Investment management is at a turning point. The sector has already had to adapt significantly to changes in the institutional market, but a number of factors – including auto-enrolment, regulation and passive investing – mean the retail side of the industry is under serious pressure to define its future and respond.
Scotland's investment management sector contributes a significant proportion of the country's GDP, so it's of vital importance that it retains its economic firepower in the years to come. The leading players are already working and taking steps to make sure their models work in an increasingly fragmented market. But which are the main factors to be considered?
We recently commissioned The Economist Intelligence Unit to conduct some research on the subject. The resulting report, entitled Seismic shifts in investment management ( free to download here), looked at a number of key issues to be addressed by industry and – critically – how that could be done.
1. Retail-isation
Intermediation remains a key part of the market for retail investors. Our research points to a group of about 150 intermediaries holding the keys to the future of the investment management industry, creating a 'winner takes all' market.
In pensions, the shift from defined benefit (DB) to defined contribution (DC) pension provision has changed the rules of the game for pure-play asset managers. The DB market remains a huge part of the market, with 76% of workplace pensions in DB schemes. As the DC market grows in importance, however, the income stream diminishes – that means no revenue growth and no net new money for the asset managers.
DC schemes, combined with auto-enrolment and changes to annuities rules, create a long-term change for asset managers. Retail investors at this level are disengaged, so brand and reputation becomes critical – and becoming the default fund offered by a pension provider is the 'Holy Grail' in the new DC world.
2. Burning platforms
Most sectors at the moment have 'disruptors' – businesses changing the established model and often creating very specific but very real challenges for bigger players. Platforms are that disruptor for traditional distribution, with UK platforms currently accounting for £274.4bn of assets, and growing.
The platform model 'groups' investors, allowing them to demand institutional-style rates from asset managers; the platforms can then charge retail prices to their clients, which poses a real threat to asset management fees and profitability. As a result, many of the smaller asset managers have taken the decision not to participate in the sub-advised retail market.
3. Internationalisation
The UK's market is mature, and its gatekeepers have limited options for increasing market share. Growing wealth in the East has led asset managers to take a dual approach; taking UK products overseas using international distribution networks, or building local capabilities in a smaller number of territories with selected products.
Some of the managers interviewed said Asian investors will only consider European funds as a small part of their investment strategies; successfully exporting UK-domiciled products is restricted to a handful of large players. Even at home, institutional clients are asking for global asset allocation, and retail investors are likely to follow suit. For many, boots on the ground is the preferred option.
4. Regulation
Compliance, audit and group risk costs have increased, but managers have proven adept at making efficiencies elsewhere or passing these costs on to consumers. Fee squeezes and price competition will make this harder, though.
Regulation isn't often seen as an opportunity, and it has hitherto been seen as a drag on efficiency for asset managers. However, that could be about to change with new regulation being introduced to the sector.
The Alternative Investment Fund Managers Directive (AIFMD) provides a pan-European passport for investment products, making it easier to sell UK products across the continent. But regulation creates barriers to entry, so some commentators expect it to be harder for smaller to mid-sized managers to compete.
Similarly, the Undertakings for Collective Investment in Transferable Securities Directive (UCITS) could provide a similar advantage for UK asset managers with global scale.
The response
Considering how distribution models are structured is a key aspect of asset managers' future strategies, as well as issues of product development and pricing in response to the challenges that lie ahead.
Our report provides more detail on each of these points than we can include here, so please take the time to digest it.
Download the report at: Deloitte.co.uk/Seismicshifts
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