The asset management industry is going through a period of upheaval that promises to reshape the to reshape the landscape. In our The Changing European Fund Landscape report we identified two contrasting, but related ways, that the European fund market landscape will be reshaped over the next decade – either through consolidation among the traditional players or disruption from new entrants.
Distribution is at the core of any asset manager’s strategy and is a key challenge for European funds. Despite efforts to improve the cross-border distribution in Europe, it remains a fragmented and complex process – which is ripe for disruption. According to our survey, fund platforms and advisors are the two parts of the funds distribution ecosystem that are most susceptible to disruption this decade.
There is perhaps an irony in fund platforms being seen as ripe for disruption given that the fund supermarkets that hit the market back at the turn of the millennium were then seen as the disruptors of the day. This survey finding also underlines how quickly innovation can move and how the disruptors of the past become the disrupted of the future.
In recent years we have seen the onset of consolidation in the platforms sector both between rival platforms looking to build scale and from asset managers looking to broaden their own offering. A FundsTech panel debate in May 2019 looked at this very subject, asking if the same platforms that revolutionised fund distribution in the 90s now needed a technology reboot of their own.
It could also be argued that advisors have already been subject to disruption from the growing robo-advisor market, however the survey results suggest that almost a third still believe there is room for further disruption from tech-enabled entrants. Perhaps we are only in the early stages of robo-advisory and the next wave of offerings will make greater use of artificial intelligence and machine learning, thereby ensuring a greater predictive ability and more advanced analytics rather than the bot-based offerings that simply automate the investment process.
The Importance of TA
Perhaps surprisingly, Transfer Agency (TA) was only cited as most susceptible to disruption by less than 20% of the respondents. However, when you see how important TA is seen as to firms’ distribution strategies it makes a more sense. Over 50% of the respondents viewed TA as a key cog in the fund distribution chain, sitting at the intersection of funds and investors.
This suggests that the imminent demise of the TA through the rise of DLT predicted by so many may be some way off yet. This is not to say that transfer agency technology is not likely to change, just that we are likely to see the incumbents continue to dominate by upgrading their capabilities or partnering with FinTechs.
In a December 2020 article, FundsTech spoke to a number of transfer agents about why they are unfairly held up as an example of the industry’s inefficiency, be that as one more intermediary on the processing chain or as a service provider reliant on legacy systems rather than digital technology.
As Citi’s global head of transfer agency operations Owen Carroll told FundsTech, TAs have made great strides in reducing the number of systems they use. “I think we give ourselves a hard time in the TA market over the amount of consolidation we have done. Over the last ten years, I have seen a lot of progress in reducing the number of systems,” he said.
This is not to say it will be without challenges, added Carroll. “We can get there, but in the interim, we’re trying to find how we can best add value to the investor experience.” The pandemic has helped TAs to move further away from the use of legacy systems and paper and embrace new, digital technology.
“There is an opportunity to reimagine ourselves coming out of this latest crisis, said Carroll. “But if we can make systems more cost-effective as well as nimble, that might help to make the speed of change quicker over the next three to five years compared to what we have seen over the last ten years.”
One of the most notable asset management trends of the last decade has been the increase in consolidation among the top tier of firms. In recent years we have seen Aberdeen and Standard Life join forces, as have Janus and Henderson as well as countless others. Consequently speculation mounts as to where the next mega merger will occur.
Certainly our survey respondents expect the consolidation among European asset managers to continue to be a trend this decade, with 90% expecting the pace of asset management consolidation to increase over the coming decade and 10% stating that the rate of consolidation will stay the same. With no-one predicting a slowdown in consolidation, the only question is how big of an impact consolidation will have on the landscape.
The survey also asked respondents to rank the major drivers of consolidation in order of importance. Unsurprisingly, the main driver for consolidation cited by was to gain scale, followed by cost reduction. Far less important were the ability to gain access to new investment capabilities or new markets and geographies.
This suggests that a defensive mindset is propelling much of the consolidation, as opposed to a spirit of adventure of entrepreneurship. When interviewed by Funds Europe, JP Morgan Asset Management’s chief executive in EMEA Patrick Thomson highlighted the role that technology will play in deciding the winners and losers as the industry goes through the next round of consolidation.
“Only the strong will survive – and the strong are people who’ve got scale and who can invest in the technology.” There are, he added, “probably too many asset managers... and clients want more from their asset managers at a cheaper price”.
The focus on cost and scale also underscores the importance of prioritizing operations during a consolidation. “Without a solid operational foundation, firms face the risk of not being able realise the cost and scale efficiencies, which can derail a merger,” notes Pervaiz Panjwani Global Co-Head of Fund Services at Citi Securities Services. “This why it is critical that asset managers prioritize operations during a merger.”
Finally, almost half of respondents think European managers are most likely to be bought by non-European (possibly US firms) managers, rather than the other way round. Which could reshape the industry by having more of key decision-making being increasingly located outside of Europe. In addition, there is a danger that consolidation will mean that the bar to entry for newcomers and disruptors will become too high.
Navigating the Change
There is little doubt that the European fund landscape will look very different at the end of the decade. Understanding the impact of the confluence of disruption and consolidation can help firms navigate the changing landscape and put them on solid footing for the decade ahead.