The future of asset management will either be completely virtual, or a hybrid model that features a mix of in-person and online contact. Either way, the old way of doing business appears to be gone for good.
In a December article, authors and Oliver Wyman partners Julia Hobart, Joshua Zwick, Dennis Zhang, and Kamil Kaczmarski outlined ten trends that they expect will shape the asset management industry in 2022, including the shift to a virtual working model. According to the article, research that the firm conducted before the Covid-19 pandemic indicated that a completely virtual asset manager — one that would eliminate in-office, in-person contact with clients — could lower the manager’s cost base by about 40 percent.
While Hobart, Zwick, Zhang, and Kaczmarski concede that most managers will eventually shift to a hybrid way of doing business, they argued some “trailblazers” will take the all-virtual plunge, which will not only enable them to cut costs but will also allow them to provide better service to their clients. “There’s a broader pressure across the industry to reduce costs,” Zwick told Institutional Investor. “While the buoyant markets have helped [float] all boats, there is an underlying fragility in the business model. As a consequence, managers are focused on how to operate more efficiently.”
Zwick said that many managers spend major capital on client services expenses, including travel and entertainment. Over the past two years, these expenses have largely dissipated, allowing managers to pass the savings directly to their firm’s bottom line. The question now is whether those savings will simply stay in-house or eventually be passed on to clients.
“I think the jury’s still out on that,” he said. “But with the pressure on asset managers to generate net-of-fee performance, and the continued scrutiny on the amount of fees that are being charged, it wouldn't surprise me that the power actually sits with the investors as opposed to the managers. And then, ultimately, the benefits of a more remote or virtual operating model would flow through to clients, as opposed to being captured by the asset managers. The markets are just too competitive to suggest otherwise.”
While a virtual model may help managers lower costs, Yariv Itah, a managing principal at Casey Quirk, part of Deloitte Consulting, said that cost is not a primary motivator when it comes to managers shifting the way they do business. Instead, the executive teams that Itah and his colleagues have worked with since the onset of the pandemic have been more focused on the sustainability of their business models. The general consensus, he said, is that most firms view a hybrid model as the most viable way to maintain the culture of the investment team. And, although the definition of a hybrid model has changed over the course of the pandemic, Itah said that most managers now loosely define it as, “We’re not going back to the way things were.”
“[Asset managers] are primarily focused on how the hybrid approach will change the culture,” Itah told II. “A lot of the value, they believe, comes from two sources: the [unstructured] interaction among the investment team members...and teaching the next generation.”
The asset management industry certainly seems ready for a digital shift. In September, KPMG released a survey in which 75 percent of asset management respondents indicated they had a strong appetite for digital transformation, Institutional Investor previously reported. But in an Accenture survey released in October, which included 100 c-suite asset management executives, 68 percent of respondents indicated they believed their firm was resistant to adopting new technologies.
Zwick agrees that asset managers are worried about culture and collaboration. Specifically, he thinks they’re primarily concerned that a completely virtual model will chip away at the teamwork-centric culture of firms. “Asset managers don’t want the culture to dissipate,” he said.
But he also argued that the ideas that he and his authors present in the article can serve as a healthy challenge to the status quo and as a reminder that there is always a better and more efficient way for managers to execute their mandates: “[Managers] thinking outside the box...need to challenge those assumptions,” Zwick said. “The opportunity to collaborate in a virtual environment is actually much higher, and you can engage a broader range of people.”