There's no shortage of challenges for the asset management industry today, including fee pressures, evolving client preferences and the advance of technology. For active managers, passive continues to gain market share, leaving the question: What creates the asset manager of the future?
Culture: The Constant Amid Persistent Change
When change is a constant presence, culture can be a powerful source of continuity and connectivity. It can sustain firms through good and bad times, driving everything from talent acquisition and development to investment research and processes to corporate behavior.
Culture must be open to diverse perspectives and insights from everyone—whether they're experts at investment and research, information technology or client service. Culture should encourage innovation in all parts of the business and a creative approach to problem solving—a necessity for sustaining success in a rapidly evolving industry where the playing field faces disruption at any time.
"The world is made up of diverse and unique individuals with different backgrounds and experiences," says Kate Burke, AB's Chief Administrative Officer. "Diverse perspectives lead to differentiated insights, which are vital for active managers. They also allow us to scale our business, engage with a broader client and employee base, and drive innovation."
Culture must also instill that a firm's clients are its most important asset, and that focus must permeate every aspect of the organization. If a client doesn't have enough trust in an asset manager, the potential depth of the relationship is limited. What attributes are critical to engendering trust? A good list would start with transparency, humility, accountability, integrity, collaboration and innovation.
Raising the Bar for FinTech Innovation
Not only do diverse talent and ways of thinking drive innovation, but innovation in turn can magnify the impact of human talent by creating better, more effective ways of getting things done—from investment research and portfolio construction to trading and client service.
Data science is a huge focus for investment managers. The industry is still in its early stages, but the years ahead will likely see data science become integral to developing information advantages. Some examples include analyzing mobile phone data to understand foot traffic to brick-and-mortar stores, and crawling firm's filings to dimension the tone of management communication.
And that's not data science's only use.
"Like all firms, we're still refining the formula for applying data science, because it's a field that continues to evolve," says Seth Bernstein, AB's Chief Executive Officer. "But there's so much promise. In addition to enhancing the quality of our analysts' information, we're also using data science to enhance our investment processes and platforms—and to better understand what our clients need."
Investing in data science doesn't guarantee success, and getting it right will be a key ingredient in how asset managers fare as the industry moves forward.
Digital properties are another imperative for the asset management firm of the future. The importance of these connections will only grow as clients' preferences evolve in terms of how, when and where they access information. Clients may be in front of an office computer or—increasingly—on a mobile device. But the demand is the same: They want as much information in real time as possible. It must be accurate, available in diverse formats and tailored to customers' needs. Digital engagement has to keep up.
"Our goal is to better understand how our clients experience AB," Burke said. "That way, we can enhance that experience and do more for them, whether it's sharing insights, improving our understanding of their thinking, or delivering services and solutions more effectively."
Investing in digital and innovation can also create efficiencies that enable asset managers to spend more time working with clients on investment challenges. Streamlining the complexities of an investment firm and enhancing collaboration lets client-service professionals focus on delivering needed services—and empowers them to do it more effectively. To that end, AB is investing in collaboration technologies, improving information sharing and access, and applying learnings from consumer technology, including biometric capabilities.
"There are many, many areas in which we can use technology and innovation to create a better business," Bernstein notes. "We've built a global business transformation team to dig deeper into these opportunities and help us understand the best ways to integrate them with our business. It's still early days, but the results to this point are encouraging."
Building Solutions That Deliver Differentiated Alpha
In the current low-growth, low-expected-return environment with the potential for higher volatility, investors are looking for innovative strategies that can capture differentiated return streams.
The notion of distinguishing cheap beta from diversifying strategies and high-conviction alpha solutions isn't going away. Passive investing has given investors more pricing power, allowing them to access broad market exposure at low fees while steering the bulk of their fee budgets to higher-potential areas where differentiated insights can make a difference.
Alternative alpha sources are highly sought after, including liquid, systematic strategies that offer lower fees than traditional hedge funds, and illiquid assets like private credit that diversify public credit exposure and provide a yield premium for longer investing commitments. Broad equity-market exposure is becoming commoditized, so investors are gravitating to high-conviction active equity strategies. And clients want innovative fee structures that distinguish beta from distinctive alpha.
As the number and type of in-demand services continue to grow, asset managers must recognize that clients' needs are evolving. For forward-looking firms, this means the necessity of developing new capabilities in response.
"Before the global financial crisis, AB was much more focused on long-equity services," Bernstein says. "In the years since, we've made strategic investments to broaden our lineup. Some of this growth, of course, comes from within, but we've also recognized the need to acquire capabilities where we lack the necessary expertise and experience."
Responding to Demand for Responsible Investing Strategies
If any one area can claim to represent the future of investing solutions, it's probably responsible strategies.
The call for solutions that integrate environmental, social and governance (ESG) considerations continues to grow. And many investors are looking to go further than integration—investing with purpose in addition to achieving financial objectives. Whether solutions are screening, goal-based, sustainable or impact, investors want more innovation and more variety.
The demand for responsible solutions will put a premium on understanding incredibly complex dynamics like climate change and applying them when analyzing risks and opportunities to industries and individual issuers. In some ways, the industry is only scratching the surface in making these connections, and that needs to improve, according to AB's CEO.
"No one firm has all the answers to how to incorporate climate considerations in investment research and decisions—the industry needs more education," Bernstein says.
"We recognized this gap, so we recently announced a collaboration with Columbia University's Earth Institute to develop a curriculum for our investment professionals on climate change and investing," Bernstein notes. "It's intended to fill a need to dig deeper into climate change and the far-reaching impacts it will have on economic and financial outcomes."
Developing New Ways to Partner with Investors
Another skill that we see underpinning success for tomorrow's asset manager is the ability to build deeper partnerships with clients: What new forms of engagement and benefits can be brought into the mix beyond those of the traditional manager-client relationship?
These innovations may include sharing investment tools to help investors refine portfolio construction or better understand underlying return drivers. Joint on-the-ground research trips allow investment managers and clients to come together in exploring new markets and opportunities. Joint training programs can bring advantages to both asset managers and asset owners.
Deeper dialogues on key issues can facilitate the sharing of insights. Topics might include how portfolio construction needs to adapt to evolving cyclical environments, the isolation and sourcing of alpha and beta components, and advancing progress on diversity in the investment industry.
Investing for the Future: How Do We Get There?
Collectively, we think these pillars will go a long way toward defining success for tomorrow's asset manager. But every firm has finite financial resources—and the obligation to remain a financially strong and viable partner over the long run.
Getting the balance right requires a focus on reducing costs to fund long-term growth initiatives. That means harnessing technology and innovation to make human talent more efficient and productive—and more client-responsive. Diverse perspectives and ways of thinking must be applied to challenge and rethink existing processes, uncovering more resource-efficient approaches. A culture of intellectual curiosity and empowerment is critical in driving and empowering this process.
"Transparency is key to success during times of change, particularly when it comes to allocating resources to firmwide initiatives, Burke says. "We're looking at our processes globally and examining how we conduct our businesses, identifying ways we can be more effective."
Strategic cost reductions—including reducing the size and cost of real estate footprints—are also vital to fund asset managers' investments for the future while maintaining financial strength.
"We've been working globally to reduce real estate costs, transitioning into more space-efficient and greener buildings," Bernstein stated. "This includes relocating our corporate headquarters to Nashville, Tennessee, where we expect to benefit on a number of fronts—including lower real estate costs."
Summary: Looking at the Big Picture
There are obviously many moving parts to building the asset management firm of the future: Managing core businesses. Serving clients effectively. Making thoughtful cost reductions. Rethinking processes and approaches. Investing in strategic initiatives including talent, technology and innovation as well as product development.
"In our view, culture is the one constant that runs through all of these initiatives and helps us connect today to tomorrow," says Bernstein. "But none of it can be achieved without exceptional talent and creating an environment in which employees can thrive."
