Why seven future scenarios can help asset managers today

By Hermin Hologan, EY EMEIA Wealth & Asset Management Leader at EY

Making detailed long-term predictions is difficult at any time, let alone during unprecedented times.

On top of the uncertainty brought on by the COVID-19 crisis, the war in Ukraine, the sanctions on Russia, and the ripple effects on supply chains and inflation, the last few years have seen investors’ demands grow ever more complex, forcing asset managers to accelerate diversification in the face of a growing operating-margin squeeze.

The EY Future of Asset Management Study predicts that the next five years will be much tougher for asset managers than the last five.

In this article, we set out seven ways in which the asset management industry might be reframed by 2030. These scenarios are very different from the status quo — and from each other — but they are not as remote or implausible as they may appear. They are all inspired by structural shifts and industry trends that are already reshaping asset management.

Seven scenarios for asset managers’ future-back planning — how would asset management firms respond …

1 What if our industry’s purpose was to help every adult to invest in capital markets for a zero or minimal fee?

Features of the scenario:

Long-term value to all industry stakeholders is increased by democratization of investing via the provision of financial education, access and zero-fee products to the entire adult population. This is now a necessary “licence to operate” required from asset managers.

2 What if direct-to-customer (D2C) relationships were the norm, not the exception?

Features of the scenario:

Asset managers have sizeable D2C distribution networks. They source a large portion of their inflows directly from investors or via investment platforms. Investors’ preferred digital interfaces vary between different markets, with simplified distribution as the common theme.

3What if every investor knew the impact of the assets they held?

Features of the scenario:

Every investor — institutional and retail — has full “touch of a button” transparency into their holdings. The ability to look through to underlying assets reveals the ESG impact of every investment, along with full accountability and liability for that impact.

4 What if asset managers were paid for long-term value and impact?

Features of the scenario:

Funds no longer charge fees for pure investment performance, making conventional benchmarks obsolete. According to the weightings and objectives, fees are based on a blend of investment performance and nonfinancial value. Calculations take place over a period of at least 3-5 years, with refunds for subsequent underperformance. Asset managers help build a greener, fairer and more sustainable economy by fuelling recovery via a new public-private collaboration model.

5 What if index providers partnered with “Big Tech,” such as Amazon, Apple and Alphabet, to become the largest asset managers?

Features of the scenario:

With the shift to passive investing, the influence of index providers has grown to such an extent that they are best placed to provide access to index investing. In contrast to asset management, the index industry has not experienced cost pressure. Since indexing is now an investment strategy with billions in assets under management (AuM), index providers have become the biggest asset managers by 2030.

6What if fractional ownership removed the need for funds?

Features of the scenario:

The fractional ownership of assets is recorded on a public distributed ledger, removing the need for burdensome fund structures and their associated costs. Tokenization broadens access, allowing anyone to invest in previously restricted asset classes — ranging from private companies and infrastructure to property and fine art.

7 What if a combination of artificial intelligence (AI) and quantum computing could augment human portfolio managers?

Features of the scenario:

If computers can beat humans at chess, a combination of AI and quantum computing could augment or even replace portfolio managers, as technology can absorb, analyze and process more information than any human. AI decision-making is more transparent than its human equivalent, and can conduct investment management with minimal intervention. All required data is available in a digitized format, suitable for machine learning.

How should CEOs prepare for these seven future scenarios?

One thing is certain: there is no single course of action that will lead to success. CEOs should plan for an unpredictable future by assessing the likelihood and the possible negative or positive impact of these seven scenarios on their business, and work backward to evaluate how they can protect, prepare and position their business now. This exercise should always start with a clear idea of each firm’s purpose in the industry of the future. Which clients will firms serve? How will they reach them? What investment solutions will they provide? How will technology support both the creation and distribution of these solutions?

You can explore the EY multitrack success strategy for asset managers in the graphic below:

In conclusion, the COVID-19 pandemic highlighted the need to build flexibility into asset managers’ strategy to accommodate different scenarios. The shift to digital operating models, and the application of environmental, social and governance (ESG) criteria to all areas of the business may be one of the biggest future learnings for asset management companies priming themselves to compete in a post-pandemic world. Viewing today’s investments through a long-term lens based on plausible scenarios can create powerful benefits in the long run.