Asset managers are turning to third party vendor relationships as a means of reducing costs, a report from Northern Trust and Coalition Greenwich has found.
Around 37% of the 151 asset managers surveyed by Northern Trust confirmed plans to renegotiate fees with vendors to reduce costs and increase efficiencies.
On the other hand, survey responses show that in the face of industry challenges – including higher interest rates, regulatory amendments, and technological disruption – almost two thirds (63%) of asset managers are banking on the deployment of new technology.
Gerard Walsh, global head of capital markets client solutions, highlighted that implementing these more cost-effective operations and launching new technology is more difficult in a contracting market. “Addressing the internal challenges facing managers will require skill and a diverse mix of capabilities to continue on their growth course,” he said.
Read more: Fireside Friday with… Northern Trust’s Gerard Walsh
The report also found that 84% of respondents are expecting AUM to grow irrespective of market valuation fluctuations, with 27% anticipating an increase of more than 10% in the next 12–18 months.
Asset managers in the US and Europe are more confident around future AUM growth, while the Asia Pacific region was most sceptical in this area. A third in APAC expect AUM to be flat, compared to 13% in the US, and just 6% in Europe.
In terms of industry challenges, 60% of respondents listed volatility as the most significant difficulty, followed closing by just over half of respondents stating regulatory change was their biggest concern.
Elsewhere, a third (33%) of respondents said they believed more frequent black swan events – unexpected incidents with potentially severe consequences that are unable to be predicated – was a top industry challenge looking at the next three years.
Looking at the leading internal challenges, the report found that performance was the top concern for 59% firms. This was closely followed by talent management (50%), and rising costs (44%).
In terms of seeking solutions to these challenges, adjusting or retooling current operating models was found to be key in keeping up with the market. The survey reported that 22% of respondents are planning to implement changes to operating models in a bid to optimise operations.
Author of the report, Stephen Bruel, and senior analyst at Coalition Greenwich Market Structure and Technology highlighted the significance of asset managers being able to regulate their operating models, even in an uncertain market.
“One item asset managers control is their operating model,” he said. “Rethinking and rebuilding with flexibility, growth and cost in mind can help bridge the gap between where firms currently stand and where they need to be.”
Furthermore, compared to new technology and renegotiation of fees, increased outsourcing was not considered a key answer for improved efficiency and low costs, with just 17% of respondents highlighting it as a relevant option.
However, following the findings, the report recommended that asset managers should adopt a holistic view when looking to address efficiency, which includes outsourcing either part or the entirety of processes. It also suggested integration of the entire investment organisation – front, middle and back office.
Notably, the cost of maintaining performance of current platforms was found to be the main driver of increased outsourcing for asset managers. Of the respondents, 40% confirmed that rising costs increase the likelihood of outsourcing. In addition, technology and staffing considerations were also part of the top three potential drivers.
Walsh echoed this, stating that “in the next phase of the cycle, it seems likely that firms will seek more ways to develop orchestrated ecosystems that support their alpha generation activity […] firms that assess their entire value chain of activities will benefit from recent evolution of traditional outsourcing models into new areas.”
The white paper – Evolving Asset Management Landscape: Only the Fittest Will Thrive – surveyed 151 asset managers across North America, Europe and APAC.