Asset managers are seeing a major growth spurt, with assets under management (AUM) on the rise. In fact, PwC predicts "AuM growing from US$84.9 trillion in 2016 to US$111.2 trillion by 2020, and then again to US$145.4 trillion by 2025."
The uptick in AUM is influenced by a number of key factors beyond companies simply adding bigger accounts. The same study from PwC notes that firms are starting to expand the types of services offered, whether it’s adding advice to wealth management, launching funds in addition to separate accounts or implementing new products/strategies in the real assets, hedge fund or private equity space in lieu of traditional stocks and bonds. Favoritism toward passive investment strategies is also on the rise and being adopted by managers, while new investor categories, such as cryptocurrencies, are attracting money. Another driving factor is the generally low interest rate environment, which has prompted individual and institutional investors to invest their money rather than letting it sit in savings accounts with limited returns.
So, what implications does this have for asset management firms?
While rising AUM opens the door to various opportunities, it also presents some unforeseen challenges that may come as a surprise to firms. It’s worth exploring both sides of the coin to understand how asset managers can quickly scale and have the right processes and infrastructure in place to maintain their current business but remain nimble enough to support exponential growth.
Rising AUM is not all smooth sailing.
Increased AUM is a great problem to have, and it lends itself to many opportunities for firms. High AUM is often directly correlated to increased revenue streams, which allow companies to grow their business by expanding products and services (i.e., hiring more talent and increased spend on research and development). As a result, managers can appeal to a wider range of clients through these new offerings, and it cements a firm as being a reputable and strong choice.
The benefits of rising AUM are apparent, but the catalysts driving an increase in AUM can also create unexpected challenges for firms. Put simply, overseeing more clients and money equates to added pressure when it comes to investor relations (IR), money management and technology requirements.
The new products and services you’re able to bring to market as a result of increased revenue often require new expertise and oversight. If you’re offering a new hedge fund investment, this will lend itself to additional regulatory compliance and reporting requirements. You may also need to include counterparties such as International Swaps and Derivatives Association (ISDA) counterparties for OTC trading, Futures Commission Merchants (FCM) and prime brokers and custodians, which will require legal work and counterparty due diligence.
If you’re attracting new investors from certain categories or countries, this can also have an impact on your investor relations function. For instance, if you have a new client based in Luxembourg, you will have to start using third-party management companies to govern the funds as a precautionary step stemming from the 2008 financial crisis. To add another layer of complexity, the passing of the General Data Protection Regulation (GDPR) now impacts non-EU based managers who are looking to expand their client list to include EU investors.
Regardless of what part of the business is growing most, whether it’s the number of services, the number of accounts or number of investors, rising AUM will put your operational infrastructure to the test. There will be:
• Increased demand for timely and accurate trading data and a tradable Investment Book of Record (IBOR) available at market open.
• On-demand reporting requirement from management and other internal constituents.
• Increased requirement for detailed performance reporting.
• Increased demand for transparency from clients and investors.
How can you address challenges before they spiral?
This is where reliance on technology comes into play in order to properly scale and handle the abovementioned demands. A few best practices for getting a proper handle over AUM include:
1. Counterparty and service provider review: Seek out expertise and capabilities to handle new investor types, fund types and/or jurisdictional regulations. Having a counterparty and service provider that can help you support these efforts will save time and headaches down the road.
2. Employee skill review and training: Assess what you need to educate employees on and what training programs might be necessary to implement as demands increase with rising AUM. If employees have the right resources in place, they will feel more at ease dealing with an uptick in inflows. These trainings can either be very technical as it relates to reporting or focus on more general best practices to help the IR team interact with investors.
3. Operational scale and technology review: Both the C-suite and IT department should convene to understand what new workflows are going to be required and/or where the firm will need to add scale to existing processes. It’s important to focus on any processes that require manual intervention as these can likely be automated. Investing in artificial intelligence-enabled tools will help streamline time-intensive tasks and save time and money in the long run.
It can be both exciting and overwhelming to see an increase in AUM. Even before inflows start to pick-up, it’s critical to assess how your firm can properly scale and what resources are needed to be successful. Understanding what’s expected from clients will help inform back-end processes to keep operations running smoothly and efficiently. The rise in AUM is not expected to slow down anytime soon, so it’s more important than ever to make sure your firm is asking the right questions and equipped with the right talent, technology and overall strategy to keep growing pains to a minimum.
