Investment managers face balancing act to improve operations and cut costs

The investment management industry has found itself in a perfect storm over the past couple of years. Like the shifting of tectonic plates, we have had multiple seismic changes in market volatility. Driven by factors such as geopolitics, inflation and digitalization, many asset managers are evaluating operational improvements to protect declining fees and profit margins.

According to professional services company EY¹ the world’s 40 largest asset managers experienced a 14.9 percent fall in assets under management between Q4 2021 and Q3 2022, on aggregate. At the same time, revenue declined by 22.9 percent versus a fall of 12-percentage-points in operating margins.

On the one hand, the imperative to safeguard profitability by streamlining costs across remains pivotal. On the other hand, the need to invest in transformative digital initiatives persists, nurturing long-term growth and continually striving for greater customer experience and value differentiation.

Recently published surveys of key decision makers at buy-side institutions, such as the 2023 Global InvestOps Report², reveal a clear consensus: operational efficiency and cost-cutting measures take center stage as strategic priorities in the quest for sustained competitiveness.

To address these challenges and improve cost/income ratios, many investment managers aim to reduce their operational costs by 20-30 percent over time. We anticipate a significant transformation within the investment management industry in the next few years in terms of strategic consolidation and increased drive for operational efficiency.

It's undeniable: investment managers have crucial decisions to make in their quest for long-term growth and profitability, and those who are willing to make bold decisions will likely reap the rewards.

Building an operating model that is adaptable, flexible, and future-proofed ensures you can navigate upcoming challenges. Technology plays a vital role in this process.

Ben Sher, Head of Sales EMEA, SimCorp

Too many applications add complexity

According to consultancy firm Oliver Wyman’s analysis of asset management trends for 2023³, one of the primary challenges faced by asset managers is the use of many fragmented applications to run their investment operations, and it is not uncommon for a diversified asset manager to be running 300+ apps.

This can be both expensive to maintain and can, paradoxically, add operational complexity despite an initial intent to enhance operational efficiency.

In a new white paper by the global financial institution Northern Trust entitled The Evolving Asset Management Landscape: Only the Fittest Will Thrive⁴, surveying 150 global asset managers, when asked how they expect to achieve efficiency and cost savings, 63 percent said they would deploy new technology. Northern Trust emphasizes that firms will need to more deeply integrate their front, middle, and back offices to support the business environment of tomorrow.

An effective approach for asset owners and asset managers is to adopt integrated investment management platforms. By operating within an integrated architecture instead of many fragmented applications, firms can free up valuable resources that can be allocated to more value-added activities. This includes activities such as optimization of asset allocation or generating insights and effectively delivering on those insights, rather than spending excessive time on manual tasks involving Excel spreadsheets.

Three things to consider when looking to improve operations

When striving to improve operations, there are three key factors that deserve careful consideration.

Firstly, selecting the right partners is crucial to reduce risks and enhance productivity. Collaborating with compatible organizations that align with your objectives can bring valuable expertise, foster innovation, and increase operational efficiency.

Secondly, it is imperative to maintain a clear investment identity and remain focused on areas where your competencies lie. While the pursuit of incremental margin improvements may be tempting, losing sight of your strengths can lead to a downward spiral.

Lastly, it is critical to plan for the future. Recognize that the operational model you adopt today may not be sufficient in the face of evolving landscapes, frequent regulatory changes, and shifting customer expectations.

Building an operating model that is adaptable, flexible, and future-proofed ensures you can navigate upcoming challenges. Technology plays a vital role in this process. By planning for the long term, you position yourself for success not just in the present but also 10 years down the road.

References

1. Six ways asset managers can prepare for an uncertain future, EY
2. 2023 Global InvestOps Report, SimCorp
3. Oliver Wyman - 10 Asset Management Trends For 2023
4. The Evolving Asset Management Landscape: Only the Fittest Will Thrive, Northern Trust