Imagining the Future for Asset Service Providers
Profound change is happening to the traditional Asset Manager (“AM”) business model, and technology will enable it at an extraordinary pace. What does this mean for the Asset Service Provider (“ASP”)? Here, we explore the impact of change within AMs, together with the drivers of change within ASPs, as their business model broadens, deepens and scales.
Defining the ASP Sector
We define the sector with four quadrants, some overlapping but often fragmented:
- Large, traditional custodian banks with full-service administration
- Specialist Administrators, largely focused on Alternative assets
- Managed Services, offering fund and investor reporting and data services
- Third Party ManCos
The sector reflects a typically unbundled buying pattern, with little opportunities to procure an end-to-end package. It is highly regulated, with an understandable emphasis on compliance, perhaps at the expense of innovation. It is also very competitive and crowded; to be a scale player in ASP you have to be in Luxembourg.
However, would it still look like this if we just invented the ASP sector today? What if we started with the premise that Asset Managers would welcome a world where they focused on maximising performance and gathering investor assets, with everything else outsourced?
We would conclude there are significant opportunities to expand the outsourced proposition, and to create more convenient “bundles”. Let’s test that with a look at the evolving needs of the Asset Managers.
The Changing Expectations of AMs
Some of the more profound changes affecting the AM’s proposition include:
- Adapting to next generation investors:
This cohort appears willing to invest via unregulated crypto exchanges, takes advice from peers, has a limited attention span to make life-changing financial decisions, is living much longer, does not trust banks or AMs, is familiar with technology and convenience, demands immediate gratification, has no time to spend on research, and only wants a world where everything is available in palm of your hand, anytime. They are beneficiaries of the greatest wealth transfer we have ever seen. They are likely to be more altruistic and environmental/societal-minded. They demand a new way to save and invest.
Does this suggest a world where the traditional mutual fund is replaced over time by algorithms sold by AMs and low-cost brokers used to convert into personalised portfolios? That would turn the ASP sector on its head... or are we being too dramatic?
- Shift towards personalisation:
HNWI/MNWI demand is for personalisation, and a shift towards segregated mandates for larger institutional investors. Family Offices are evolving into full platform propositions offering a fusion of illiquid assets alongside more liquid options, offering an illiquidity premium without compromising liquidity.
- New channels:
Next generation platforms have a proposition built around the end investor, offering tailored investments and service. AMs are responding by seeking ways to deal directly with those end investors. We may well see dramatic disintermediation of distribution in the next five years, requiring massive scale in retail recordkeeping, and technology enabling the end investor with convenience and speed of access.
- Data as an Asset:
ASPs hold massive amounts of data reflecting their AM client and their client activity, but do they pursue a strategy to monetise through creating value for their clients from their data? Are they agile, with the data science skills to deliver? Can they capture, consume, digest, verify, harmonise, enrich, analyse, store, offer desktop analytical tools with “alerts” ……. all from multiple sources of structured and unstructured data? A coherent and believable data strategy is probably the most profound differentiator today when seeking to win mandates from AMs.
- One Stop Shop or Diversify Risk?
Some AMs prefer a diversified approach to procurement, spreading risk and maintaining competition, whilst others prefer the convenience and economics of a one stop shop. The clearest examples we are seeing is in the 3PMC model; some building a proposition covering the entire value chain, whilst others focused on being the very best at the core, with great technology. There are examples also amongst large custodians, almost all of whom now have AIF/Real Asset fund administration capability.
The ASP’s Response
We highlight six themes we believe are the most critical as ASPs shape their strategy.
- Target Operating Model:
Do you have a plan to maximise offshoring? Have you stress tested it against a core service proposition, not just against the Circular? Is it designed to enhance service or just to save cost?
Private Asset Administration remains in the dark ages, with few examples of automation. This is not sustainable as this asset class continues to grow in size and complexity. Perhaps a combination of automation and co-creating with clients a simplified product is the right balance.
- Client innovation:
Do you syndicate technology investments to deliver a solution across all your clients, to avoid each of your clients investing themselves? For example, have you mutualised an ESG data solution for your clients to assess portfolio scoring, or a robust approach to sourcing data that can be syndicated across all clients? Do you have a client advisory board?
- FinTech from threat to opportunity:
Luxembourg has attracted and nurtured a significant wealth of FinTech talent. With the pace of change discussed above, using financial technology specialists represents a tremendous opportunity to select from the best and offer speed to market, but we still see very few examples of ASPs partnering with FinTechs. Does your organisation still suffer from the old paradigms of “in-house is best”? Do you have a strategy for searching, filtering, selecting, partnering with FinTechs for mutual benefit? Why is the procurement process still not adapting?
Merging FinTech solutions with an ASP business model seems an elegant way to extend and accelerate your bundle, through either a buy/partner/contract approach. We have recently seen an example of combining Fund management, documentation and dissemination excellence with DaaS and “at a glance” oversight.
- Cyber threat:
ASPs sell an outsourcing concept to AMs, but increasingly this comes with a risk of cyber-attack... your client data is at risk. What is your strategy to ensure your clients’ data is safe, and they will not suffer consequences of an attack on your organisation?
- Data: standardise or harmonise?
Earlier we discussed data as an asset, but what about the debate over common “standards” to simplify reporting and minimise duplication? We would argue that achieving agreement on “standards” is like herding cats. Perhaps the focus should be on data “harmonisation”, where a centralised DaaS utility can capture, consume, harmonise, enrich, store and feed back to clients, or offer its own service proposition via a range of analytical tools. Clients can provide data in any form, any format and receive a harmonised version back within minutes. That technology exists today.
- Managing the talent/capacity gap:
PwC recently issued a Thought Paper in this series on this topic and we refer readers to that.
Collaboration to solve sector problems
Why does the ASP sector seem unwilling to organise itself to collaborate and solve sector problems without compromising competitive advantage? We would encourage the ASP community to consider examples such as:
- KYC Utility: all ASPs perform this activity, but none use it as a competitive differentiator!
- Talent/capacity: a sector challenge that can only be solved by an industry approach harnessing the scale of the industry;
- A sustainable community of ASPs with scale, muscle, leverage, influence, representation.
Imagine what the ASP Sector may look like in 3-5 years
Given the discussion above, we can imagine a sector that looks very different in the future. We highlight here four examples:
- Traditional custodian banks:
How will the SST-BBH example resonate in the industry? Will they instead grow through expanding their bundle? Some are expanding by adding Real Asset Administration. Others are pursuing a front to back model, and some considering a 3rd party Manco service alongside custody/Depo/admin.
- Impact of FinTechs:
Inevitably we shall see more collaboration between FinTechs and ASPs, probably evolving from Joint Business Relationships, into eventual acquisitions. We may even predict FinTechs as a 5th sector within ASPs, as they expand beyond a technology platform into a service proposition.
- Data as a Service:
Potentially another 5th segment within ASPs, focused on leveraging data as an asset. This could be a large tech player such as Google, Microsoft, Amazon, or could be a new entrant with a focused, scalable proposition.
- Fusion:
An amalgamation of all the quadrants into mega-ASPs, finally delivering a full bundled proposition, backed by a financial powerhouse. Will traditional banks buy their way into the other ASP quadrants, and can the cultural challenges of such a fusion be overcome?
Conclusion
We have illustrated the profound changes likely to transform ASPs. It is clearly a strategic approach to shape the future and it is certainly a better approach than becoming a victim of it!
We hope you find this stimulating, provocative, and will join the debate. PwC looks forward to working with the ASP sector as it evolves, matures, and transforms into meeting the future needs of its clients.
