Drivers of industry change

23 May 2016
By Tiziano Giannotti

By Fiona Maciver

Remaining relevant in a rapidly changing world requires innovation and adaptation. The asset management industry faces change – both internal and external – in many guises across the value chain. In our quarterly temperature check of industry drivers, distributors continue to highlight regulation and pricing as the main influencers of transformation.

Over the last year, the top drivers have remained relatively stable, with both distributors’ and fund manufacturers’ minds preoccupied by the burden and prospect of regulatory change. Keeping with our theme of transformation this month, and to increase granularity of cover-age, we have moved on from a simple ranking of the most pressing drivers to instead highlight the change in feeling towards each aspect according to the percentage of respondents mentioning them each quarter.

The chart below illustrates trends over the year to March 2016, showing that sentiment over the latest quarter has moved around a little. While regulation and pricing remained firmly at the forefront of distributors’ thoughts, the latter trended up, with more distributors citing this as a driver of change than at any point over the past year. This trend is also endorsed by the increasing momentum of passive sales. It should be noted that, for clarity, the chart only captures the top five drivers as ranked in the first quarter of this year. The next five most important drivers are tightly clustered below drivers three to five, and they are: new sectors / themes; active vs passive management; architecture of fund industry; volatility of the financial markets; and transparency / simplicity.

top drivers

The very top drivers of industry change remain static but the challenges of client education and distribution intensify in the eyes of fund buyers.

Over the quarter though, the most significant shift was an uptick in the importance of distribution into fourth place. This covers a multitude of factors, including selectors’ anticipation of changes to the distribution landscape (also heavily influenced by fundamental changes to regulations), responses to demographic transition, and the rapid infiltration of digital disruptors.

The weight attributed by fund buyers to the aspect of educated clients / risk awareness has bounced around over the past year, but exhibited a big upswing in the most recent quarter with particularly strong movement registered in Spain and Sweden. Underpinning this trend is the macroeconomic environment of low interest rates and very unsettled markets. Understandably, many clients are cautious and looking for solutions that will mitigate risk. While distributors believe some clients are well informed and more demanding on transparent product information, they also see many clients that require more education on savings and investment. Combine these factors with regulation on product suitability, and there are implications for both intermediaries and fund manufacturers. One UK discretionary manager touched directly on this in a recent Fund Buyer Focus interview:

‘A key driver will be the increasing use of new technology and social media to get information across to end-clients, and an accompanying improvement in transparency generally.’

The message is clear: end investors need quality information that satisfies personal and, increasingly, regulatory requirements. Responding to these of course necessitates a good understanding of customer needs and investor behaviours in order to provide access and transparency in user-friendly formats. For years, the asset management industry has trained its eyes on the lucrative, top-end of the market, focusing on the heavily intermediated and wealthy baby-boomer and generation-X segments, but what about the less affluent and future generations? In the words of John F. Kennedy:

‘Change is the law of life. And those who look only to the past or present are certain to miss the future.’