Coronavirus exposes the asset manager’s business conundrum

Coronavirus exposes the asset manager’s business conundrum

With profitability now under threat, we are now at the point where asset managers must transform to stay ahead.

IA Fintech Member Insights: Jacobi

Curtis EvansManaging Director EMEA, Jacobi

What a difference a month makes

As market volatility hits levels not seen in a generation, the need for investment groups to do more with less has become critical.

Investment businesses are unique. Supported by ad valorem charging (% of value), their revenues are highly geared to market swings while their costs are largely fixed. That’s a double-edged sword. It’s a great business when markets are rising, just like the last 10 years.

But the flip-side is that when markets turn, revenues drop… fast. Sharp market falls then create a triple whammy of lower asset values, fund outflows and increased investor churn (including flows away from legacy funds that charged higher fees).


Why bother transforming if markets are good?

With profitability now under threat, we are now at the point where asset managers must transform to stay ahead. And while there has been much talk about innovation over the past decade, most asset managers face a mix of legacy systems, teams, processes and products. Buoyed by strong market returns, the reality was there was little incentive to transform and disrupt what was a pretty stable and comfortable business model.


Hope for the best, but prepare for the worst

As strategists debate whether the future path for markets will be a U or V-shaped recovery, prudent CFOs, CIOs and CEOs must prepare for a worse-case scenario. Rather than punt the business on market direction, asset managers also need to account for an L-shaped trajectory where markets simply muddle along. That means no natural tailwind for revenue growth, as seen in the past 10 years. They must then account for more regulatory red tape and even more price pressure as basis point fees become cripplingly high versus yields on cash and mainstay fixed income asset classes.

So how and where can asset managers do more with less? First, they need to prioritise the products and distribution avenues that will work best in the next cycle. Chances are, they must make tough choices. Finding revenue sources that are more stable and counter-cyclical to the whims of the market are increasingly important. This leaves the trend of unbundling services within fund management likely to accelerate.


Operational efficiency prepares you for an uncertain market environment

But beyond crystal ball decisions on which products and markets to prioritise, critical to any strategy will be improving operational efficiency. In addition to keeping costs lean, this allows an asset manager to be more nimble and adaptive to future changes. And while M&A becomes an ever more enticing way to add scale, it doesn’t negate the need to improve the underlying efficiency of processes.

In response to today’s challenges, the tendency for asset managers will be to start with hiring freezes, putting a pause on any new business or spending initiatives and trimming unprofitable product lines. But to be truly transformational and create scale, asset managers need to look closely at their existing teams, systems and structures.


An opportunity to start afresh

This means breaking down their current investment and business processes, then putting the pieces back together with efficiency and future client requirements in mind. Ultimately, the entrenched silos and ways of working that were established in previous bull cycles need a fundamental re-think.

For instance, closing the gap between investment and client teams, shifting the common culture of restricting investment information provided to clients, getting true scale into investment processes that downplays the role of any one individual, increasing out-sourcing of services beyond their core business and re-working technology architecture that was designed with only single teams or users in mind.

Out of the 2008/09 market crash, asset managers were cushioned by rapid market recovery and growth. But if history does not repeat and incumbents don’t transform to future-proof their businesses, the industry may look very different once market tailwinds eventually return.


To learn more about how Jacobi works with asset managers, owners and consultants to transform their investment and client engagement processes, visit ​ 

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