While asset managers invest ever greater amounts of their client monies in the financial markets, the threats to their business models are steadily increasing. The answer to these mounting threats can only be digitalization.
The changes in asset management are not only fundamental, they are life threatening: the latest wave of mergers and takeovers should set the alarm bells ringing for an industry which already sees itself under threat. The apparent relentless flow of assets into passive investment strategies –in the first half of the year it reached a further $500 billion—is the epicenter of this phenomena.
Dearth of Client Confidence
For the majority of asset managers this means lower growth in managed assets, shrinking margins due to pressure from administrative costs, and also implies waning client confidence in their ability to deliver satisfactory performance.
Asset managers also face a bearish investment environment, with low and negative interest rates, and a phase of the technological revolution which given the problems they confront, threatens to pass them by.
Digital Know-How Gaining Importance
If there is one common thread running through the entire asset management sector, then it is that the digital competence of asset managers is becoming increasingly important.
This requires a transformation in existing business models. Or, to quote digital guru David Rogers: «You need to rethink your business.»
The advisor to concerns like Google, General Electric and Toyota has identified five trading areas for which a successful digital strategy needs to be developed: customers, competition and cooperation, data, innovation and usage.
Jan Spelsiek, head of digitalization at Allianz Global Investors, has defined these trading areas for asset managers.
1. Individualisation and Personalization
The public funds business is an anonymous mass market: «One size fits all» function with standardised investment products has long worked well. It no longer however fits the digital age: customers want individually tailored investment solutions, personal service and open communication channels to their advisors.
What Asset Managers have long been delivering to institutional clients, they will now need to offer to private investors. Still, there is also plenty of digital development potential in the institutional sector, for example in the communication and service areas.
2. Only the Best is Good Enough
Digitalization has hugely increased the transparency of asset manager offers and services and led on the other hand to more competition in the quality of services. Clients are no longer scared off by the transaction costs involved in an asset manager switch since they know another administrator offers better performance and service at a comparable or even lower cost.
Asset managers are thus forced to offer market leading digital services. If they are unable to do so themselves, then they will have to buy in the services or develop them with the help of partners. Asset managers will thus have to identify which services they’ll need to maintain their competitiveness: using their own initiative, cooperation or outsourcing.
3. Transforming Data Into Information
Production processes and their accompanying communication alone generate huge amounts of data for managers. The problem though is many asset managers don’t know how to transform this data into information that can be used to simplify decisions and improve results.
Data analysis and interpretation can provide active managers with decisive advantages for their investment processes, as long as they are supported by digital technologies.
4. Innovation Means Experimentation
Transforming the business model requires the creation of a systematic innovation management. Knowledge of the innovation method Design Thinking becomes indispensable since clients and their needs become the middle point.
Innovation also requires client input, and so testing the effect of digital changes makes market experiment essential. This shouldn’t be too difficult for asset managers since the content of services is always focused on fully digitalized goods: namely exchange-listed securities.
5. Standing Still Means Ignoring User Promises
The digital transformation isn’t the final step, but rather leads to ongoing and rapid change. For an asset manager this means they cannot rest on a single solution. They have to constantly test and if necessary undertake further developments.
A key condition is not only the early recognition of digital trends. The asset manager must maintain close client contact and anticipate changes in their business needs, monitor the competitor and cooperation environment, as well as regulatory changes.
