Investment Management

The business of managing money for clients has a much different look today compared to where it was 10 to 20 years ago. Asset management as an industry is slowly entering a new phase in its life cycle, one that has long-term effects on both sides of the market—the suppliers and buyers of investment products. As companies work through this newer, more competitive cycle, the impacts are far reaching, touching on virtually all aspect of the business: marketing and product positioning, risk management, technology, trading strategies, compliance reporting to the financial regulators, and—last but not least—talent management. “Business as usual” will never be quite the same.

Certain trends are inevitable in an industry where growth and profitability are so connected with its ability to attract money from investors. There are several trends worth watching.

Demographic Change Will Influence Competition

An aging U.S. population will heighten competition among money managers for market share. As Americans between the ages of 40 and 60 today reach retirement age, individuals who were prime savers in their working years will become “dis-savers” instead of investors. The shift is most noticeable in the Baby Boom generation, Americans born between 1946 and 1964. At 20.6 percent of the U.S. population in 2022 (according to Statista.com), the boomer generation has widespread impact on the composition of the country. As the flow of new money into retirement accounts begins to taper off, money managers who previously didn’t have to work too hard to bring in new clients and new investments will find themselves devoting more energy to marketing—and hiring additional staff to promote their brand.

Investment Funds Focusing on New Investors

Investment funds are increasingly marketing to high net-worth individuals (HNWIs). In the United States and Canada, HNWIs had $83 trillion in assets at the end of 2022, according to Capgemini, up from nearly $21.7 trillion in 2019. The amount of private equity capital contributed by high-net-worth individuals is expected to increase from 2.4 percent in 2015 to 11 percent in 2025, according to a report from Boston Consulting Group and iCapital. “This vast, untapped market has become increasingly attractive to alternative asset managers seeking to sustain double-digit growth even as the industry matures,” according to Bain & Company’s Global Private Equity Report 2023. “The reverse is also true: Wealthy individuals (not to mention their advisers) are increasingly drawn to alternative investments as they look for new diversification options and better returns than they can get in the traditional markets for public equity and debt.”

The hedge fund sector is also marketing to HNWIs. An increasing number of high-net-worth people are from the Millennial generation. “Funds targeting these new investors must deal with new preferences,” according to Grant Thornton. “Millennials have grown up with interactive, online, real-time access to their financial data and expect the same transparency and level of service from their investment options. For hedge funds, that means new investments in technology, potentially including robo-advisers and other self-service options. It also means exploring new investment strategies and product offerings.” Institutional investors are also increasingly investing in hedge funds. Institutional investors allocated $16.6 billion to hedge funds in 2022, up from $8 billion in 2021, according to the Alternatives Watch Research Investor Compendium, which was commissioned by Vidrio Financial.

More Help for Investors—and More Choices

Sixty-one percent of Americans who were surveyed by Gallup in 2023 reported that they owned stock, up from 56 percent in 2021. But despite increasing investment activity by Americans, many are uninformed about basic investing terminology and concepts. A 2022 survey by The Motley Fool found that the average American correctly answered only 48 percent of questions in its 11-question quiz on investing terms and basic concepts. Fewer than 1 percent answered all of the questions correctly.

As a result, many consumers want more information about their accounts, they want easier access to information about their accounts, and they want more “hand-holding” and general guidance about investing from their financial adviser. Customer service call centers will take on a greater share of investor education in the years ahead.

Besides helping clients make better informed investment decisions, investment firms are paying more attention to their menu of investment products, upgrading their offerings to include more low-cost alternatives, “absolute return” funds offering positive risk-adjusted returns in any market, hedge funds, commodity funds, and other alternative investment options. Since 2000, index funds—passively managed funds that buy and hold a broad market (the Standard & Poor’s 500, for example) and exchange traded funds (ETF’s)—have been steadily gaining market share against actively managed mutual funds. In 2021, passively managed funds comprised 42.9 percent of mutual fund/exchange traded fund assets under management (AUM), as compared to 23 percent of AUM in September 2015 and 9 percent of AUM in December 2005, according to Bloomberg. It estimates that the percentage of funds that are passively managed could surpass actively managed funds by 2026, which could cause profits for investment firms to decline. Among individual investors, exchange traded funds (low-cost funds that trade on public exchanges at market determined prices) were a clear winner. “U.S.-listed ETFs, the overwhelming majority of them passive, have seen their assets rise fivefold to $7.2 billion since 2012, according to a 2022 article in the Financial Times. “Overall, 88 percent of ETF ranges saw positive net inflows last year…compared to just 48 percent of mutual fund ranges, continuing a pattern witnessed over the past decade.”

Investment firms Barclays, State Street Global Advisors, and Vanguard are well positioned to take advantage of the rising interest in the ETF and index fund alternatives to traditional funds. Of course, with so much attention focused on paring down fund manager expenses and expense ratios, traditional fund managers now face added pressure to deliver results on both investment performance and client servicing.

Brand Marketing Will Become Key to Success

Investment firms will need to find new and innovative ways to differentiate themselves from the competition. The easy money flowing from investors building up their retirement nest eggs won’t last forever, putting a premium on marketing strategies that build upon and reward customer loyalty. Many firms are recognizing the value of a strong brand. In fact, 82 percent of PE firms surveyed in 2023 by SuperReturn and BackBay Communications said that having a strong brand was very important. Eighteen percent said it was somewhat important. “The importance of focusing on building a strong brand to support fundraising and investment success in the private markets cannot be underestimated,” said Bill Haynes, founder and CEO of BackBay Communications. (BackBay Communications is a public relations, marketing and branding consultancy that specializes in working with private markets firms, and SuperReturn is a well-known private equity conference series.) In the long run, having a branded name with “household” recognition will be key to attracting and retaining customers, and in opening new markets. Top tier investment firms have most of the pieces in place, and have already invested heavily in building brand recognition.

Technology is Changing the Face of the Investment Industry

The investment industry is undergoing a vast transformation as a result of new technologies. One noteworthy trend is the growing popularity of high-frequency trading, in which sophisticated algorithmic models are used to trade stocks rapidly and take advantage of small changes in stock prices to earn healthy returns. In late 2020, high-frequency trading firms accounted for 50 percent of all U.S. equity trading volume, according to the Centre for Economic Policy Research. In recent years, hedge funds have used algorithmic trading technology to earn big profits, but the Financial Times reports that some industry insiders worry “that the swelling influence of computer-powered ‘quantitative,’ or quant, investors and high-frequency traders is wreaking havoc on markets and rendering obsolete old-fashioned analysis and common sense.” Another trend involves the increasing use of data analytics and artificial intelligence (including generative AI) to improve fund performance, attract and retain customers, improve in-house efficiency, and perform many other tasks. “The applications of AI in asset management can and will impact the entire value chain,” according to Broadridge, which offers digital and mutualized solutions to the financial services industry. “Starting with the optimization of sales and marketing interactions, predictive market modeling, and portfolio management based on instant processing of petabytes of data, to the use of AI bots for transaction processing across the entire middle and back office.” Many companies are using cloud computing software to store applications and data in the “cloud,” (i.e., cyberspace), help improve collaboration between employees and communication with investors, and for other tasks. The increasing use of these and other technologies is also increasing demand for information technology (IT) professionals with expertise in these fields. The IT association CompTIA recently listed machine learning, cloud computing, data analysis, data science, data visualization, and Big Data among the top 20 in-demand technology skills.

The alternative investment industry is beginning to use blockchain technology, which can be defined as a distributed ledger database that maintains a continuously-growing list of financial records that cannot be altered. Blockchain can be used to create better record-keeping, especially regarding financial transactions.

Generative artificial intelligence (AI) and the metaverse are two additional technologies of note. Generative AI is a form of machine learning algorithms (including large language models) that can be used to create new content (including text, simulations, videos, images, audio, and computer code), as well as analyze and organize vast amounts of data and other information. One of the best-known examples of generative AI is ChatGPT, which was released in late 2022 by the San Francisco-based company OpenAI. Areas of current and potential use for this technology in investment management include wealth management advisory services, investment research and portfolio management, marketing, client support, legal and compliance, and process automation and efficiency. "The dawn of the GenAI era marks the beginning of a transformation in how investment industry professionals and other white collar professionals do their jobs,” according to Michinori Kanokogi, CFA and Yoshimasa Satoh, CFA in the article “ChatGPT and Generative AI: What They Mean for Investment Professionals.” Kanokogi and Satoh go on to say that “those who leverage AI as their copilot will boost their productivity, while those who fail to embrace this revolution risk losing their competitive edge. As various fields integrate AI, the technology will redefine the workplace and lead to new standards of efficiency and effectiveness.”

Generative AI is still in the early stages of use and development, and companies are still trying to address the ethical issues, security risks, and operational challenges of using this technology. Although the introduction of generative AI will reduce the number of administrative jobs, the use of this technology will create the need for many new occupations. These include generative AI utilization directors, implementation specialists, product and adoption managers, quality controllers, editors, engineers and software architects, and output auditors.

The metaverse is an emerging 3–D-enabled digital space that uses converging technologies (e.g., artificial intelligence, augmented and virtual reality, blockchain technology, cloud computing, digital twins, e-commerce, Internet of Things, social platforms) to create a lifelike experience online. It can be used to meet business and other goals, engage in commerce, have fun playing games and interacting with others, and utilized for other purposes.

The metaverse has some current and many possible future applications for the investment management industry. For example, investment funds already have been launched that include companies that create or market metaverse-related products. In the future, the metaverse may be used for staff training and collaborative projects, as well as to interact with clients in improved and different ways.

Despite the challenges of building the metaverse (and getting the public and businesses to embrace it), 89 percent of 3,200 executives (including those in capital markets-private equity) surveyed by Accenture in 2022 believed that the metaverse would play an important role in their organization’s future growth. (Survey respondents represented nearly 20 industries from companies that generated $500 million or more in annual revenue.) In the capital markets sector, 34 percent of survey respondents said that they were most interested in exploring the metaverse as it related to consumer services experiences, followed closely by 33 percent who were most interested in consumer product experiences. Seventeen percent of executives cited the enterprise metaverse (e.g., extended reality, virtual workplace) as their ideal focus area.

Unlike generative AI, which is already in extensive use in the investment management industry, the metaverse is still in the early stages of development and adoption. “At this juncture, [the metaverse] is much like the internet of the early 1990s or the smartphone of the early 2000s,” according to Reid Menge, co-portfolio manager of the BlackRock Technology Opportunities Fund. “We expect it is going to be big, and very likely change people's daily lives. But we don't yet know exactly how, or how big the shift will be.”

The Increasing Use of Next-Generation Data

More companies are using data analytics tools to collect and study alternative data to obtain investing, operational, or other benefits over their competitors. Next-generation data, which is also known as alternative data, is nontraditional and non-market economic and financial information, such as business performance metrics, online reviews, weather patterns, satellite imagery, consumer spending/lifestyle data (including payments data), and social media trends. Forty-two percent of alternative fund managers reported using next-generation data tools, according to EY’s 2019 Global Alternative Fund Survey. Twenty-eight percent of respondents planned to do so in the future. Forty-eight percent of hedge fund managers believed it was “critically important” to use next-generation data to support their investment process. Forty-one percent of managers believed it was “somewhat important” to do so.

The Growing Popularity of Socially Responsible Investing

Socially responsible investing (SRI)—which is also known as sustainable; "green"; socially conscious; ethical; or environmental, social, and governance investing (ESG)—has been around for decades, but SRI issues are becoming increasingly important to companies and other organizations. They include climate change and wider sustainability; environmental compliance and liability management; diversity and inclusion; employee development and retention; customer welfare; community relations; and business ethics and governance, among others. “The fund industry is responding to increased investor interest in ESG investing by, among other things, creating new funds that explicitly tailor their investments to specific ESG criteria,” according to the Investment Company Institute. The institute reports that the number of investment funds that invest according to ESG criteria increased from 185 in 2019 to 430 in 2022. These funds have a broad ESG focus.

According to U.S. SIF: The Forum for Sustainable and Responsible Investment, sustainable, responsible, and impact investing assets reached $8.4 trillion in the United States in 2022. These assets accounted for one out every eight dollars under professional management in the United States. “The largest percentage of money managers cited client demand as their top motivation for pursuing ESG incorporation,” according to U.S. SIF, “while the largest number of institutional investors cited fulfilling mission and pursuing social benefit as their top motivations.” The leading ESG criteria for money managers in 2022 were climate change/carbon ($3.45 trillion), military/weapons ($1.78 trillion), tobacco ($1.70 trillion), fossil fuel divestment ($1.23 trillion), and anti-corruption ($1.02 trillion). “Asset managers globally are expected to increase their ESG-related assets under management to $33.9 trillion by 2026, according to PwC. The U.S. SIF: The Forum for Sustainable and Responsible Investment provides detailed information about the field and job listings at its Web site, http://www.ussif.org.

The COVID-19 Pandemic and Its Aftereffects

In late 2019, the coronavirus COVID-19 was detected in China and quickly spread to nearly every country—causing hundreds of millions of infections, more than 7 million deaths, and massive business closures and job losses. In the short-term, the COVID-19 pandemic negatively affected the health of individuals; employment opportunities at businesses, nonprofits, and government agencies; and daily life. The pandemic also affected job-seekers and employees. Some companies cancelled or delayed internships and other experiential learning opportunities, while others converted them to an online format. Onboarding of new hires was either delayed or moved to an online format by many companies. Most employers transitioned in-person interviews to telephone and online formats, and many businesses required their employees to work at home some or all of the time.

The pandemic affected the various sectors in the investment management industry in different ways, although all sectors reported that they had largely converted in-person activities such as interviewing and onboarding to virtual formats at the height of the outbreak. Deloitte reports that the investment management industry experienced less damage than other sectors in the economy, and revenues in the industry remained largely intact. Many private equity and venture capital firms focused on supporting their existing holdings (such as retail, entertainment, and hospitality companies), many of which have been negatively affected by pandemic shutdowns and reduced sales. During the early months of the pandemic, the number of hedge fund liquidations soared and the number of new hedge funds declined. Many smaller hedge fund companies closed because they did not have the financial resources to compete with the big players. As of late 2023, each financial sector was gradually bouncing back—with the traditional investment industry experiencing the strongest recovery.