In a recent KPMG report it was noted that “Nobody can predict the future”, but that has not stopped the company contemplating what the investment management industry will look like in 2030. In its report, the professional services company contends that the rapid change the industry is experiencing is driven by a number of deeply rooted forces, or ‘megatrends’.
Over the next 15 years, these megatrends are meant to impact the investment management industry in a number of ways (see Fig. 1). For starters, over the past 30 years the industry has been driven by the baby boomer generation, which has provided strong levels of investment, underpinning solid market growth. But it is important to remember that these markets have also been buoyed by rapid globalisation and a massive rise in international capital flows.
As that generation begins to reach retirement, however, the focus of investment managers shifts to a younger group of investors, but one that is not accompanied by such a favourable socioeconomic environment as the generation that preceded it.
In the wake of the financial crisis, many of the world’s major economies are still struggling; putting a cap on growth. The crisis has also played a big role in eroding trust between investors and financials service providers – adding to a challenging path ahead for investment managers to navigate, but one they plan to meet head on.
Digitisation is pervasive in all industry sectors and can be difficult to keep ahead of
“Investment management has become more and more sophisticated with the tools that are available nowadays and with easy access to information”, says Pedro Pinto Coelho, CEO of Azure Wealth in Switzerland. “The main driving forces behind this evolution include, on the quantitative side, more sophisticated tools to manage risk and models that allow us to digest large chunks of data and, on the qualitative side, the ability to reach out to the local expertise on the ground. However, the distinction between good and bad performance still lies in the human factor and the ability to make sense of the data analysis to try to forecast the expected outcome.”
Investor circa 2030
In the future, Azure Wealth and other investment management firm’s will need to find new ways to meet the ever-evolving demands of their clients as the profile of the typical investor continues to evolve over time and become harder to pin down.
KPMG suggests there are likely to be far fewer ‘typical’ investors. Instead, the industry will benefit from being able to draw from a larger pool of investors, but will have to tailor their services to a investor class with a far more diverse set of needs, attitudes and income patterns.
The financial services firm believes that in the coming years, investors are going to expect the organisations to provide bespoke service models in order to better suit the individuals needs of this increasingly diverse group of investors. Not only that, but because financial literacy remains low around the world, investment managers may be expected to provide better advice, information, education and support for investors.
“In an industry currently suffering from high levels of consumer mistrust, investors are likely to assign increased value to trusted brands, particularly as awareness of issues such as data security, confidentiality and privacy increases”, writes the author of the report and global head of investment management at KPMG, Tom Brown. “In tomorrow’s world, simplicity, transparency, honesty and integrity are likely to be regarded as more important buying criteria.”
This is going to require investment management firms to change the manner in which they provide many of their services to clients. No longer will the fund factsheet be enough to satisfy the new 2030 investor that KPMG speaks of. Instead, investors will expect the type of access to information that they have become accustomed to and, which is provided by other industries. It will require the implementation of interactive service models that will allow investors to obtain up-to-date market information through a variety of platforms.
Brown and his colleagues believe that as a result, future investors are going to want better solutions to their individual needs and will want to ‘lock down’ value earlier in a product lifecycle. In order to track value and lock it down earlier, it is important that investment managers implement effective data analytics in order to provide investors with consistent returns.
“[Azure Wealth] has proprietary forecasting models that represent the different components of an integrated platform to be able to make a top down and bottom up analysis”, says Coelho. “This platform allows us to adjust our investment allocation and spot new investment opportunities in a consistent way. We believe in long-term objectives and by analysing the market trends we define an investment strategy based on fundamentals and not on market swings. We analyse carefully the risk associated with each component of our portfolio to allow us to have a combination that has consistent returns with reduced capital erosion.”
Digitisation is pervasive in all industry sectors and can be difficult to keep ahead of, but if used properly it can help firms offer alternative service models and better cater to the needs of their clients. Investment management is an industry that takes pride in cultivating strong, personal relationships, but is facing both challenges and new opportunities as technology shapes the expectation of individual and institutional investors.
While there will always be demand for face-to-face interaction between clients and those tasked with managing their capital, the growth and success of mobile applications, video and social media platforms means that they are becoming the preferred method for investors to stay abreast with market information.
Therefore, the application of digital technologies is essential if firms want to be successful. They must be willing to adopt, evolve and grow their use of these platforms and incorporate these systems into the very heart of how they do business if they hope to cater to their new, technologically savvy client base.
However, it is important to remember that real people with the right expertise should compliment new technologies in order to help investors makes sense of all the data that they will soon have at their finger tips if trends continue in their current trajectory.
“Although technology has evolved significantly, we still believe the human assessment plays a far more significant role to provide clients the risk-adjusted returns they expect”, explains Coelho. “Today we live in a world of high swings between high and low volatility periods.
We believe in long-term returns and believe these swings can generate good opportunities to make investments with strong fundamentals.” Over-spending by governments around the globe has created high levels of debt, which has led to the implementation of harsh austerity programmes in a bid to balance the budget.
As a result, more and more people are realising that their state and even private pensions are not going to be enough to support them later in life. This trend has and will continue to force people to look for viable investment alternatives that are capable of providing the financial security that people desire.
According to KPMG, this new generation of investors, as a result of the economic climate that they have grown up in, will be more likely and willing to consider non-traditional alternatives to ‘traditional’ savings and retirement products.
Furthermore, the financial services firm contends that investors’ decisions are not only going to be influenced by the current economic situation that they find themselves in, but also the choices they make are likely to be influenced their peers, friends and colleagues.
This provides investment managers with a massive opportunity to attract a new generation of investors with a very different set of motivations and needs. But in order to make the most out of this opportunity, investment managers will need to adapt their business practices in accordance to the demands of their clients.
“The future trend of the industry will take into account the aggregate value of each expert. In other words, we will see more cooperation between the different asset managers where each one will provide its knowledge and will rely on others for specialised knowledge on areas they will require support. There will be a new world of aggregate knowledge”, continues the KPMG report.
“Azure Wealth is built on the strong conviction of wealth preservation in the long term. Therefore, we see that more clients require the necessary support in a world of constant uncertainty and conflicting information. Azure Wealth is expected to have a strong growth as more and more clients recognise our added value”, says Coelho.