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The Future of the Asset Management Industry

Mutual fund investors are not alone in how the financial crisis has profoundly changed the way they approach saving, risk management and asset allocation. Without question, investors are more conservative and interested in flexible products that minimize risk and use alternative investments during heightened market volatility or a prolonged downturn as we saw in 2008.

For asset managers who serve this dramatically different public, the financial crisis has changed the products and services that they must offer. Today, asset management firms must be more nimble and client-centric than ever and, particularly as clients' retirement balances grow, do a far better job of educating investors through proper guidance and advice.

But the crisis and projected continued market volatility has also unalterably changed the way asset managers run their businesses. They must provide high-quality customer and operational services in the face of this increased market volatility and continuously fluctuating assets. And even the largest firms with billions of dollars under management are finding that the only way they can accomplish this seamlessly high level of service is by strategically outsourcing more back- and middle-office functions to a full-service provider that can adjust with their needs and provide a long-range vision for growth.

Asset management, regulatory and operations executives met last month at the headquarters of SourceMedia, publisher of Money Management Executive, for a roundtable on the future of the asset management industry, post-crisis, and what the winning business models will be.

In attendance were:

Fred Naddaff, Managing Director and Head of Fund Services, N.A., Citi

Elizabeth Krentzman, Principal, Governance, Regulatory & Risk Strategies, Deloitte & Touche

Amin Rajan,  CEO, CREATE-Research and Visiting Professor at the Centre for Leadership Studies, Exeter University

Hazel McNeilage, Executive Director, Institutional Advisors Services, Principal Global Investors

Bob Wallace, Managing Director, Head of Securities and Fund Services, N.A., Citi

Lee Barney, Editor, Money Management Executive

Barney: Are investors truly changed by the credit crisis? Are they actually risk averse and if so, how can asset management firms compete and stand out from their competitors if their customers are favoring mainstream, low-fee asset classes? After all, the mutual fund industry is known for its bold innovation.

Hazel McNeilage: Our feeling is that they are absolutely changed. We've already seen savings rates in the U.S. rise to 6% or 7%. There's a big debate as to whether that's just a temporary phenomenon and people will go back to spending pretty much everything that they earn.

Our view is that the shock has been sufficiently severe that savings rates will probably go even higher and stay there for some time. We're starting to see this reflected in the behavior of our 401(k) participants.

We've just completed some research that indicated that over the last 12 months, almost 20% of our 401(k) participants have increased the level of their contributions, versus a much smaller number, 9%, who have reduced contributions and 7% who have stopped them.

So, overall, the tide is toward more people increasing their contributions rather than suspending them or reducing them.

Barney: Have you been able to drill down on that data to find out if the performance is affecting those contribution rates?

McNeilage: People are definitely concerned about the fact that their balances have gone down. Our data suggests that the average 401(k) balance is about $37,000, which is around the level it was two years ago.

A lot of investors are saying they intend to work longer. However, our data suggests that historically that has not necessarily been feasible due to factors like ill health or downsizing.

Amin Rajan: Too much has happened for things to remain the same. We experienced two of the four worst bear markets of the last 100 years in the past seven years. As if that wasn't enough, we had a battery of rules and regulations introduced in this decade to curb the excesses of the last decade. They were benign in their intent but malign in their outcome in the sense that the mark-to-market rules, for example, have converted the U.S. subprime crisis into a global disaster.

It's always best not to project the future at a time when the present is so uncertain, although I'd like to think that what we will see will be a model emerge which will combine stability and change.

Certain aspects of investor behavior will remain stable. Investors will continue to put money into 401(k) plans. Private investors will continue to save, too, even in countries like Japan where they've lost huge amounts of money in stock markets in the past.

So, savings will be there, as will people's appetite for investment.

However, what would really change will be the kind of investment approaches that they will adopt.