The fund management industry faces a challenging short-term outlook, defined by a slowdown in the pace of inflows and diminishing operating margins. It has become an inescapable reality that the industry must find new ways to grow and thrive.
Fortunately, the industry is also facing a significant demographic opportunity. According to the consultancy BCG, there is an untapped category of potential investors that contains hundreds of millions of people, over $50 trillion in investable assets and the ability to add over $100bn to the global revenue pool. It characterises this group as customers with ‘simple needs’, with assets ‘too large to conform to retail offerings and too small to attract the attention that higher net worth tiers draw’. This maps closely onto the ‘mass affluent’ demographic – with six- rather than seven-figure asset pools – that 86% of managers were targeting for growth last year, more than any other group.
These are the customers in whom many managers are investing their hopes for the future. The question that follows, of how to win and retain their loyalty, will in part be answered with a change in the nature and structure of investment products. To widen their customer base in a meaningful and above all profitable way, managers must look both to new investment products and vehicles for delivering them.
Foremost among these innovations will be tokenisation: the use of distributed ledger technologies (DLT) to allow investors to hold assets as virtual entities (tokens) stored on a ledger that provides a single, universally accessible record of ownership. Among the benefits of this approach are reduced costs and the ability to convey fractional ownership of assets that have typically been restricted to those with larger asset pools – such as infrastructure, some real estate and private equity.
Technologies such as DLT and artificial intelligence promise to change how fund managers can build products and provide services, and widen the demographic to which these can then be offered. For the first time it is becoming feasible that a customer with a relatively small asset base could now receive the kind of investment advice and service that would once have been reserved for high-net-worth or ultra-high-net-worth individuals. Once prohibitively-expensive features such as separately managed accounts, direct indexing and tax planning are likely to become part of the mainstream offer as managers seek to expand their reach across the global population – bringing in a potentially much wider and deeper base of smaller accounts, all of whom can be served in more bespoke ways than before.
Industry research suggests that funds are looking to move quickly in this direction: 80% of asset managers surveyed by Accenture believe that ‘customisation for the masses’ will be an important trend in the years ahead, while 61% are seeking to provide an ‘enhanced personalised client experience’ according to BNY Mellon.
Such personalisation is likely to be increasingly important as funds target the rising generation of Millennial and Gen Z investors, who are often more engaged with their portfolios and likely to have a strong opinion about which asset classes they do and do not wish to be invested in. A combination of tokenisation, AI and slick user experience means we are getting closer to a world in which an investor can self-select a portfolio personalised to their interests and preferences, at the touch of few buttons.
That would be a dramatic departure for fund managers – bringing them onto the territory of financial advisers and even threatening to make the traditional mutual fund obsolete. Yet it also carries the potential prize of making them indispensable to the investors whose decisions will shape the future of the industry. The closer to these customers fund managers can become, and the more precisely they can meet their needs, the better placed they will be to navigate a challenging road ahead.