A turning point for the global asset management industry The Temenos Multifonds Every Fund Survey 2017
A turning point for the global asset management industry Foreword Asset management has been one of the slowest industries to be impacted by the digital revolution. Where disruption and innovation have changed other mainstream industries beyond recognition, asset management remains reminiscent of what it was a generation ago. Passive instruments have been the only game-changing innovation in the past decade. Yet change is on the horizon. Never before has the asset management industry been faced with so many drivers for change. Savers are desperately searching for yield in a world of rock-bottom interest rates and investors expect record low fees and consistent returns from the same product, while pressing concerns of financial and political uncertainty suggest that the status quo cannot go on forever. The asset management industry has been living in the shadow of the global financial crisis of 2008. For nine years, steadily rising markets have seen the exponential growth of exchange-traded funds (ETFs), while unprecedented waves of regulation have pushed compliance costs to the front of asset managers minds. In the face of mounting pressure from competitors, regulators and investors, it is almost impossible to maintain that significant innovation and change are not coming to the asset management industry. The question is, where will the innovators come from, and how will they throw off the shackles of a post-2008 world and change the game for the future? Keith Hale CEO, Temenos Multifonds
Asset management has been living in a world defined nine years ago Regulatory burden 65% say regulation is among the three biggest challenges facing their business Fee pressure 54% feel that fee pressure is one of their three biggest business challenges The tsunami of regulation Since the 2008 financial crisis, a tsunami of regulation, the likes of which the asset management industry has never seen before, has increased the strain on asset managers to deliver the requirements of regulators across both their middle and back office systems. Almost a decade on from the crash, time and cost intensive regulation that will potentially change the shape of the industry forever is still being pushed through and implemented. Indeed, regulatory compliance is now seen as the biggest business challenge in asset management, ahead of fee pressure and reducing costs. It was the most widely reported business challenge with nearly two-thirds (65%) of respondents citing it in their top three. With MiFID II and the DoL Fiduciary Rule coming into force over the next 12 months, it is unsurprising that regulatory compliance is the greatest overall concern in the asset management community more than four in every five UK asset managers (82%) cited MiFID II as the regulation they are most concerned about, while more than two in five US asset managers (43%) said this of DoL 1. A pressure cooker of fees and costs On top of costly regulation, asset management fees and costs have been under extreme pressure post- 2008. Both in Europe and the US, regulators are undertaking extensive market reviews to assess the appropriateness of asset management fees, especially in light of the success of cheaper passive vehicles. Consistently rising markets have allowed passive investments to provide investors with good returns at rock-bottom prices, bringing into question the value of active management. As a result, fee pressure has been highlighted as a major issue in asset management over the next 12 months, with more than half (54%) citing fee pressure in their top three business challenges. Reducing costs is also a significant issue, with two in five (37%) citing it as one of their three biggest business challenges placing it as the third highest challenge overall after regulatory compliance and fee pressure. 1 Discretionary Fund Managers 2016, September 2016 1
A turning point for asset management Falling profitability 65% of asset managers believe profitability will decrease in the next 12 months Under the increasing pressures of regulation, fees and costs, the asset management industry is ripe for change. Following years of post-2008 remedial economic policy, market confidence remains a concern for many within the industry; political and economic events of the past 12 months have been met with volatility. Yet, despite the backdrop of geopolitical change, market uncertainty and political uncertainty are the two factors causing least consternation among all respondents, as shown by the fact that even when combined only one in ten (11%) consider these two factors as the number one business challenge facing the industry. Instead, profitability and the threat of disruption are at the forefront of asset management industry concerns. Future concerns about profitability Concerns about future profitability are at the forefront of many asset managers minds. While more than half (51%) of all respondents to the survey believe that industry profitability will decrease in the next 12 months, this rises to almost two-thirds specifically among asset managers (65%). Among all respondents, less than a quarter (24%) think profitability will rise while less than a fifth (18%) of asset managers believe profitability will increase. If the majority are right, and profitability in asset management is set to fall, this could be a key indicator of the change to come. In the last decade, asset managers have set about cutting costs and streamlining fees in order to bring the overall expense of investing down. While businesses have undergone extensive trimming exercises to improve operational efficiencies, there is a growing sense that more fundamental change will be required to asset manager business models moving ahead. With asset managers unlikely to be able to depend on rising financial markets to boost asset values and profitability, the need has become more pressing to develop long-term competitive advantages to generate new net flows. 2
Disruption threat 3 in 5 now believe a game-changing disruptor will enter the market in the next two years Disruption barriers 69% cited regulation as the greatest barrier to external disruptors An increasing threat of disruption There is a growing sense among asset managers that the emergence of a game-changing disruptor is on the horizon. More than three in five (61%) respondents now believe in the threat of a game-changing disruptor entering the market a marked increase from just over a half (54%) 12 months ago. However, there is considerable scepticism about the ability of an outsider to effectively enter and operate in the market. The reason for this is the sheer complexity of setting up shop in asset management. While regulatory compliance remains the biggest challenge for businesses already in the industry, it is seen as by far the biggest barrier for those looking to enter for the first time. More than two-thirds (69%) of respondents cited regulation as the greatest barrier to external disruptors, followed directly by back office complexity, which was cited by less than half as many (33%). Interestingly, among the findings, technological capability was seen as a barrier to new entrants by considerably less than a fifth (14%), while appropriate investment products was deemed a barrier to disruptors by less than a quarter (24%). Getting up to speed in the post-2008 regulatory environment is therefore seen as the most difficult step to entering the asset management industry, and is potentially what has held off game-changing disruption that has been seen across so many other industries. 3
A new era of innovation Increasing innovation 9 in 10 believe innovation will increase in the next two years Product development Operational effiiciency Innovation focus 85% cite operational efficiency, digital channels and product development as the biggest areas of focus in the next 12 months Digital channels The asset management industry acknowledges the challenge it faces from potential new business models and products, and almost unanimously asset managers believe that innovation in the industry will accelerate. More than nine in ten (92%) respondents believe innovation will increase in the next two years, with almost half (47%) predicting a significant increase. While the threat of external disruption seems a practical improbability, there is certainly increasing recognition that game-changing innovation needs to come from within the asset management industry. The three biggest areas of innovation highlighted over the next 12 months were operational efficiency, digital channels and product development. Accelerated product innovation Since the financial crisis, the area of greatest product innovation has undoubtedly been passives, specifically ETFs. However, the increasing search for yield over the past decade has forced a turning point. More than four in five (82%) discretionary fund managers cite low yields as challenging their objectives in 2016 a slight increase from 78% in 2015 2 which has led to many investors choosing riskier assets in order to find yield 3. The increasing demand for yield has been reflected in our survey, which reveals product development as the third biggest focus area over the next year cited by nearly one in four (24%) respondents. More than half (51%) of asset management professionals prioritizing product development focus say their focus will be in alternatives, while more than a quarter (28%) cited active products. Just over a fifth (21%) are looking at developing passive solutions. 2 Discretionary Fund Managers 2016, September 2016 3 US Investment Outlook 2017, December 2016 4
Digital channels 1 in 5 are seeing digital channels as their firm s biggest innovation priority in the next 12 months Digital focus 55% believe big data analytics, artificial intelligence and robo-advice will have the biggest impact on the industry in the next two years Robo-advice Big data analytics Artifiicial intelligence Accelerated disintermediation through digital channels While product innovation may provide valuable diversification and alpha, the digitization of the asset management industry is slowly taking shape. It is the second biggest focus area overall, with one in five (22%) respondents seeing digital channels as their firm s biggest innovation priority in the next 12 months. Defining and reaching new audiences is of critical importance to asset managers concerned about profitability and market share. When considering which technologies will have the biggest impact on the industry in the next two years, views were consistent with this big data analytics, artificial intelligence and robo-advice together accounted for more than half (55%) of responses, all technologies which will make market research, product marketing and distribution more intelligent and efficient. Digital channels have disrupted other industries, and while big data, artificial intelligence and robo-advice in asset management terms are still in their infancy, there are indications of how they could shape the future of the industry. Almost three in five asset managers (57%) believe that robo-advice will benefit existing managers most, providing them with a greater ability to market and distribute their products direct to customers. Less than a third (30%) think robo-advice would most benefit a start-up or disruptor. And inward innovation may take place sooner than many realize. MiFID regulations in Europe and the DoL Fiduciary Rule in the US come into effect in 2018 and are likely to accelerate the development of direct-to-customer services. UK advisers think that MiFID II will lead to a rise in restricted and specialist advice, while more than half (52%) expect to see a fall in the number of independent financial advisers 4, which may lead to alternative advice channels and DIY investing. 4 The Fiduciary Rule (November 2016) 5
A new era of innovation continued Direct channels 3 in 5 said robo-advice would most benefit asset managers going direct to customers Increasing efficiency 38% said that innovation in operational efficiency was the most important area for their firm in the next 12 months In the US, there are grave concerns over the DoL Fiduciary Rule. As a result of this regulation, a significant majority (71%) of US advisers, such as RIAs, plan to disengage from some mass-market investors, with estimates that a quarter (25%) of mass-market clients may no longer be serviced. Furthermore, almost two-thirds (64%) of US advisers think the Rule will have a largely negative impact on mass-market investors and four in ten (39%) think financial advice will become too expensive for most investors 5. These investors sometimes known as orphaned investors will likely seek advice and investment solutions elsewhere which are appropriate for their cost appetite. Digital solutions that cut out the middle man seem the most obvious avenues to explore, presenting an enormous opportunity for innovators capable of moving into this arena and catering for a new customer base. Accelerated operational efficiency Yet, despite the exciting opportunities arising from product development and distribution channels, the number one focus area of innovation in the asset management industry over the next 12 months is operational efficiency cited by almost two in five (38%) respondents, considerably more than any other focus area. Increasingly, asset managers are recognizing the importance of seamless integration between the investor and the back office processes, which will be key if the industry is to realize its ambitions of accelerating both product innovation and extension into new digital channels. 5 Financial advisers and MiFID II (December 2016) 6
As the industry moves towards an increasingly digital future, financial firms which still have the limitations of fragmented legacy systems will find themselves at a serious competitive disadvantage. Since the financial crisis, the asset management industry has made good progress in terms of increasing operational efficiencies. Moving ahead, we expect to see a step change in asset management, as the industry looks to remove the limitations of fragmented legacy systems, to become more nimble, flexible and competitive. Conclusion Change is coming, but from within Nearly nine years on from the financial crisis, it is now clear that the asset management industry is at a turning point. It has successfully emerged from the shadow of the financial crisis, but significant pressure on fees and costs, and concerns over future profitability, remain. And while the industry has emerged leaner and fitter, with increased efficiencies and reduced cost bases, this strategy of incremental change will not be enough for future success. The industry has recognized it has to make more fundamental change to develop long-term competitive advantage and generate net new flows the industry has to not only embrace and adopt innovation, but innovation that is focused on delivering benefit to the end investor. This new era of innovation, powered by asset managers embracing a digital future, is driving forward an acceleration in product development, digital channels and operational efficiency. In terms of innovation, asset management has lagged many other industries and, while the threat of an external game-changing disruptor remains, it will be investor-focused innovation from within the industry that will most likely be the real game-changer. 7
Profiles Keith Hale E: keith.hale@multifonds.com T: +352 26 44 211 @halekeith Keith Hale is Chief Executive Officer at Temenos Multifonds. He has over 25 years experience creating and building fintech companies for the asset management, securities services and prime brokerage sectors, working with top-tier global clients such as BBH, BNY Mellon, HSBC, JP Morgan and Northern Trust. Based in London, New York, San Francisco and most recently Luxembourg, he regularly chairs industry working groups and is a member of ALFI TA and Fintech steering committees. Sern Tham E: sern.tham@multifonds.com T: +352 26 44 211 @serntham Sern Tham is Global Head of R&D at Temenos Multifonds. He is responsible for all product, support, development, technical and quality assurance functions for Temenos Multifonds products. Sern has over 15 years of experience in the wholesale banking and investment industry. He was previously Director of Strategy and Execution for Omnium (formerly Citadel Solutions) through its inception and business build, and was also a senior manager at McKinsey and Company, Inc. 8
Respondent profile 21% North America 64% EMEA 11% Asia The survey was carried out in March and April 2017 and received 214 responses from the global asset management industry, including third-party administrator/fund administrators (44%), asset managers (24%), custodians (10%) and asset owners (3%), with auditors, consultants and law firms accounting for the remaining respondents (19%). Respondents to the survey range across a number of business functions, including executive management (31%), operations (23%), product (13%) and technology (6%), with business development and client management among the remainder (27%). Respondents are spread globally with 64% based in EMEA, 21% in North America and 11% in Asia, located in Australia, Belgium, Canada, Germany, Hong Kong, Ireland, Italy, Luxembourg, Singapore, Switzerland, UK and United States. Respondents based in other locations make up the remainder (4%). Value of funds administered 4.7% Less than $1bn 14.0% Between $1bn and $20bn 18.2% Between $20bn and $100bn 21.5% Between $100bn and $500bn 25.7% More than $500bn 15.9% Not applicable 9
Temenos Multifonds recent industry recognition Global Custody Risk Global Awards 2016 Asset Servicing Technology Vendor of the Year 2016 Global Custodian Awards Innovation Award for Best Technology Platform across HFA and MFA 2015 & 2016 Best Transfer Agency Platform 2014 Best Provider for Fund Administrators 2013 Banking Technology Readers Choice Awards Best Funds/Asset Management Product/Service 2015 Best Post Trade Processing Product/Service 2014 & 2012 EMEA Custody Risk European Awards Post Trade Technology Vendor of the Year 2015, 2014 & 2013 Funds Europe Awards Technology & Trading Provider of the Year: Back Office 2012 Americas Custody Risk Americas Awards Post Trade Technology Vendor of the Year 2015 & 2014 Waters Rankings Awards Best Accounting System Provider 2014 About Temenos Multifonds Temenos Multifonds is the award winning investment software provider for fund accounting, portfolio accounting and investor servicing and transfer agency on a single platform. Today, more than $7 trillion in assets for both traditional and alternative funds are processed on Temenos Multifonds products in more than 30 jurisdictions for the world s leading global custodians, third-party administrators, insurance companies and asset managers. Temenos Group AG (SIX: TEMN) is a market leading software provider, partnering with over 2,000 financial institutions including 41 of the top 50 banks to transform their businesses and stay ahead of a changing marketplace.