Asset management insights:

rebuilding trust is the main challenge facing global asset managers

Thought leaders representing the investment management industry convened with renowned academics at the SimCorp StrategyLab Copenhagen Summit 2011 to discuss key investment management industry challenges in the post financial crisis environment. They articulated their findings in three thought-provoking white papers now published and which are summarised in the following article.

by Stephen J. Brown (Ph.D.)

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The greatest challenge for the asset management industry since the global financial crisis is to rebuild confidence. Confidence has been shaken, regulators have been stirred, an increasing groundswell of regulation is in the pipeline, and the industry has to get to grips with these issues. Last but not least, clients are concerned and the industry must develop procedures and techniques to deal with this crisis in confidence.

What clearly emerged from our group discussions was the need for asset management companies to increase transparency at all levels: transparency in terms of the cost structure as many companies do not fully comprehend their own individual cost structures; transparency in business processes – if the companies fail to fully understand some of the products they are selling, how can they explain them to the clients?

In the period before the crisis the asset management enterprise was very different from what it is today. Businesses were able to survive with very high cost structures. Now we are seeing a need to control costs and a need to be transparent within the organisation on the nature of the products being sold and the magnitude of the costs necessary to provide those products.

For the asset management business as a whole, the most pressing challenge is the crisis in confidence resulting from the financial crisis. On top of this, there is increased competition from low-cost providers as well as increased government regulation and intervention in the markets.

The opportunity for growth lies with those enterprises that are most able to meet these challenges by providing transparency to their clients, their stakeholders and in particular their regulators. Those enterprises that can meet this challenge will be the ones that will be the most effective in meeting future challenges. They will be the winners in this new and different environment.

The four main conclusions in the Asset management white paper are:

  • The main conclusions to emerge from the discussions were the importance of rebuilding investor trust, the important role of increasing transparency at all levels as a means to that end, the difficult challenge posed by increasing competition from low-cost providers, and finally the extent to which the factors that influence risk, cost and growth interrelate.
  • Clearly, the greatest challenge since the global financial crisis is to rebuild confidence. Confidence has taken a severe knock, regulators have been put on notice, and there is an increasing groundswell of regulation in the pipeline. The industry has to come to grips with this reality. Last but not least, clients are concerned and the industry must develop procedures and techniques to deal with this crisis in confidence.
  • We believe that the most effective way in which to rebuild lost confidence is for asset management companies to ensure that their investment management systems embrace transparency at all levels: transparency in terms of really understanding and comprehending their own individual cost structures as well as the need to increase transparency in business processes and products for sale.
  • The crisis in confidence is also associated with increased competition from low-cost providers as well as increased government regulation and related challenges. Those enterprises that are best equipped to meet these challenges will benefit the most in terms of exploiting their growth opportunities.

 

Stephen J. Brown (Ph.D.) is David S. Loeb Professor of Finance at the Leonard N. Stern School of Business, New York University, USA. He graduated from the University of Chicago with an MBA and a Ph.D. in 1976. On his first appointment at Bell Laboratories, he spent time on assignment as District Manager in the AT&T Pension Fund where he was responsible for the asset management function. Steve Brown has served as President of the Western Finance Association and is a Managing Editor of the Journal of Financial and Quantitative Analysis. He has published extensive research on asset management issues. This research won the prestigious Graham and Dodd Award in 2010 for the best paper published in the Financial Analysts Journal. He has been retained as an advisor by asset management companies in Australia, China, Japan and the United States and is currently retained by Russell Investments as a member of their Academic Advisory Board. Steve Brown has testified on his asset management research before the US Congress in March 2007.