KPMG: Investment industry needs to radically change

The global asset management industry will have to drastically change over the next 15 years to remain relevant. Demographic shifts, technological development and changing social values and behaviors will all contribute to a changed corporate landscape requiring the industry to adapt, argues the KPMG report “Investing in the future.”  

“We believe that the confluence of megatrends will drive significant changes in the needs, requirements and behaviors of investors in the future,” the report says. 

First and foremost, an ageing population will make the client-base of the investment industry much more diverse. By 2030, 13 percent of the population will be over the age of 65 compared to only 8 percent today, as generation X approaches retirement, generation Y matures and middle classes in emerging countries continue to grow. 

The currently narrow client base of the industry will be further widened by the changing role of women, growth of the middle class, increasing mobility and the growing economic influence of developing countries. 

“We are on the verge of the biggest shake-up the industry has experienced; and the message to asset managers is clear – adapt to change or your business won’t survive. The two biggest issues that need to be addressed are the changing client base and technology. Asset managers need to get to work on these areas now,” says Anthony Cowell, head of Alternative Investments at KPMG in the Cayman Islands. 

Most significantly for the industry, KPMG says, individuals will have to take greater responsibility for their retirement planning, given the continued pressure on retirement savings models. A growing number of people will quite simply run out of money during their retirement, the accounting firm predicts. “The prospect of having to take care of parents and of far lower inter-generational wealth transfer will, in our view, shape future generations’ attitude to savings. They will not be able to afford to ignore the issue.” 

KPMG partner Gordon Rajamohan says, “There is a huge risk that the global economy can’t grow fast enough to absorb the volume of savings needed to fund the needs of an ageing population. The asset management industry undoubtedly has a huge role to play in this broader savings debate.” 

It will force investment firms to capture their younger and multi-generational client base much earlier in life, even before they have assets to invest. An evolving client profile will also transform investors’ expectations and the way clients interact with the industry. The desire to be more involved in the investment planning and process requires more personalized solutions. 

Cowell says, “It is no longer just about attracting the clients who are armed with cash and ready to invest. The successful asset managers of tomorrow must focus on building cradle-to-grave relationships with a dramatically different and more diverse client base from today, which includes much younger investors. They must also be mindful that women are increasingly controlling a bigger share of family wealth.” 

The growing importance of social networks is already bringing investors to seek advice from “people like me” rather than professionals. These developments are not limited to personal investors, KPMG believes. Institutional investors will have similar demand for tailored and multi-faceted delivery and reporting. 

Today’s investment management proposition is unlikely to be suitable for the broader client base of the future and pushing products on the basis of decent returns will no longer be sufficient. 

KPMG anticipates a greater demand for outcome certainty and says the investment industry can play a broader, more significant role in clients’ lives if it becomes more engaging and relevant. In other words, distribution will become more important. 

Investment managers can also become more influential for clients “through a greater role in asset allocation, development of a broader range of solutions, helping intermediaries better understand and educate end-investors or taking the lead in aggregating an investor’s total financial position.” 

Changes to the operating model will largely be based on new technology and people. New platforms with better scalability, functionality and flexibility and the ability to analyze customer data are only one part of the equation. New business models will also require new people skill sets and talent from non-traditional fields. 

But asset managers still have a long way to go to recognize and exploit big data and data analytics. While IT is already attracting a significant amount of investment, it is not being channeled into the right areas, KPMG says. Businesses are focusing their efforts on trying to untangle the complex legacy of disparate systems and technologies, and ensuring that they provide the right level of control to meet increasingly stringent compliance requirements. But there is not enough attention given to building the right architecture to meet future business needs. 

This leaves the door open for new market entrants who will potentially disrupt the industry with emerging business models that in response to the identified trends combine technology, data and social networks to develop new propositions. New entrants, who aren’t plagued by legacy issues and outdated clunky systems, will thrive as they can move quickly to implement more relevant digital and data strategies, KPMG argues. The key challenge for new entrants will be to build a brand profile and distribution footprint. 

This brings non-traditional players into the picture, which in combination with continued pressure on margins and the search for capabilities, could kick-start a wave of M&A activity. 

“We could see the Apples, Googles or large retailers of the world becoming the next big powerhouses in investment management. As such, we expect to see mass consolidation in the industry and predict that within 15 years there will be half the number of players currently in the market,” the accounting firm says.