Asset managers need to become more operationally resilient

14/01/20

New pension system requires a massive transformation

Asset managers are facing pressure from all sides to improve their operations. For parties operating in the Dutch market, the situation is particularly urgent, says Patrick Heisen. "A new pension system with a high degree of individualisation requires a massive transformation on the part of asset managers. That's why my message is: act vigorously now so that in three years’ time we will have an organisation that is up to the challenge."

Customers want a peek behind the scenes

Asset managers constantly face new and more stringent legal and regulatory requirements. Minimum requirements are therefore being raised and the pressure from regulatory authorities – in the form of inquiries, request for information and regulatory reporting – is increasing accordingly. PwC estimates compliance costs in 2022 will amount to approximately 10% of asset manager revenues. That is before they have earned a single euro. To generate revenue, asset managers are reliant on clients who are also becoming more demanding. Institutional investors, in particular, want more than ever to see a tailored approach to both their investments and the way they are served with reports, services and access to people in key positions at the organisation.

"The degree of transparency that institutional investors want in the selection and monitoring of asset managers is rising spectacularly", says Patrick Heisen, leader of the Asset and Wealth Management practice at PwC Nederland. "We are especially seeing an increasing focus on operational due diligence; in other words, the way an organisation’s processes, systems and people operate. This is due to changes in the investment policies currently being pursued at institutional investors making greater demands of asset management organisations. Furthermore, their risk management has matured in the past few years, putting a greater focus on non-financial risks and consequently a greater need for information from asset managers regarding their IT, HR and other operational aspects."

High expectations, disappointing results and concerns about the future

The importance institutional investors attach to this is also borne out by a recent PwC study which refers to Operational Strength as the number-one criterion when assessing asset managers. That same study also reveals that this is exactly the area where asset managers fail to meet customer expectations most. "There are two reasons why institutional investors are worried about the operational capacities of asset managers. The first has to do with today's extremely low interest rates, which is driving a shift towards alternative investments. For asset managers, effectively organising these types of investments means a real increase in organisational complexity. The second reason is that investors consider ESG (Environmental, Social and Governance) to be ever more important: ESG is no longer a separate product, but one that is to become an integral component of all investment processes. That, too, places additional demands on the operational resilience of asset managers."

Asset managers in a quandary

Yet, customers do not only want higher returns, greater customisation, transparency and a better service, they want all of that at lower prices. "For asset managers, the pressure on their revenues means they need to examine their operational model very closely. Behind the scenes, they will need to standardise, simplify and automate to ensure they can get their work done as efficiently as possible. But, in their front-office roles, they are dealing with customers with highly specific demands and requirements. That is the squeeze today’s asset managers are having to deal with."

Digital technology offers a solution

To alleviate that pressure, many asset managers will need to invest in a technological transformation. They will have to use digital solutions in their efforts to boost customer satisfaction and customer loyalty. Data analytics and artificial intelligence can help in gathering research and data faster and thus, improve investment performance. A third category of digital solutions comprises automation and robotics and is focused on improving operational excellence.

"But investments in digital technology are not enough. Asset managers will at the same time need to invest in attracting, training and retaining talented professionals. People will not only need to be able to avail themselves of all these new technological solutions; they will also need to drop old work habits and procedures and develop new processes in which they can optimally utilise the digital possibilities now available to them." For smaller and mid-size asset managers, this means growing in scale, as only then will the needed investments yield a return.

The extra challenge: a changing pension system

Alongside all these challenges that are visible across the entire international asset management industry, Dutch asset managers face a further development that is placing yet more pressure on their organisations: the imminent changes to the Dutch pension system. "It is still unclear what these changes will mean exactly and when we can expect them. But one thing is certain: the future system will be characterised by a larger degree of individualisation than is currently the case." Asset managers who, for decades, have mostly been business-to-business (b2b) oriented will therefore need to prepare for a business-to-business-to-client (b2b2c) model.

That might start with a scan of the organisation – from the perspective of the current customer – to identify areas of improvement. This could be followed by an analysis of how well an asset manager is able to respond to various scenarios regarding future market changes, for example a change of the current customer or new customer groups with a more individual-focused approach. This often results in a number of no-regret moves, measures that make sense in all scenarios. Think of, for example, the use of new modules for offering products and services to customers, simplifying the operational model by reducing the number of systems or outsourcing tasks and establishing a professional data management system linked to analyses for clients, investment, risk management and reports.

Three more years to strengthen the operational model

Asset managers who already feel the pressure to boost their operational resilience in their current b2b environment could be totally overwhelmed if there is a need for engagement of individual investors as well as of institutional investors due to change of pension reform. "To serve individual investors as part of the b2b2c strategy, the asset manager will need to provide them with information, inform them of the impact of political and macroeconomic risks and offer them guidance when making investment choices. This requires a huge transformation on the part of asset managers. That’s why my message to them is: don’t wait, but act vigorously now and strengthen your operational model. In, say, three years’ time, that should be completed and we should have an organisation able to handle the transformation of the pension system."