flexible, bold and talented companies. 

 

About Nicolas Faller

Nicolas Faller is the Co-Chief Executive Officer of Asset Management at Union Bancaire Privée, UBP SA. Since joining UBP in 2010, he served as the Head of Sales of Europe and the Executive Managing Director.

 

Prior to this, Nicolas was the Global Head of Distribution Sales and Member of the Executive Committee at BNP Paribas Investment Partners. He was also the Head of Marketing at Fortis Investments (France). Nicolas was a Senior Sales Director at Paribas Asset Management from 1996 to 1998. He was the Head of Client Service based in London covering European and Asian institutional clients. Nicolas graduated from the Ecole Superieure de Gestion in Paris. 

 

 

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