Report Predicts New Management Challenges
March 22, 1999
For the next three to five years, money managers plan to rely, as they do now, chiefly on investment performance to differentiate themselves from competitors, according to a report, "Tomorrow's Leading Investment Managers," prepared by the Economist Intelligence Unit, a London-based research company for PricewaterhouseCoopers. Executives from 200 companies of all sizes in the U.S., Europe and Asia were surveyed for the report.
After investment performance, they will rely on customer service, product specialization and investment style to make their companies stand out. Small firms will be more likely to choose product specialization while larger firms will most likely choose customer service, said the report.
But, the report concludes that to be successful, money management firms will need to rethink their strategies, develop a global perspective and pay attention to developing deeper relationships with service partners and customers.
The report found that to stand out, future asset management leaders will have to take stock of their companies and identify inherent strengths. They will need to decide whether they are better suited to be a product manufacturer or integrator'- a combination of manufacturer and distributor.
"The value in the investment management process will shift more toward the integrators who will increase their overall share of the market," said Simon Jeffreys, leader of the Global Investment Management Group of PricewaterhouseCoopers in London. Jeffreys, who oversaw the report, spoke in an interview from London.
Though some very large companies will be able to successfully play both roles, most small- and medium-sized firms will lack the necessary capital and will be forced to focus on one or the other.
"They will need to choose their roles very carefully," Jeffreys said. "We see the future of the industry as being much more competitive and very sophisticated."
According to the report, managers must also become more responsive to the needs of "instividuals" as the retail marketplace merges increasingly with the institutional. Mass marketing is out. Customized products, like hedge funds for high net worth investors, and customized pricing will become the norm. Moreover, asset managers will have to meet these challenges in the midst of a marketplace which is becoming increasingly global as a result of technological advances, the report said.
Many forces are simultaneously at play within the industry. One of the most significant of these is a major shift in demographics. Baby boomers, now producing a steady stream of assets flowing into securities and mutual funds, will begin drawing on those retirement assets within a dozen years. Asset managers no longer able to rely on the baby boom generation to build assets will have to identify new markets to pursue. But there are opportunities.
While Generation Xers represent a smaller group, studies have shown that they are more dedicated to investing and are starting to save earlier. High net worth investors will continue to be a fertile segment for asset managers to target. High net worth investors - those with $1 million in investable assets - now account for $4 trillion in invested assets, and that group is growing. Growth of the defined contribution market will also continue.
"Firms will have to start thinking in terms of marketing to reach these people," said Cathy Lazere, senior project manager in The Economist Intelligence Unit's New York office. Leaders will have to become more "visionary" and think creatively about everything from distribution, to image and branding, to how to apply a "holistic" approach for servicing investors who want a one-stop-shopping experience.
Globalization will continue to spread throughout the money management industry as firms establish subsidiaries abroad, form strategic alliances with leading global players and forge far-reaching distribution arrangements, said the report. Some firms will focus exclusively on one vehicle; others will use all of them to varying degrees. Still others will pursue acquisitions as a way to tap local markets abroad, manage cultural differences and retain close control over strategies, said the report.
Europe will be the next major growth area with an expected inflow of new assets of between $7 trillion and $13 trillion within the next dozen years. European growth is being fueled by a variety of factors including the formation of the European Monetary Union (EMU).
Anticipated shortfalls in European pension plans will occur when the number of retirees exceeds the number of workers.
"One study indicated that Europe's (pension plan system) is under-funded by as much as $2 trillion," said Garry Moody, National Director of the Investment Management Services Group of Deloitte & Touche's Global Financial Services Practice. That translates into opportunities for investment managers as governments are forced to privatize pension plans, said the report.