Why innovation is key to overcoming regulatory challenges in asset management

During 2019, heightened regulatory scrutiny on investor transparency, combined with wider competitive pressures, may further squeeze profit margin for asset management firms. One obvious temptation may be to cut back and do less, but doing things differently is often a better way to overcome challenges. So what are the regulatory and wider strategic factors that will continue to drive this trend of compressed margin, and how can innovation help firms get ahead?

As part of the Financial Conduct Authority's asset management supervisory agenda this year, the regulator will be continuing its work to test how effectively firms have embedded the MiFID II framework on product governance and the disclosure of costs and charges, as well as the new best execution reporting requirements. Fund managers are also facing a busy 2019 implementing the asset management market study remedies, which include the value assessment and wider transparency measures around the use of benchmarks across funds and presentation of fund objectives.    

In response to these developments, firms must sharpen their focus on providing greater transparency to investors to help inform their decisions on the relative merits of different funds. Margins are also likely to face further strain now that asset managers are making hard payments for research - another area the regulator will closely examine this year. Added to this are ongoing market-led competitive pressures arising from emerging FinTech solutions, greater adoption of investment platforms, and the rise of more cost-effective passive funds. Firms will also need to manage expensive operational programmes relating to Brexit.     

The more forward-looking firms will seek to respond by innovating across their business to find ways of increasing returns from investments, easing margin pressure and responding to competition from new market entrants.

Fundamentally, asset managers must focus on placing value at the heart of their proposition. This should involve reviewing their funds in this context, and providing clarity on how value is being offered to investors. If properly executed, providing such clarity can be a marketing tool to help give firms a competitive advantage.  

Related to this, firms will need to take time to consider what ‘value’ they should be showcasing to investors. On the whole, investors look for high-performing funds, though there is now an increasing appetite among savers to invest their money in companies with strong environmental, social and governance credentials. This shift in attitude is also reflected in the agenda of policy-makers, both international and domestic, around sustainable investments and stewardship. If investors are actively seeking these features - and regulators are requiring them - then asset managers should take a close look at how they can properly integrate this into their business model and products.

Firms should also consider whether pricing structures adopted for their actively managed funds can help to offset the additional margin pressure created by the current regulatory environment.  For example, some firms are now moving towards greater adoption of performance-linked fees. This approach has the potential to better align incentives between fund managers and their investors, and may result in fairer and more competitive pricing, as well as boosting investors’ confidence in active fund management. It is important, however, that any attempt to integrate any innovative pricing structures is done in a manner that avoids complexity and is easy for the client to understand.

Firms should also review their investment in technology. Are firms doing enough to streamline internal processes and structures to help cut costs? In addition, they should be asking themselves whether more can be done to harness technology to improve their product and service offerings, or the distribution of those products and services to clients.

These innovations are just some examples asset managers might want to spend more time thinking about - they are by no means exhaustive. But with increased regulatory scrutiny and competitive dynamics placing strain on business models and profitability across the sector, firms cannot afford to sit back. The most progressive firms have already planned and begun executing their strategy to combat these challenges, if they get it right, they are likely to reap the rewards.

Andrew Strange

Andrew Strange | Director
Profile | Email | +44 (0)7730 146626

Lucas Penfold

Lucas Penfold | Manager, FS Risk and Regulation Centre of Excellence
Profile | Email | +44 (0)7483 407581

Read more articles on