The day Blockbuster, the former movie rental giant, failed to embrace the future is the day it sealed its fate.
As South African asset managers encounter their own ‘Blockbuster moment’, Anton Eser, Chief Investment Officer at 10X Investments, looks at four areas where world leaders have shown the way by positioning themselves for a very different future.
If you’ve worked in global wealth management for the past several decades, you’ve had a great achievement.
Steady economic growth, low inflation and accommodative monetary policy have resulted in double-digit investment returns, with the piggy bank growing every year as the global workforce grew and the rich got richer.
Even in South Africa, where we’ve had mixed fortunes in terms of economic growth, the asset management industry has continued to make decent profits thanks to solid margins and great asset returns.
However, the future looks very different. It’s hard to see the past repeating itself in terms of investment returns.
And that while assets and profit margins come under pressure from an aging society that attracts savings and competitive forces that drive fees down.
Global asset management giants, such as BlackRock, Vanguard and Legal & General Investment Management (LGIM), have already made significant strides in positioning themselves for this shift.
Drawing on these and other global industry leaders, we see four key areas that will ultimately also separate the winners from the losers in South Africa’s wealth management industry.
First, index-based strategies in the US, Europe and now Asia are making up a large, increasing proportion of investor portfolios.
The reasoning is relatively simple. For active managers, often a large part of their returns is the market rather than the active positions.
By allocating to index strategies, investors can free up their budget to devote to active, high-persuasive managers in areas of the market where real value can be generated.
Let’s not forget that none of the world’s largest and most successful asset managers got there by focusing on active management.
South Africa’s large asset managers, on the other hand, still have a strong focus on active management, with index-based investments largely driven by newer, smaller competitors.
Second, global asset managers have invested heavily in technology, both to automate key processes and to improve the customer experience.
Automation significantly reduces friction costs, creating savings that can be passed on to the customer.
Even more exciting is the huge potential of technology to break down barriers to investment by creating tools that are easy to use.
Think about Google Maps for a moment. When we create the tailor-made journeys the tool creates for us, we don’t even think about the artificial intelligence behind it. Do you envision the same when saving for your future?
Explore the calculators on the 10X Investments website and generate your customized retirement plan.
In the next decade, machine learning, blockchain, etc. will reduce costs and provide accessible, customized and easy-to-understand platforms for consumers.
The asset managers that do not invest now are lagging behind.
Third, the most successful asset managers will be those who move away from the old product-driven approach and deliver results-driven solutions for clients.
Traditional asset managers are set up to develop and sell products, not to create individualized solutions. Teams at these companies still work in silos and have no real connection with customers.
Fourth is the integration of the next generation of sustainable investing, or ESG (environmental, social and governance).
ESG initially emerged as a risk management tool, or found its way into portfolios that excluded certain sectors, such as oil and gas.
In the coming decades, ESG 2.0 will change the role of asset management in allocating capital to companies that truly solve some of humanity’s greatest challenges, from tackling climate change to providing access to energy and education.
Investment managers who don’t take this trend seriously enough are missing out on investment flows, especially as millennials and ‘Gen Z’ consumers become a larger share of the piggy bank.
These future owners of capital want their investment portfolios to have a positive impact – a measure that will be just as important as risk and return when comparing the performance of asset managers.
They also want to work for organizations that operate responsibly and do good, meaning companies that prioritize purpose and positive impact are best placed to attract talent.
Make no mistake, investing with impact does not mean compromising on returns. As the world moves towards a more sustainable economy, the companies that win will be the ones driving positive change. The same applies to the asset manager of the future.
The investment industry has attracted some of the brightest minds. It is an exciting job to find out how the world is changing and where the opportunities lie.
Historically, however, the industry has not been particularly good at delivering a result that is good for the customer.
The fees were too high, the products can be confusing and it is often very difficult to access and understand what you are investing in. South African asset managers score poorly on all these measures.
Globally, we are witnessing significant changes in the wealth management industry.
It is powered by the same forces that are transforming all industries – a transparent and competitive environment enabled by exponential technological advancements and a growing awareness of the sustainability of our planet.
Every market and every industry is different, but this is a global truth. Either we embrace that change and build the Amazon of the financial industry, or we risk becoming the last Blockbuster video.
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The content herein is provided as general information. It is not intended as financial, tax, legal, investment or other advice. 10X Investments is an authorized FSP (number 28250).