February 26, 2019
Vision and focus can drive success for asset management firms and the ability to predict the future and read the signs has never been as important. Whilst some firms will thrive, overall the operating environment for the industry is likely to be harder in 2019 and beyond.
Wealth managers (WM) will face margin compression, as investors favour low-cost investment solutions, and at the same time operating models at many firms could continue to see challenging forms of environmental change driven by regulators, changing customer preferences, and advancing technologies. At OneLife we have embraced this, and apply REGTECH solutions to be compliant, but also to meet customer needs when it comes to service.
How to handle an increasingly more complex regulatory landscape
Most WM organisations are pushing ahead with their risk and compliance initiatives, even as regulatory uncertainty will likely remain a significant and ongoing challenge. Even if law-makers and regulators make certain definitive changes, wealth management organisations must continue to drive the effectiveness and efficiency of their risk and compliance programmes so that they meet applicable laws, regulations, and supervisory expectations.
In most cases, we do not have the time or luxury of waiting to see how things will pan out, and the penalties for “bad behaviour” are now severe, on both financial and reputation levels.
Changing customer preferences
Within a generation, millennials are likely to be an important segment for many wealth management firms. Establishing relationships early on with this segment (like “Next Generation” services) will increase a firm’s credibility, but could be challenging, since they seem to prefer lower-cost funds (ETFs) and trading services.
Part of the shift to low-cost funds is linked to the move from active to passive funds. Index funds have enjoyed strong tailwinds over the past several years, as many investors already considered lower-cost investment vehicles. At some point, these tailwinds may become headwinds, driven by new operating models that combine low cost with digital community engagement. However, in certain areas of WM such as private equity, where firms have been able to make their case for alpha or risk-adjusted return, gathering assets has been more business as usual.
One of the keys to success for active mutual fund managers is to “make the case” for alpha, which likely starts with having a product line-up with high “active share,” meaning the percentage of holdings in a portfolio that differs from the benchmark index. This, in combination with offering direct Private Equity Investments, with none or little correlation to other asset classes, will probably increase in popularity in the coming years.
In general, WMs can use for instance life insurance as a solution for “bridging” to the next generation, and in particular the use of a OneLife life insurance contract, for holding Private Equity investments.
New operating models
The next part of this challenge could be the manner in which the business is run. Agility is one way to meet changing regulatory and tax requirements with new processes, rather than just increasing the capacity of existing infrastructure. 2019 will see some firms doing more with less and becoming more agile by breaking down existing tasks into components such as people, processes, and technology. Some WM firms could explore which components can be outsourced, including tasks that are critical differentiators for the firm, because they carry a large portion of the operating cost.
Technology infrastructure rarely needs to be owned to be effective, and with the state of cloud computing today, the cloud has the potential to be cost-effective as well as capability-enhancing. It may be the case that the process portion of a task is the only key differentiator for a firm, where both the people and the technology that support the process can be rented instead of owned or, employed, as it relates to personnel.
Customer service needs for WM firms also seem to be changing. Whilst for many customer segments that change might be somewhat static, for some segments, such as millennials, the difference in preferences could be dramatic. How quickly to invest in a digital customer service model may be a key decision for WM firms, and it will be intertwined with each firm’s growth strategy and its transformation to an agile operating model. At OneLife we have invested in AI (Artificial Intelligence), in order to improve response time to customers, and to be able to offer more time for our customer service personnel for proactive measures. Parallel to this we have developed both mobile applications, and digital signature capabilities, in order to meet the demand of those who prefer this way of doing business. As we see it, the way forward is to put new technology in place, but at the same time not to forget to keep and develop the human touch. Wealth management will still be a “people business” for years to come.
Growth through mergers and acquisitions to increase
Scale appears to be a key growth pillar for investment managers, with the industry concentration rising as larger firms gain a greater share of the assets managed globally. Operating on a larger scale provides a WM with factors that can contribute to growth, such as greater distribution reach, a more diverse talent pool, broader product portfolio, cost efficiencies, and being able to handle the increasing pressure of regulations, in an efficient and compliant way. These factors can translate to higher, more stable margins for the largest firms. An example of leverage after acquisitions is OneLife, who will have great synergies from our new shareholder APICIL Group, an insurer with over 80 years of market experience.
Alpha generation for organic growth
Many investment managers are augmenting traditional stock-picking methods with advanced analytical techniques and alternative datasets to stay ahead of the curve. These investment managers seeking organic growth via consistent alpha generation should be on the lookout for creative approaches utilising technology and alternative data sources for making investment decisions. Alpha generation has shifted the focus from the stock-picking skills of portfolio managers and traditional financial analysis to augmented processes including:
New alternative data sources that can provide investment insight
Investment managers are using a myriad of technologies in their investment decision process—including AI and other advanced analytical techniques to improve their traditional processes. In fact, many hedge funds and family offices are using AI not only for investment decision-making, but also for finding better ways of executing trades. At OneLife we try to expand our traditional business towards some of these asset managers in the forefront of technology, and adopt new ways of servicing our mutual clients.
Digital disruption
Transformation of the broader WM scene appears to be coming, and coming fast. Furthermore it seems to be low-cost, low-touch digital investment products and services, that will transform wealth management starting with retail and affluent clients.
An example: Look at the phenomenon Alibaba, and the largest global money market fund to see evidence of that transformation in China. The Yu’e Bao money market fund, with more than $190 billion in AUM in 2018, is the result of processes and technology coming together to meet the needs of a large, underserved segment.
The fund name translates into “discovered treasure” and it has generated its AUM by locating idle balances in the largest digital payment platform in China and sweeping them into the fund. It is a FinTech partnership between digital payments and investing. The fund services customers digitally, has low acquisition cost, and has many very low-balance accounts.
The success appears driven by ease of use, low-touch, digital investing, and returns that initially just outpaced alternatives. Now that the fund has tremendous scale, it can offer highly competitive returns derived from the ability to take a large portion of investment offerings, sometimes even the whole offering, of a short-term securities issuer. Funds investing in smaller increments have less negotiating power with issuers and distributors, and may receive a lower yield as a result. Clearly, scale is not the only contributor to yield, but it can make a difference. In this case, a popular online payment processor extended its services to include a simple money market account as a savings option for its subscriber base. The key was making it easy for investors. Who is to say that something similar cannot happen in other markets around the globe, and WM segments above retail level?
Private equity is another WM segment that loves disruption. The industry views itself as nimble, disruptive and opportunistic and so well-placed to respond to disruptive trends. This is in stark contrast to trying to change the direction of the large publicly-listed company super tanker. There are several ways, in which technological disruption impacts private equity directly, and the most obvious is technology as an investment theme.
Of huge interest to limited and general partners alike, is how disruptive technology is being used as a value acceleration tool for analogue portfolio companies.
As industry after industry is disrupted, the tech specialists have attracted huge amounts of capital across the whole spectrum from venture capital through growth to large tech buyouts.
With the vast market capitalisations of the tech giants, and new disruptors moving in all the time there is no sign of this trend abating. The very best growth and venture capital firms will explore the newest themes, and probably generate the most exciting returns around the evolution towards digitalisation. The future is finally here, and OneLife provides the platform to invest in it!
2019: a summary
2019 will most likely be the year of exceptions. Some WM companies will suffer hard due to the increasing burden of regulation, changing customer demand, and lack of management insight. Some will vanish through mergers, and some will just cease to exist. But there are also firms who will get the mix of growth, agility, and service right for their unique strategies. They will be able to deliver on their brand promises to current and future investors, whether that be risk-adjusted return, alpha, or just plain old great customer experience.
We at The OneLife Company, have been around for over 25 years, and are looking forward to the next 25, starting with 2019.
To find out more about how to best manage wealth through a life assurance contract, contact our experts for the domicile of your interest. OneLife’s coremarkets are Sweden, Finland, Denmark, UK, France, Spain, Portugal, Belgium, and Luxembourg.
Author:
Staffan Eldros Country Manager Sweden