These are testing times for the investment management industry. The stuttering global economy and market volatility are making it difficult to deliver profitable growth, even as the ever-tightening regulatory environment – especially in North America and Europe – is driving up the costs of risk management and compliance1. As a result, margins are being squeezed.
At the same time, both retail and institutional clients who have suffered a worrying few years are increasingly looking for a tailored service that more accurately reflect their individual situations and approaches to risk, reduces their exposure to fluctuations, minimizes the management fees and transaction charges that eat into returns and increases the transparency of the investment strategies being pursued on their behalf. How to protect consumers from unnecessary risk by enhancing transparency and establishing greater product controls has also been at the heart of recent regulatory change.
With the balance of market power in this traditionally product-driven industry gradually shifting toward clients and regulators, survival and success are no longer just about profitable products. These are just the table stakes. Winning will come from understanding clients and regulators’ needs as well as optimizing the business cost structure.
These fundamental shifts mean that the old inefficient business models that evolved in the past can no longer be sustainable. The days when it was possible for each product team to have its own business priorities, compliance and reporting arrangements and approaches to client communication are gone. To profit and grow in the new environment, investment management firms will have to adopt scalable operating models that enhance organizational flexibility, speed of response and operational efficiencies. Standard functions operating across all asset classes will need to be further established across support functions.
Seizing the benefits of an integrated change program
Larger firms are responding to their particular challenges regarding cost structures by focusing on core competencies, optimizing their processes, migrating jobs from the front office to back office and optimizing their location strategies. At the same time, agility and flexibility in client service are increasingly recognized as critical success factors for investment managers moving forward and driving investments in client experience initiatives. Regulation and compliance are no longer secondary issues, but are high on the chief executive’s agenda. As a result, the most forward – looking companies have already started to invest in their risk and compliance functions in response to increasing regulatory complexity and more demanding client requirements.
The challenge now is to bring all these activities together at a time of limited investment budgets in an integrated program that exploits available synergies to minimize the costs of change and ensure it delivers a competitive edge.
Addressing all these issues together will require sophisticated change management. There is no single silver bullet solution that firms can take off the shelf. Each firm is different and will have to develop its own future business model and associated change program. Key to this model will be a clear understanding of future revenue growth priorities, cost structures, evolving regulatory requirements and client aspirations.
Understanding these parameters will require a clarity by senior management for where the individual firm ultimately wants to end up. What size? What levels of profitability? What products? What clients? What geographies? What parts of the investment management value chain? Only with this clear vision can a firm define the changes it needs to make and ensure that the change program addresses all the drivers – client, regulatory, competitive – in a holistic way and is harnessed to increase operational excellence, eliminate duplication and deliver simpler, standard processes enterprise-wide.
Such a change program can only be created and driven by a small group of senior managers with the necessary business and industry overview, leadership skills and authority to secure internal stakeholder buy-in to the program and drive through change. Sales & Distribution, Portfolio Management, Risk Management, Operations, Finance, Compliance and others, despite all their potentially conflicting priorities, have to support and implement the changes. This will not happen overnight. It will take time and a multi-year program to execute the best ways to simultaneously meet customer needs, deliver regulatory compliance, lower costs, improve margins and grow revenue.
Patience and a systematic approach will be required. In the past, a firm might have 10 bright ideas for strategic projects and try to implement all of them simultaneously. Halfway through, market and priority changes would push the organization to drop five of them. The remaining five would run into problems because their budget constraints and interdependencies had not been sufficiently appreciated. They would then be put on hold while the issues were sorted out. In the end, nothing would happen.
This may be an exaggeration, but not much of one. Firms cannot afford this approach any more. Within the overall change plan, they need to focus on a small number of key changes a year and make them happen, with concrete deliverables, timelines and comprehensive quarterly reporting. Adopting an integrated approach will enable firms to achieve efficiencies by building on common themes across client, cost optimization and regulatory requirements. The metrics need to be built from the bottom up, initiative by initiative, to create the top level key performance indicators (KPIs) for the firm, not the other way around. This will lock the whole program together and ensure that detailed frontline changes are aligned behind the desired strategic outcomes.
Investing for the future
So this is no time to pursue ‘business as usual’ in the hope that everything will return to pre- 2008 conditions. It may not.
The transformation that is happening to the investment management sector is creating opportunities as well as challenges. The keys to success include understanding the complete nature of the transformation and articulating a firm-wide vision for the new world, developing and executing a new business model that delivers operational efficiencies and an enhanced competitive position and becoming ever closer to clients by listening more and using a combination of personal contact and emerging technologies to enrich communication and transparency. Even though investment managers may be struggling to achieve revenue targets and cope with rising regulatory costs, this is no time to retrench.
Principal, KPMG Management Consulting
KPMG in the US
Tel: +1 212 872 6549
1See Evolving Investment Management Regulation: Meeting the Challenge, KPMG, June 2011.