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Posted by Heidi Schwartz
Changes to the asset management operating model are now being driven by the expansion of distribution channels and the development of new products, as managers gear up for growth and position themselves to capture new inflows. Increasingly, managers are even positioning themselves to embark upon a direct to consumer distribution strategies, with significant investment in marketing and brand management, according to Managing Complexity and Change in a New Landscape, EY’s global asset management investment operations survey.
“The biggest driver of change is no longer cost and regulation, but has shifted to the expansion of distribution channels and supporting the development of new products,” said Alex Birkin, EY’s Global Wealth and Asset Management Advisory Leader. “While there is still a large change agenda driven by regulatory compliance and cost management, managers are now more focused on internationalizing their distribution channels and investing further in their brand to make sure they are in a position to reach out directly to their end customers if they choose to.”
Improving distribution channels was named as the primary driver of operating model change for 55% of managers surveyed, followed by enabling new products (45%), changing regulation (42%) and targeting new markets (33%). EY surveyed 40 CEOs and head of operations across the Americas and Europe.
“The question of managers developing a direct to consumer distribution strategy isn’t clear cut—going direct won’t be the right strategy for all managers and requires significant investment in brand and marketing, not to mention the thorny issue of disenfranchising existing intermediaries,” said Alan Fish, EY’s Americas Wealth and Asset Management Advisory Leader.
US in prime position to steal a march on European managers
The priorities of managers in the US and Europe differed considerably in 2013. When asked to rank the primary drivers of change to their distribution models, 81% of US managers said improving their distribution channels, followed by enabling new products (43%), targeting new markets (33%) and increasing brand awareness (24%). Just 19% cited the changing regulatory landscape.
Whereas in Europe, 68% of managers said operating model change is still primarily driven by regulation and while 47% are focused on enabling new products, just 26% are prioritizing improving distribution channels or targeting new markets and barely any are driven by increasing brand awareness (5%).
“In the US there is less overlap and complexity of regulation than in Europe and the US economy has recovered from the crisis faster,” said Birkin. “US managers have greater flows, which mean they are out of the blocks quicker on growth. Many European managers are only now starting to focus on the growth agenda. As a result, the US managers are investing in international distribution and inorganic growth, including new product and distribution targeted at Europe. These results suggest US managers will gain greater market share in Europe over the next few years.”
Equity recovery brought respite but leading managers still focused on efficiency
“The more forward thinking asset managers recognize that, while the recovery in global equity markets may have saved them from restructuring, there is still downward pressure on margins and they are still focused on efficiency and cost reduction,” added Fish.
Many managers are looking at their global footprint and investigating the opportunity to move to a center of excellence approach and/or a shared service center model. Offshoring is accelerating in the industry, managers are creating centers of excellence offshore or near shore, and the functions they’re outsourcing are moving up value chain to things like equity research. Just 17% of managers said their target location strategy involved limited or no near shoring or offshoring. Fifty-five percent want to maximize use of near shore locations, and 20% want to maximize the use of offshore.
Despite regulatory scrutiny, outsourcing is still a growing trend. “The question is not should you outsource, it is what should you outsource,” says Birkin. “The survey results suggest the majority of managers would like to use one or two strategic partners. Although service providers are continuing to significantly enhance their capabilities, there’s still a perception held by managers that no single provider can provide a complete global service and therefore they are continuing to use multiple providers.”
Looking across all responding firms, fund accounting is a significant cost and is widely viewed as the greatest opportunity for cost reduction.
Biggest may not be best
Medium size managers appear to have globalized their operating model more than the largest managers, primarily because they have less complexity of product and geographical footprint and therefore can leverage their global model for efficiency.
For example, creating a shared services organization is a strategic decision that is implemented across as many functions as possible and is a relatively mature concept in investment operations. Most organizations already have central teams in place to handle most insourced functions but only a handful of larger firms have separate teams throughout the organization for each separate functional area. Here, scale and complexity to consolidate outweigh the benefits.
“The further globalization of the operating model for medium sized managers should help them improve operating margin and fight off the curse of being stuck in the middle, neither large or niche,” added Birkin.
Technology no longer creates a competitive advantage, but data does
Technology continues to be a challenge for managers – the volume of data and the multitude of applications across products and geographies needs to be carefully managed – especially in larger firms.
“With only a small number of vendors in the market, managers are rationalizing and consolidating their platforms and so there’s little competitive advantage in technology any more. Data is becoming the differentiator,” said Fish. “Access in terms of being able to analyze and use data for client, regulatory and management reporting is the new battle ground.”
The overriding data management challenge for firms is quality and access of data (75% ranked this as a top challenge), followed by increasing regulatory demand (62%), availability of data (60%) and data governance (52%).
“Regulatory concerns aside, firms are still grappling with how to source and use their data to their advantage,” said Birkin. “Data silos are still prevalent and a single view is not easy to achieve. But those managers that get there first are going to have a distinct competitive advantage in all aspects of their business.”