Innovative disrupters, powerful economic forces and irreversible societal trends are shaking up asset and wealth management in ways we haven’t seen before. I recently wrote a piece in Ignites that revisited three of my 2018 predictions for the industry. They were:
- Financial advisors will have to shift their value propositions to holistic wealth management.
- National Accounts and Product Development will align.
- National Sales will right-size their external and internal wholesalers.
Last year’s predictions outlined some fundamental ways the industry needed to change in order to weather—and thrive—in this new era of asset and wealth management, and they are, if anything, even more relevant now.
I’ve also added three new predictions for 2019, focusing on the impact of technology. Significant strides have been made in technology, particularly in the area of artificial intelligence, and leading asset managers will soon be making use of these advances to optimize distribution, marketing and product development.
Here is a scorecard of how the inflection points I identified for our industry in 2018 have turned out — and where I believe additional changes and transformations continue to be necessary.
Concentrated and differentiated portfolios will grow in importance due to shrinking shelf space
Report Card: Little Movement
Although we continue to believe that concentrated portfolios have a place, the reality is that in 2018 large, well-managed and well-diversified, (not to mention increasingly less expensive) funds dominated overall AUM and flows. Some active asset managers are attempting to differentiate their strategies by building highly concentrated portfolios to deliver higher alpha, but performance, for the most part, remains volatile with few managers able to deliver consistent, long-term outperformance.
As we head into 2019, major broker-dealers will continue to scrutinize the products on their platforms. Alternative managers will continue to incorporate more illiquid securities in their product structures and look to alternative fund structures like interval funds, non-traded business-development corporations and REITS. These kinds of products will become increasingly shareholder-friendly, offering more competitive fees and a wider range of share class structures. More important, distributors will work to make them easier to access by advisors, but overall they will continue to be constrained by concerns around the appropriateness of these structures for advisors and their clients.
Investment managers will rationalize their mutual fund product offerings
Report Card: Beginning Stages
We haven’t seen mass rationalization of funds in the past year, as we had anticipated. According to Morningstar, the industry merged or liquidated 1,161 mutual funds from the start of 2016 through October 31, 2018. During the same period, 954 new funds were launched, indicating a modest but not yet drastic reduction in total funds and share classes.
On the back of broker-dealer product platform rationalization, mutual fund managers will undergo a more significant rationalization process of their own in the coming year. In order to manage costs, asset managers will begin to meaningfully reduce their mutual fund offerings by eliminating or merging away noncompetitive offerings. There are currently almost 8,000 unique funds, but most of them have little impact on the industry at large. In fact, if three-fourths of these funds were eliminated, it would account for less than 10% of overall industry AUM.
Moving forward, mutual fund rationalization will be accompanied by a decision to eliminate investment management resources in areas of underperformance or outside the core value proposition.
The largest asset managers will lower their fees aggressively
Report Card: Some Progress
As mentioned, Fidelity, one of the world’s largest asset managers, launched the first zero-fee mutual fund. Also, Vanguard recently lowered the cost of investing by broadening access to its cheapest share class, reducing the investment minimum from $10,000 to $3,000. Going forward in 2019, investors will continue to gravitate toward the lowest-cost products. Several investment managers will be forced to finally acknowledge the reality of zero-fee investing and will decrease their fees significantly, while the rest of the industry will continue to lower fees gradually. Fees will also continue to decline for smart beta and other specialty ETFs.
Firms should think about how they can use their pricing strategy to their competitive advantage. Ultimately, asset managers and broker-dealers alike will have to get used to lower profit margins. Asset weighted average expense ratios already fell from 0.99% in 2000 to 0.59% in 2017 for equity mutual funds, according to ICI, and we expect they will continue to decline.
The SEC will approve additional options for Active Non-Transparent ETFs; look out for the emergence of direct indexation capabilities
Report Card: No Progress
It hasn’t happened yet, but I anticipate that the SEC will, against all odds and expectations, finally approve several Active Non-Transparent ETF solutions — and the market will finally get to determine whether Eaton Vance’s NextShares, Precidian’s ActiveShares, Blue Tractor’s offering or T. Rowe Price’s solution will meet the needs of investors.
Although this is not a cure for what ails the active investment industry, these new funds will slowly gather assets. Passive and so-called smart beta ETFs continue to win market share, fueled primarily by RIAs, other fee-based advisors and online financial advice firms, such as Vanguard and Charles Schwab. But asset managers recognize that they can’t get to scale through organic ETF growth, so the largest firms will continue looking to acquire the few remaining independent ETF sponsors.
Also, while the SEC will make it easier to launch new ETFs by simplifying the exemptive relief process, the product rationalization process will continue to extend to ETFs. The number of ETFs closed in 2018 will exceed the record number of 138 closures set in 2017. Finally, direct indexation will begin to emerge as a threat to the business models of even the largest ETF providers due to the ease with which they can be integrated into UMA platforms.
Marketing will partner with National Accounts to use account-based marketing strategies
Report Card: Some Progress
We’re already seeing some notable headway in this area. As power shifts to distributors that are trimming fund families and products from their lineups, marketers at one in four asset management firms have begun to partner with national account teams to analyze and tier distributor relationships.
Looking ahead at 2019, we expect more firms to prioritize their strategic relationships based on rigorous analysis of profitability, demand, alignment and partnership. We also expect them to allocate their levels of support accordingly, from highly customized business development programs and online portals to programmatic and tailored digital support.
Predictions for 2019
The use of artificial intelligence technologies will be an essential competency for distribution and marketing
Advisors appreciate the same kind of highly personalized experiences we all do everywhere in our consumer lives. In fact, our research finds that personalized customer experiences tip the balance for three out of four advisors when it comes to choosing between asset managers with similar products and comparable performance.
Artificial intelligence (AI) technologies can help marketers move from traditional one-size-fits-all campaigns to creating individually relevant experiences at scale. A few asset managers have been piloting the use of machine learning and natural language generation technologies for obtaining insights and gaining efficiency. We believe firms will start to leverage the data and AI capabilities they have to scale personalized, one-to-one marketing and use the technology in their distribution efforts as well.
Expertise in marketing technology will separate the leaders from the laggards
Chief marketing officers know they need to recruit marketing technologists, who easily straddle the gap between effective marketing strategies and the sophisticated technologies that can bring them to life. But fewer than half of firms have at least one dedicated marketing technologist on their teams today to help them leverage the capabilities of the marketing technology stacks in which they have invested. We anticipate that this role will be filled by the vast majority of firms in the near future.
The largest firms will improve their investment performance and distribution strategies through data-driven insights
Leading firms will continue to invest heavily in their data infrastructure and analytics in 2019. The most forward-looking of these organizations will create the role of a Chief Data Officer (CDO) to oversee their business intelligence efforts and expand their data science staff. If they haven’t already done so, they will also build data innovation centers and will outsource any functions that don’t provide a true competitive advantage.
On the opposite end of the spectrum, most other firms’ BI teams will continue to be underfunded and continue focusing on reporting and tactical campaign support. Executives have to make sure they are fully aware of what their firm’s data strategy is and that the organization is positioned to be able to compete on data.