Next in asset and wealth management 2024

Five ways asset and wealth managers can transform and grow amid business and economic challenges

The pandemic, inflation, market performance and other pressures have led the asset and wealth management industry to take stock, reflect and take action. The challenges posed by this once-in-a-generation change has fundamentally altered the industry’s principal stakeholders’ behaviors and expectations. In particular:

Expectations have risen among investors, employees, regulators and society.
Emerging technologies, including GenAI, are revolutionizing how managers operate.
A pending “great transfer” of wealth is set to bring about $70 trillion¹ in assets to younger investors, who may have different investment philosophies and goals than previous generations.

Most asset classes have benefitted from strong beta returns in recent years. However, the past eighteen months have demonstrated that relying on beta for growth won’t work anymore and managers will need to look for other avenues to generate growth, including expanding into new areas such as asset classes and investor segments.

AWM firms have long been rewarded for their stability, both in terms of investment performance and consistency of talent and operations. But managers are now faced with investors expecting lower fees, more value for money and solutions that are tailored to their evolving specific needs. In response, AWM leaders must transform now or risk disruption, irrelevance or failure.

Leaders can no longer delay their transformation efforts, as we project that 16% of existing AWM firms will have been acquired or have fallen by the wayside by 2027 — twice the historical rate of turnover. To adapt to today’s changing industry landscape, leaders should leverage a series of key actions — focused on strategic positioning, digital transformation and trust, among others — not only to survive but also to drive the growth and profitability expected.

^{1 Source: “There are 618,000 millennial millionaires in the US, and they're on track to inherit even more wealth from the richest generation ever,” Business Insider, Hillary Hoffower, accessed on Factiva, January 4, 2024.}

5 key actions firms can take now to transform:

Find growth through M&A and strategic partnerships
Deepen relationships with the HNW, leverage private market products
Leverage GenAI as part of strategic digital investments
Make tax a critical component of broader transformation strategies
Continue to make earning trust a priority

Find growth through M&A and strategic partnerships

In the face of higher interest rates, fee pressure and other key barriers to growth, AWM firms have looked to mergers and acquisitions (M&A) and strategic partnerships to reinvent their business models. Such transactions enable firms to add capabilities, grow with new asset classes and investor segments or by building new channels to capture more of the investor wallet. Such strategic moves may also create scale and efficiencies.

Among the ways AWM firms are leveraging M&A include:

Asset managers are seeking to diversify by focusing on expanding into or scaling up private asset classes, capturing flows from new distribution channels and investor segments or accessing new geographies.
Wealth managers, particularly those sitting inside larger banks and insurers, are exploring strategic partnerships to grow revenue, optimize cost structures, reduce their supervisory burden, gain new capabilities, and access to new pools of clients and advisors. As we outlined in our Deals Report for 2023, such collaborations enable firms to capitalize on shared revenue opportunities while strategically streamlining back-end operations for efficiency gains and cost reductions.

Evaluating potential mergers, acquisitions and partnerships involves analyzing shared objectives, operational risks, upfront transition costs, recurring cost-saving and revenue synergies. Key considerations include cultural compatibility and the alignment to long-term strategic goals. Evaluations will also involve meticulous assessment of financial, operational and cultural factors for comparing against M&A opportunities, successful integration and sustained value creation.

Key actions: Look beyond strategic considerations; consider operational and cultural fit

CEO, COO, CFO, head of product development/distribution

As executives evaluate potential targets to complement their product mix and investor needs, they’ll need to understand how such teams can integrate with their existing capabilities, distribution and support infrastructure and whether talent management practices, including pay, will be a fit.
Leaders should continue to evaluate their operational needs and risks to ensure the post-deal integration is seamless and accretive to the organization.
When considering a deal, cultural fit can be more important than its financial effects (revenue synergies, cost savings, etc.). Cultural compatibility in terms of a shared investment thesis, complementary product lines and a similar approach to client engagement can make the difference between deal value creation that exceeds forecasts versus merely meeting expectations.

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Deepen relationships with high net worth (HNW) investors, leverage private market products

The demands from shareholders and owners of asset management firms for more growth have helped trigger the AWM industry’s current focus on offering private market products to HNW investors. At the same time, retail investors are demanding more access to private market products that have traditionally been off-limits due to high investment minimums and illiquid structures. However, enhanced technology, heightened investor interest, and new and proposed regulations, have made private market products more accessible to broader investor pools.

Asset managers — both registered and alternatives — also view retail investors as a viable way to continue growing AUM amid concern institutional investors may be approaching self-imposed allocation limits to alternatives. Retail investors offer largely untapped openings for growth beyond high net worth investors to the mass affluent and younger investors who want to diversify their holdings beyond traditional long-only public market strategies.

Wealth managers serving HNW and mass affluent clients have also looked to expand their product offering beyond traditional investment vehicles to stay competitive. In addition to expanding their product lineup, HNW wealth managers are focused on educating and empowering their advisors on alternative investments. To capture wallet share previously locked away, some HNW wealth managers are even developing solutions around secondary market trading, liquidity and lending.

Though still in its early stages, the industry has made significant progress in making the private markets more available to retail investors. Continued success will likely depend on an efficient secondary market through technology or exchanges that enables retail investors to freely and cost effectively trade, as well as gain broader access to fund managers. However, improving the transferability and liquidity of traditionally illiquid assets will require significant upskilling, operational alignment and careful due diligence on technical providers by actors across the value chain.

Other key considerations for managers include launch costs (Do you have a revenue model ready to be activated?), new compliance requirements (Are you prepared to now account for the taxable income that comes with a retail offering?) and talent (Do your employees have the expertise and knowledge to handle the additional reporting requirements?).

Key actions: Develop new relationships, evaluate operating model and evaluate risks

CEO, COO/CFO, Head of product development/distribution

Executives focused on growth must continue to find new sources of assets under management (AUM). Firms interested in retail investors will have to focus on developing new relationships (e.g., private banks) to access new AUM, deciding whether they want to “buy, build or borrow” capabilities they may not currently have in-house, decide whether these new products can be delivered profitably and encourage their teams to think and act globally.
Learn about the opportunities and the risks associated with offering products to the mass affluent. Familiarize yourself with such products as business development companies (BDCs), interval funds and real estate investment trusts (REITs), as well as emerging digital-based tokenized funds. Understand the new distribution models and technology and upskilling that may be required. Consider, for example, the opportunities and risks associated with serving the mass affluent via wealth management firms.
Handling regulated products focused on alternative assets will require close C-suite coordination among leaders in operations, technology legal, compliance, finance and tax. Leaders will have to assess whether the current operating model is fit for purpose and work to identify outsourcing opportunities that are more beneficial to achieving efficiencies and cost savings.

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Leverage GenAI as part of strategic digital investments

Recent advances in generative AI (GenAI) have made it impossible for the AWM industry to ignore the emerging technology. Across your organization — from operations, to finance, to research and analytics, to risk management, operations, investment relations, compliance, and M&A — GenAI’s applications are endless. GenAI can massively improve your operational efficiency by, for example, enhancing data collection and sharing across your firm as well as your ability to mine structured financial data and unstructured data, such as investor documents. It can also significantly improve your ability to analyze a client’s portfolio and recommend investments based on their risk tolerance, financial goals, personal circumstances and retirement horizons.

GenAI can also gather and analyze data on companies, read and summarize quarterly reports, execute trades, keep records and generate first drafts of tax and regulatory reports. It can work on customer segmentation to improve marketing effectiveness. For wealth managers, GenAI can even answer client questions about the advice your firm is offering. It can enable smaller firms to compete with larger ones in research, sales and technology because GenAI has the ability to “democratize” coding.

Overall, GenAI is a game-changing technology that fundamentally alters the AWM business model. We also see it helping firms achieve previously out-of-reach goals for both cost savings and productivity gains, which fuels faster growth and, in turn, greater value creation. However, if you’re starting with this use case or that one, you might be overlooking what makes AI such a big deal. A single GenAI model can help you do most of these things better, more thoroughly and faster than before.

To maximize GenAI’s benefits, leaders should consider their firm’s AI readiness with an assessment framework that covers technology, data, governance, culture, strategy and your time frame for the investment. Leaders must also build a team around GenAI and trust with a secure technology environment, as well as everyday practices, controls and governance that follow responsible AI practices.

Key actions: Analyze opportunities, raise awareness and assess risks

Chief Investment Officer, COO, CISO/CTO

Leaders should evaluate how digital tools like AI can enhance their ability to analyze investment opportunities, streamline the due diligence process and recommend investments. This may potentially result in their existing operating model relying less on human talent (e.g., analysts) and more on technology to assess investment opportunities.
Accelerating AI-driven transformation is more easily achieved by centralizing adoption and scaling under a “head of AI and Data” executive who reports to the CEO or a chief lieutenant. A single owner, in charge of setting the vision and direction of the AI factory lead, is better able to define roles and responsibilities, coordinate with legal, risk and compliance functions, and take responsibility for screening use cases.
Adoption of GenAI is deliberate and careful, and for good reason. As a highly regulated industry in possession of sensitive data, leaders must put GenAI model governance, data ring fencing and compliance and reporting at the forefront of any technological deployment. Those steps may require capital, but that can be more than made up for by efficiency savings across the firm.

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Make tax a critical component of broader transformation strategies

Whether you’re considering a strategic partnership, scaling into new asset classes or a major digital transformation, tax is a crucial strategy consideration for AWM firms. Such business objectives as creating value, liquidity and fundraising, can get a boost from enhanced tax planning and strategy.

Since tax rules vary by territory, managing the information and timing needed to deliver to all stakeholders is extremely challenging. Many asset managers are also finding that handling all of these tax issues in-house can be expensive, as technological and human resource costs related to tax functions continue to increase, partly due to the voluminous and complex nature of investor reporting.

Firms may want to consider Tax Managed Services. A Tax Managed Services model helps companies conduct core operations like tax, finance and accounting on modern tech platforms with highly skilled professionals. Even if your firm does not consider managed services for tax, you may want to outsource your tax reporting deliverables, like many asset managers, due to the volume and complexity of the rules. We also recommend a regular tax review to assure that the facts and laws covering your firm’s tax positions have not changed and that risk levels are consistent with your firm’s operational risk management perspective.

Key actions: Assess technology and data needs, consider outsourcing

CFO/Tax Director

The tax director is not only faced with optimizing an already lean workforce but also with pressure to manage costs. Tax directors should assess the ability of their technology to accelerate efficiencies to produce impactful savings for the tax function. Third-party managed services platforms are an alternative path toward higher efficiency.

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Continue to make earning trust a priority

No aspect of your organization has been more impacted by rising stakeholder expectations than trust. Trust significantly impacts the ability of any firm to do business.

Investors expect it. Employees want it, and regulators demand it. And one poor decision can erode a firm’s perceived trustworthiness. With ongoing margin pressure and new regulations set to go into effect, we expect firms to treat trustworthiness as a value creation center.

The face a firm presents to its stakeholders often begins with the data it shares — whether it’s performance, financial or tax reporting data. A key component of establishing trust with stakeholders, therefore, begins with having strong command of the data within your organization and at third-parties.

No matter the data set — sustainability; diversity, equity and inclusion (DEI); or tax — firms will be judged on the accuracy, completeness and general reliability of the information they provide. The stakes are high: Presenting wrong information can turn investors, employees and regulators against your firm.

Winning with trust isn’t just about having the right technology or infrastructure. Firms that win in this space should build trust throughout their organizations, making it the foundation of every action, and share the same vision and goals.

Key actions: Focus on trust to enhance brand value, improve performance, attract and retain talent

CEO, CFO, CHRO

CEOs must set the tone. Whether the stakeholder is a regulator, investor, employee or society as a whole, the CEO sets the tone for the organization. A lot will rest on the CEO’s shoulders for setting this new course.
Employees want to believe they are working in an organization where they can develop and progress without bias, and externally, investors and customers are asking questions about the firm's inclusion efforts.
In addition to focusing on data, firms should consider telling their complete DEI story, including success stories, testimonials and examples of their commitment, through its marketing materials, due diligence questionnaire or website.