Next in asset and wealth management 2023

AWM transformation forges ahead amid business challenges

The asset and wealth management (AWM) sector has been undergoing massive transformation in response to such ongoing challenges as fee pressure, rising costs and shifting investor preferences, including growing interest in alternatives, thematic investment needs and digital engagement preferences, among others. These challenges have been exacerbated by today’s macro economic environment of market volatility, rising interest rates and inflation, and a looming global economic downturn as well as crises like the turmoil in the digital assets market.

Despite these headwinds the fundamentals of the AWM industry remain solid with potential profitability quite attractive. In fact, today’s challenges are felt across the entire financial services industry, with players across the spectrum vigorously transforming their business models to survive and grow.

Here’s our look at what’s next in asset and wealth management and what leaders can do to stay ahead of the competition.

Great transformation expected to continue

AWM firms continue to evolve their business models — either organically by scaling into new asset classes or inorganically through acquisitions. They’re also preparing for a global recession and the impact it would have on their bottom lines by increasing focus on where to streamline, what to stop investing in or the possibility of exiting the sector altogether. 

With a keen eye on protecting their economics for an uncertain near future, many asset managers will look to evolve in many ways.

  • Large players will continue to scale and add new capabilities, including ESG solutions, distribution and technology capabilities, potentially through M&A options.

  • Niche managers are shoring up their expertise and client base, developing focused and differentiated value propositions.

In this environment, mid- and small-size firms should not only differentiate themselves but also operate more efficiently, recognizing which capabilities to invest in and strengthen and where to rely on third-party industry specialists.

Key actions: AWM leaders should continue to assess their firm’s readiness to acquire and/or divest in certain businesses in addition to how their capabilities stack up against the competition. Any acquisitions/divestitures should be leveraged to help transform your business and operating model.

The mainstreaming of alternatives

AWM firms are reinventing their business models in a number of ways. One megatrend involves alternatives managers aggressively targeting new investor segments, including high-net-worth clients, with a host of new private market products. These often involve such underlying investments as private equity, private credit or private real estate, which have lower correlations with traditional markets.

Alts managers view retail investors as a viable way to help offset concerns that institutional investors (e.g., US pensions) may be approaching self-imposed allocation limits to alternatives. They also are spurred on by investors' desire to diversify their holdings beyond traditional long only public market strategies. Asset managers are reaching HNW investors primarily through wealth managers who continue to look for new ways to capture and retain the mass affluent by offering a suite of services designed to address client needs as they grow wealth in changing market conditions.

Key actions: As alts become more popular, it’s critical that firms develop a retail investor strategy. While it’s an attractive segment, scaling your alts business in retail can be quite complex, and without the right capabilities, retail could become a costly undertaking.

AWM firms prioritizing digital transformation

Asset and wealth managers have been accelerating their investment in digital transformation spurred by the popularity of remote work, by shifting investor preferences toward digital engagement and by the opportunity to drive efficiency and growth. In addition, growing interest from investors and regulators in more sophisticated ESG data, coupled with the broader use cases for artificial intelligence (AI), data analytics and cloud migration, are leading to sustained investments in technology.

However, we see firms still struggling to reap all the benefits from those investments. Too often, firms embark on these efforts in silos, without clear alignment between business-owned use cases and tech-owned infrastructure and a less than optimal balance between long-term transformational goals and near-term impact to sustain the momentum.

Key actions: To be competitive for both clients and talent, firms should replace any antiquated (less effective) systems for cloud-based technology and build a business-driven data and analytics strategy and supporting capabilities. Firms also should decide on the strategies they want to execute now and what they can implement down the road to avoid making the mistake of tackling too many things all at once.

Building trust with digital assets

A recent fall in cryptocurrency asset prices and of large several crypto natives have undermined what every financial system depends on: trust. Until trust is reestablished, digital assets will likely fail to reach their full potential and won’t offer value to most businesses.

Rebuilding some of that trust can become a competitive advantage for some players. Take, for example, making “self-custody” both convenient and safe by offering users the demonstrable, verified ability to secure their own digital assets and keys. Or offering safe, secure, quality “hosted” custody. 

On the other end of the spectrum, AWM firms that invest in or engage with digital assets need to understand the risks, including those associated with digital asset service providers, and how that risk affects stakeholder trust.

Key actions: Trust in digital assets starts with risk management, both for your own operations and those of vendors and counterparties. If your company is a digital asset native, you may wish to take some guidance from the traditional (not blockchain-based) financial world: apply leading practices that cover controls, security, governance and transparency. If you’re a traditional company, it’s important to understand and mitigate specific risks associated with digital assets. Crypto natives and traditional companies both may wish to consider whether an independent audit can help confirm assets and liquidity, as well as the adequacy of risk management controls and procedures.

Industry intensifying focus on ESG

The asset and wealth management sector continues on a two-prong transition into environmental, social and governance (ESG). ESG is being incorporated into investment products, and firms are integrating ESG principles into the heart of their purpose, strategy and performance management.

In a recent PwC global AWM ESG report, we projected that ESG assets under management in the US will more than double, from $4.5 trillion in 2021 to $10.5 trillion in 2026 — spurred on by the Inflation Reduction Act, which commits $390 billion to fight climate change.

Key actions: To keep pace with the AWM industry’s fast-moving adoption of ESG, firms should confirm that their operating models are fit for purpose in today’s environment to secure and retain clients. They should also create a compelling ESG story and develop credible reporting to track and communicate progress toward their goals. What’s more, it’s important to build ESG into digital and workforce transformation when developing insight, strengthening leadership and delivering demonstrable value for money.

Creating portfolio company value

Private portfolio companies (portcos) are struggling with softening sales, rising input costs, uncertain supply chains and business/operating models that may not stand up to today’s headwinds. Such challenges are also impacting their ability to swiftly create value.

In the past, portcos have relied too heavily on the management team’s experience to create value. Now, according to our 2022 Next in Private Equity Survey, portcos, for example, are using digital transformation to broaden their value creation plans, with 40 percent of respondents noting the top priority to create value is to digitize and/or automate more areas of their company.

Portcos aren't however just looking to digital to create value, they're also looking across their organizations, including at their pricing and channel performance, supply chain integrity and cost structure sizing, and are implementing a number of focused solutions.

Key actions: So how can portcos create value faster? They should look to leverage more pre-packaged, “in-a-box” offerings, which can be implemented quickly and help companies drive value through speed and execution. Companies should also conduct regular portofolio reviews to get a clear analysis of which businesses are financially successful and which are not. In addition, portcos must strive to make data a part of their daily operations. This includes determining the portcos’ existing capabilities and improving upon those; changing portcos data collection, including how and what data they analyze; and empowering the portcos workforce to use data.

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