Adapting to Change: Rethinking Asset Management for an Evolving Future

Background

Recently, a colleague completed a strategic project for an asset manager client. Some of the inputs, conversations and outputs proved to be sometimes controversial but always fascinating. Because we are sure they are relevant for a wider audience, we have decided to share his reflections in this article, commencing with the client’s assessment of the marketplace for their products and services.

Their starting point was the assumption that the future environment for their business looked very like the past and could see little reason to assume otherwise. At Avida International, we fundamentally disagree.

DB Pension Schemes

Change is in vogue. Whether it is in political canvassing slogans or in election outcomes in The U.S. or across Europe, an apparent desire for change is in evidence. It would appear that we are all being forced to change the way we think about the resulting geo-political alliances and how that might impact us all. At the same time, and hardly unrelated, rapid change is continuing, driven by technological innovation, with AI at its apex. Change is certainly in the air and magnified considerably by recent USA driven events.

But for all of us in the savings market coping with a changing environment is our norm. The once dominant defined benefits (DB) pensions market continues to evolve;

• The end game for many corporate schemes is fast approaching with buy-outsand buy-ins removing assets from the market.

• This has implications for the nature of their investments. For some, risk-on strategies are no longer required with long-term illiquids restricted by the need to maintain the option to buy-out in the relatively short term. Instead, there is a greater focus on income producing and/or low risk products.

• An interesting development involves insurers who are winning considerable business through both buy-outs and buy-ins.

• There are indications of differing scheme behaviours driven by size, with many larger plans having moved or considering moving to outsourced chief investment officer (OCIO) arrangements with their smaller counterparts adopting sole trustee arrangements or fiduciary management.

Change has arguably been most apparent in the consolidation within the Local Government Pension Scheme (LGPS) market, driving investment into a smaller number or larger pools whilst political pressure to increase allocations to U.K. plc grows louder.

DC Pension Schemes

The declining dominance of DB has been mirrored by the growth in its sister market, defined contribution (DC) pension schemes. But this development is much more than just a growth in scheme number and size.

• It has been accompanied by rapid growth for the larger master trust market.

• With a decline in trustee influence, though less so in the case of master trusts.

• A requirement for the service supplier industry, asset management, to innovate DC friendly products especially as they relate to accumulation.

• A greater focus on scheme costs, with fee caps being a particularly important development.

But perhaps the most significant area of change in the savings marketplace has and may continue to be in the area of wealth management.

Wealth Management

The number of SIPP, ISA and investment accounts are growing rapidly, and further change may lie ahead if we are to believe the noises emanating from the new Labour Government in relation to the latter. We anticipate that in the future the wealth management sector may integrate more closely with the DC market to provide a more holistic view in retirement planning.

Therefore, even in the absence of any reference to the undoubted impact that AI will bring, it is difficult to escape the conclusion that significant change in the savings market lies ahead, with major implications for asset managers and other service supplier organisations.

The One BIG Question

So, what might some of the key trends in the Asset Manager landscape of the future look like?

We can say with some degree of certainty that insurance companies are likely to manage an increasing proportion of the European savings pool. The DC market will also see growth, as will Wealth markets. It could be argued that outside of LGPS and Insurers because asset managers will in future interact increasingly with individuals rather than organisations, the same pot of money will be available but will be located in different places than in the past.

Written by Patrick Woods & Phil Redding