As the page turns on 2018, a weakening market and increasing volatility are continuing to expose the soft underbelly of the asset management industry. After a decade of year-over-year growth in assets under management, asset managers have reached a critical juncture where a transitioning market can no longer mask the lack of organic growth, which is vital to sustainable profits. Firms that are slow to adapt their business models and investment strategies risk a steady decline in profitability and relevance.
One in Three Firms are Achieving Profitable Growth
Such are the findings of Casey Quirk, a division of Deloitte Consulting focusing solely on strategy advice to asset and wealth managers, which revealed that only 30% of firms benefited from profitable growth between 2014 and 2017. In the same period, 35% of firms have tried unsuccessfully to improve profitability through cost cutting and the economics of another 35% are slowly melting as they search for growth to no avail. The study concludes that, without dramatic changes to revenues, costs, or both, one-quarter of asset managers risk becoming unprofitable within a decade.
As fee compression accelerates and shifting asset mixes continue to mount, the study makes clear that firms that choose the status quo in the hopes of riding out the storm will be pushed to the brink of unprofitability. Even if fee compression does not accelerate and the markets gain 5% annually, as many as one quarter of asset managers could see their margins evaporate within ten years.
Out with the Old, In with the New Success Factors
Significant change, shepherded by a new strain of leadership, will be required to confront the challenging operating environment enveloping the industry. The outmoded, product-centric, distribution model, once highly profitable, must give way to new, executable strategies that emphasize relationships over transactions and client experience over revenue targets. New performance metrics must emphasize organic growth through client acquisition over assets under management and budget allocations need to emphasize reinvestment over top-line expense reduction.
The key takeaway from the Casey Quirk study is that firms with increasing franchise values proactively reinvest in their business for the purpose of achieving new competitive advantages, including:
- Higher-demand investment strategies, supported by strong product management and development
- Strong pricing policies, reflected in premium fees, greater contribution margins, or both
- Customized client experiences, built with proprietary data and reinforced by brand
The biggest distinguishing factor for profitable firms is their investment in technology. Although most asset management firms have been late adopters, an increasing number of firms are finding that the right technology, when extended across all functions of asset management, is the key to profitable growth. In fact, the more successful firms have increased their investment in technology three times as fast as their peers.
Data is the Key to Organic Growth and Expanding Margins
However, as much as technological innovation has advanced in the asset management industry, one critical component – data – is still vastly underutilized at the enterprise level. The collection and analysis of client and third-party data enables firms to segment clients more finely and create more customized offers. Firms that use Internet Protocol (IP) driven marketing are able to identify potential leads to dynamically serve them content and provide them with an experience that is more relevant and engaging.
Data analytics through IP-driven marketing provide marketers with key information about who is visiting their website and how they are engaging with the content. That way sales teams spend more of their time with highly qualified prospects. In fact, these technology tools can form the basis of a new distribution organizational model that builds relationships through more closely aligned marketing, sales and service processes.
For smaller asset managers, 2019 is shaping up to be a pivotal year. Hopefully, many are long past the realization that the status quo is unacceptable and are moving towards meaningful change. While changing business models, revamping investment strategies and investing in technology may seem daunting, with the right planning partners and the capacity to think strategically, any firm can meet the challenge.
Dan Sondhelm is CEO of Sondhelm Partners, a firm that helps asset managers, mutual funds, ETFs, wealth managers and fintech companies grow through marketing, public relations and sales programs. Click to read Dan’s latest Insight articles and to schedule a complimentary consultation.