Asset Management Reframes For Relevance And Leadership

Asset management’s relevance remains, but traditional methods and structures may not continue.

We are all familiar with the current challenges in our asset management industry, including financial pressures and disruptions from geopolitics, demographics, and technology.

What about other fresh developments? E&Y does a good job detailing some challenging scenarios in their September 2023 report “Are you reframing the future of asset management or is it reframing you?”

The E&Y report suggests that by 2030, asset managers could face any of many radically different but plausible scenarios.

Scenario analysis is more than identifying risk. The report reminds us that conventional planning processes can exaggerate continuity and reduce adaptability to the unforeseen. And unexpected events can often bring unanticipated opportunities.

E&Y presents seven scenario challenges. Here are two:

I. A combination of generative AI and machine learning replaced human portfolio managers.

  • Features of the scenario: investment management is largely conducted using AI with limited human intervention. AI tools can follow pre-selected and defined investment guidelines, simulate risk scenarios or develop new investment approaches based on analysis of conventional market data or hidden signals derived from alternative, open or unstructured data sources. AI decision-making can be tracked and audited in real time.
  • Enablers of the scenario: asset managers develop, or gain access to, cognitive AI capabilities. Firms use a combination of human skills and AI tools to revolutionize portfolio management techniques. Decision-making is real-time, automatic, and scalable.

Today, top-of-mind for many firms is bracing for increasing regulatory pressure over AI. Asset managers are already establishing strong risk and governance infrastructure around their AI-driven activities. This is in response to President Biden’s October 30th executive order establishing a new set of rules to combat price and security risks associated with AI. The executive order acknowledges the problem-solving potential of the technology while also noting that “irresponsible use could exacerbate societal harms such as fraud, discrimination, bias, and disinformation; displace and disempower workers; stifle competition; and pose risks to national security.”

Regulation is trailing behind actual usage. Asset managers should assume many of their employees are already using AI, if only for such simple tasks as writing emails and summarizing reports.

When asset managers input swathes of data into AI models, there is a risk of compromising private information. Again, we see European rules being more robust than those in the US. The European rules, with the E.U.’s General Data Protection Regulation Legislation of 2018, provide greater privacy for personal data.

II. Direct to customer (D2C) became the industry’s default client relationship type

  • Features of the scenario: asset managers operate large D2C distribution networks based on online connections, sourcing inflows direct from investors or via introductory online platforms.
  • Enablers of the scenario: large firms acquire or build D2C portals in a drive for disintermediation, encouraged by regulatory pressure for clearer reporting, lower costs and greater fee transparency. Distributed ledgers allow for instant processing of transactions. Client reporting and education is enhanced through next generation tools including virtual and augmented reality.

In the next decade, the ability to perform and to provide superior execution will provide the baseline for asset management success. However, to lead and be relevant, the winning firms will have strategy rooted in purpose, starkly serving investors’ needs for planning retirement or financing life events.

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