It should come as no surprise that over the first six months of the year, industry leaders have continued to discuss the challenges but also opportunities facing US asset management. Asset managers have always focused on and adapted to changes in product, performance, distribution, price and investor demand. Yet more and more they face new challenges with the ever-changing regulatory environment and the disruption of technology. Add this to the pressure from investors to create new and differentiated products, competitive pricing, and the obvious need to maximize performance, these new challenges increasingly distract asset managers from what is ultimately most important – the end investor.

Regulatory Complexity Persists, Creating New Data Challenges

There doesn’t seem to be any regulatory relief for US asset management on the immediate horizon. Despite rhetoric from the Trump administration, the much hoped for “bonfire of regulation” has yet to spark. While President Trump has ordered impact assessments of various regulations, there has not been a material rollback of any regulation. Additionally, the industry is in-limbo until Jay Clayton, the new head of the Securities and Exchange Commission (SEC), reveals his regulatory priorities.

While US asset managers wait to see if any deregulation will come to fruition, it remains a transformational time for the industry. They have their hands full preparing for several upcoming regulatory changes.

The SEC is demanding complex information that they’ve never before requested in a 30-day filing format in the new Reporting Modernization and Liquidity Rules. In August, the first phase of the SEC Reporting Modernization rules take effect with the new S-X rules. Asset managers must focus on improving their data management and operational efficiency to ensure they can keep pace with these requirements.

Another regulatory milestone is the long-awaited Department of Labor (DoL) Fiduciary Rule. After a two-month delay, the Fiduciary Rule soft-launched on 9 June. While the DoL is not requiring full compliance until 1 January 2019, managers need to be working now to ensure their products are compliant. Even though the DoL is reviewing the rule and the possibility of an SEC Fiduciary rule replacing the DoL’s, it seems clear the rule will survive in some shape or form.

To be operationally efficient in the current environment, regulation should be a critical consideration in asset managers’ product development, distribution, and expansion strategies. Firms need to organize their reporting around the new data requirements for all the jurisdictions, while still maintaining a consistent approach to their own data management.

The Crossroads of Convergence Leads to an Identify Shift

Converging asset classes, investment approaches, and firms will force asset managers to look in the mirror and make some hard decisions to be successful in this new environment.

Over the last decade, investors’ increased focus on fees has resulted in a shift to passive index funds and ETFs. Since 2006, over $1 trillion has shifted from active to passive US equity funds, according to Morningstar. This focus on fees has also put more pressure on hedge and private equity funds to reduce their fees. This pressure could reduce asset managers’ revenue by as much as 30% over the next three years.

In addition to focusing on performance one way asset managers can cope with this pressure is to grow in scale. Managers must look to merge or acquire firms to diversify their product offering and geographic presence by expanding beyond the US market. According to the Investment Company Institute, roughly half the world’s mutual fund assets are domiciled outside of the US, a figure that seems set to grow as the emerging middle classes in developing regions begin to invest their savings. To tap this potential growth, asset managers need to have a strong domestic and global plan. Otherwise they may find themselves losing ground as their competitors grow.

There is another side to globalization worth watching. Over the next five years, Brown Brothers Harriman expects there to be a noticeable westward expansion of Chinese asset managers. Some managers will establish cross-border funds in Europe to create a global distribution platform. Other Chinese managers will enter the US market, by setting up operations or by acquiring a US asset manager. Either way, Chinese firms are well financed and they have the potential to globally alter the asset management landscape.

The Technology Tipping Point

The asset management ecosystem is facing disruption. However, due to a confluence of technology and market trends, fund distribution is facing one of the biggest threats.

In the US, the DoL Fiduciary Rule is accelerating the shift from commission-based to fee-based accounts. As a result, asset managers must match their products more closely to their clients’ needs. This has led to the introduction of clean shares for mutual funds, which are funds without any distribution costs. The shift to fee-based fund distribution has also made the robo-advisor model more attractive, which has been making steady inroads in the US market and is projected to grow to $2.2 trillion by 20201.

Additionally, investors of all ages are becoming increasingly digitally savvy. Investors now expect to be able to access their portfolios and make investment decisions online and via their mobile device.

If asset managers use technology to create digital platforms that reach directly to their clients, they can disintermediate elements of the traditional distribution channel. By doing so, managers can reduce distribution costs, which benefits both them and the end investor.

Many fund distribution developments have been underway for some time, but the pace of change is quickening. Asset managers who aren’t thinking digitally could find themselves exposed when the tide shifts. The push for tech isn’t going away anytime soon and asset managers need to embrace technology and invest in technology to boost performance, lower costs, and ultimately, create a better experience for their clients.


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© Brown Brothers Harriman & Co. 2017.  All rights reserved.

IS-2017-07-24-3098      exp: 7/31/2019

1 Statista, Forecast of assets under management of robo-advisors in the United States from 2016 to 2020, 2017.