Highly reputed Canadian asset manager CI Financial Corp (TSE:CIX) has enjoyed excellent growth compared to the competition because of its impressive track record, having been ranked amongst the top two funds every year over the past decade.
But CI Financial Corp (TSE:CIX) is now facing problems on distributing its products and analysts are wary that these issues may affect its performance. Currently, Sun Life Financial and Scotiabank handle distribution for the company, but both these organizations are now nurturing their own ambitions in asset management, and this could result in business being switched out from CI Financial.
Key market forces
This is an example of how market forces can affect distribution, and hence the business prospects of an asset manager. “Managing complexity and change in a new landscape,” a global survey on asset management investment operations conducted by Ernst & Young (EY), observes that firms in the industry are facing market challenges from higher competition, changes in the regulatory environment, cost and margin pressure, investor demands regarding transparency in reporting, and technological changes.
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“These complex forces require firms to implement enterprise-wide transformational change spanning people, processes and controls, data, and business applications,” observes EY. “Our survey indicates that leading asset management firms are now implementing change at an unprecedented rate.”
Change can also create new opportunities. In the U.K., the recent budget announcement by Chancellor George Osborne that retirees need no longer buy annuities creates opportunity for reputed fund managers who could offer substitute products.
According to analysts, retirees could opt for funds offering some kind of multi-asset or balanced products that carry low risk and volatility, and would likely take their business to asset managers with a reputation for quality and strong brands. These funds would therefore be expected to create suitable products to address this new demand.
Distribution channels and brands the key to growth
The EY survey, which covered 40 leading global asset managers based out of the Americas and Europe and managing assets between $50 billion and $500 billion, says asset managers have basically deployed seven strategies to align their business with new market realities.
Distribution and brand management is now a key focus to drive growth as well as margins, as seen in the chart below.
The ever-changing, increasingly complex and costly burdens from regulatory demands are being addressed by asset managers by aligning their organization structure, functions, processes, systems and data with compliance programs.
Last week, the FINRA slapped Securities America and Triad Advisors with $1.2 million in penalties because the firms’ inadequate supervision led to the issue of inaccurate investment summaries to customers.
Not surprisingly, over 80% of the respondents to the survey said regulatory compliance was a top industry challenge.
The typical large asset manager would like to operate across the globe and in various financial markets and time zones. Inherent in this model is a requirement to strike a balance between the advantages of a localised central operation and the challenges/rewards of operating offshore and multiple locations.
“This model must balance trade-offs such as proximity to senior management, travel costs, information security, access to skilled resources and political and environmental factors,” observes the survey report. Not surprisingly, more than half of respondents were in favor of operating in nearshore locations.
According to the survey, outsourcing is widely prevalent and asset managers are continually seeking outsourcing strategies, primarily for trade processing and reconciliation, as well as other functions such as investment and fund accounting, valuations and institutional client reporting.
However, asset managers are now increasingly in favour of outsourcing more complex functions, provided the outsource agency has established capabilities.
For those functions that continue to be performed by in-house resources, is the function performed by a central group globally across the entire asset management organization? The majority of survey participants answered in the affirmative, as per the chart below.
“The shared services organization is a relatively mature concept in investment operations, yet realizing cost savings is an ongoing challenge as asset types and reporting requirements continually evolve. Data and technology must be well integrated to enable cost savings and efficiency gains; otherwise, a shared services organization risks being as inefficient as disparate teams,” observes the report.
Data management is receiving significant investment from the fund managers because of its overarching implications for cost management and regulatory – More than 70% of participants felt that the quality and accuracy of data was a major challenge, followed by over 60% who said data had become crucial to meet regulatory demands.
Business complexities and investor demands for enhanced reporting, transparency and better risk management “have all raised the bar for data management,” says the report.
Rationalization and simplification
“Our focus is to make our technology environment more robust, trying to reduce the number of applications we’re using, while at the same time making our data consistent across the organization,” said one Director of Operations, Europe with US$100b—US$500b AUM.
Areas of focus are replacing traditional applications with those that support global operations, merging of multiple applications into a single one and technology that supports a “follow-the-sun” business model.