CHALLENGES FACED BY ASSET MANAGEMENT INDUSTRY
Manager Research, PAGE
Mar 17 - 23, 2008
The asset management industry continues to face fundamental changes that have been transforming the competitive landscape over the last several years.
Traditional asset management firms - whether subsidiaries of banks, securities firms, or insurance companies, or stand-alone entities - and on "alternative" investment firms - such as hedge funds and private are growing rapidly as both institutional and individual investors are allocating an increasing percentage of their portfolios to them in their search for higher returns and strategy diversification.
Meanwhile, serving the corporate pension market is changing as companies continue the transition from offering defined benefit to defined contribution plans. The race to create new products to serve this market is underway, with lifecycle funds one popular choice. The demographic shifts in developed economies that are driving these changes are having important impacts on asset managers. The baby-boom generation, which is just beginning to retire, will be drawing down their pension plans. The departure of baby boomers from the workforce is igniting a battle among asset management firms to attract and train talented professionals from the new ñ and stylistically different - generation now entering the work force.
Asset managers should pay special attention in 2007 to the following five key issues.
* Growth in alternative investments. Assets continue to flood into hedge funds and private equity funds, and increasingly these come from institutional investors, which demand much greater transparency. In addition, some hedge funds will need to respond to investor concerns that their risk management processes may not be strong enough to handle the risks they have assumed.
* Data security and privacy. Traditional asset management firms are gathering more confidential customer information than ever before. They face the significant challenge of safeguarding the privacy and confidentiality of their growing databases of sensitive information.
* Transformation of risk management. In the past, traditional investment management firms focused on market and credit risk, but now they are equally concerned with managing operational and compliance risks. Firms face the challenge of consolidating all the various risk-related issues and initiatives across their organizations to manage their risks more effectively and efficiently.
* Recruiting the young generation. The aging of the workforce in most developed economies, coupled with increasing skill requirements in many industries, has created fierce competition for talented professionals. To successfully recruit the members of the new generation of workers now entering the labor force, asset management firms will need to understand and respond to their distinctive profile and requirements.
* Shift to defined contribution plans. The continuing shift of retirement assets from corporate defined benefit to defined contribution plans is creating a new competitive landscape. To be successful, traditional asset management firms will need to respond to the needs of individual plan participants for financial information and advice, while working to create innovative products appropriate for less knowledgeable investors.
RIGHT MIX OF PRODUCTS
The shift from Defined Benefits (DB) to Defined Contribution (DC) retirement plans has fundamental implications for asset management firms. The continuing shift of assets into DC plans should serve to favor firms that are already active in managing these plans, offering mutual funds or other products targeted to individual investors. The challenge is greater, however, for asset management firms that have specialized in serving the DB market. With more DB plans being frozen, they must decide how to react and whether they can compete for DC assets. Although developing mutual funds is one option, these firms may be dissuaded by the regulatory burdens these products entail. In addition, while collective investment funds, which are less regulated, are gaining popularity, they are still not offered in a significant number of DC plans. Thus, DB specialists need to consider how they can create institutional products that fit into DC plans.
TO BE A TRUSTED ADVISER
Many employees enrolled in DC plans are seeking assistance in making investment decisions, and asset management firms realize that they can forge lasting customer relationships by being seen as a source of sound financial advice. Consumers are more likely to consider a financial services firm for their next product purchase if they perceived the firm to be a "customer advocate," that is, doing what's best for its customers and not just for the firm's bottom line.
COPING WITH COMPETITION
While an asset management firm managing a DB plan faced no competition for the plan's assets when additional contributions were made to the plan, DC plans typically offer participants a range of investment options, usually from several firms (i.e., unbundled). Thus, for a provider of a DC plan's investment option, there is an ongoing competition for existing assets within the plan, as well as for new contributions.
A primary rationale of employers for moving to collective funds is cost. Collective funds do not need to pay for retail distribution, and their investors generally buy and hold for the long term, driving down transaction expenses. And unlike retail mutual funds, collective funds offer a sliding fee scale, with larger plans receiving lower fees.