Last week KPMG issued a report on the asset management industry declaring the number of global players would halve by 2030. Forecasting the size of an industry to decrease by 50% is certainly a headline-grabbing prediction but that was not the only interesting insight contained in the 80-page report.
This sentence in particular grabbed my attention: “People are living longer and taking greater responsibility for their own retirement planning. Younger generations will likely save more as they see their parents run out of money in retirement.”
This certainly encapsulates the current angst – pension provision will prove inadequate for significant parts of the population. There are worries the abolition of a requirement to buy an annuity will result in pension pots being squandered. Last week Hargreaves Lansdown highlighted how around auto-enrolment will fail around 4 million workers. And I recently wrote a feature highlighting the lack of pension provision among the 4.5 million self-employed.
The report suggests that if the government and the pensions industry fails to grasp the nettle to stop a generation from ending up in penury, then at least the woes of one generation will act as a constructive, if exceptionally harsh, financial lesson for the next generation.
While a more engaged population should make it easier for governments, employers and asset managers to spread the word about the importance of pension provision, that does not mean it will be easy to service these clients well.
KPMG made another prediction: “Clients of the future will demand more personalised information, education and advice that will require asset managers to radically address their technology capabilities to really understand their clients and support this level of service.”
This taps into another current area of debate that has been pushed up the agenda by the abolition of the requirement to buy an annuity: where does the line lie between advice and guidance? And who provides it and pays for it?
There are other longer-term trends which will radically re-shape pension provision. The death of the defined benefit pension, increasing flexibility in defined contributions including investment products that last into retirement and a decline in cliff-edge retirement all point to a far more complex and personalised approach to retirement planning.
The report says fund managers will have to have a much broader skillset than simply the ability to generate good investment returns. It suggests they will also have to have a much higher level of investor engagement to develop the right investment solutions for an increasingly diverse client base.
Perhaps the easiest way for asset managers to achieve this over the short-term is to have a closer partnership with IFAs, employers and platform providers. But this is only a partial solution – it will not be enough to reach those segments of the population that cannot afford an IFA, are self-employed or do not have access to an investment platform.
It’s likely that a far more radical solution will be necessary over the longer term. If asset managers have to develop a whole new skillset – or in other words, add a significant cost to their operation – then it is likely there will be considerable consolidation in the industry as economies of scale will be necessary in order to maintain profitability.
But there is an equally important caveat to such a vision of the future of fund management. While there is no doubt that fund managers will have to offer a far more sophisticated way of interacting with their clients, it will not be worth much if the company fails to generate decent investment returns. And that can easily happen if firms become too large.
The fund management industry is unusual in that it frequently suffers from diseconomies of scale. When a fund gets to large, it becomes much harder to generate returns. And when a firm becomes so bloated that internal politics stifles innovation, performance also suffers. There is a reason that some of the most successful funds involve only a handful of individuals.
The asset management industry certainly has interesting journey ahead of it. Even the shiniest of crystal balls will have a hard time predicting the precise path. It will take some exceptionally adroit steering by asset management executives to ensure there is sufficient scale to engage effectively with clients while ensuring funds do not become so moribund that investment performance suffers.