Operational excellence in asset management starts with digital transformation

By all measures, the year ahead could be a challenging one for businesses in the investments area. As pandemic restrictions lifted and the economy regained speed, interest rates were expected to increase, but not to today's unprecedented heights. Alongside inflationary pressure and geopolitical challenges, it's clear that economic uncertainties may translate to a lower fee environment in the months ahead.

For asset managers to remain competitive, continued innovation is a must. KPMG's annual Asset Management Opportunities and Risk report shows where Canadian asset managers see the biggest opportunities to grow and improve is through technology and where they’re likely to direct their digital / technology related spending.

Over half the asset managers we talked to identified digital transformation and embracing technology enhancements to operational processes as an opportunity ahead, not only for their own organizations, but for the industry overall. As most asset managers have made substantial technology investments over the past few years into digital distribution and customer service, this was expected. Now that those investments are starting to bear fruit, the big decision is where to double down and what digital assets might warrant decommissioning.

With markets and assets under management (AUM) revenues trending downwards, firms are looking to lower costs in any way they can. Digitization and technology are expected to play a significant role in cost optimization and streamlining in the months ahead.

Large pension plans and institutional investors have been innovating, but incrementally, with multi-year digital transformations. They’ve also gone through a lifecycle of insourcing investment to add private strategies to their total portfolios, and made corresponding technology updates to their back offices. Today’s new challenges are driving a re-assessment of the speed and scale of digital achievements to date. Many businesses are considering adding more technology to streamline operations and run their organizations.

Half of the asset managers we spoke to identified legacy systems as a risk to their own organizations, and nearly the same number saw them as a continued risk to the industry overall. Legacy systems have certain data constraints which can delay, impede and possibly increase the cost of effective investment into application development or digital experience initiatives. Firms with less mature digital strategies are likely to address any gaps by increasing investments in new technologies. Organizations with more advanced digital strategies and technological capabilities can offer better user experiences, create efficiencies and reduce operational risk, and work more effectively with outsourcing partners.

Consistently, managers identified fund accounting, trade and settlements, and transfer agents as key back-office areas ripe for technology investment in 2023.  In the middle office, optimizing customer relationship management (CRM) and creating a single source of truth for investment data will be a key focus in the immediate term. Technology improvements across risk and compliance functions and in the client on-boarding process may also help improve operating efficiency and reduce investment related risks.

Leaning in to top tech

The leaps and bounds in technology over the past three to four years have been truly astonishing, particularly in artificial intelligence (AI), machine learning, and natural language processing (NLP). Asset managers increasingly grasp the importance of those innovations in their businesses and have sufficient capital to make systems upgrades. Many will harness tech-enabled analytical power to launch and differentiate products, reach investors, and use funds more effectively.

Many of the largest players in the sector have adopted a total fund management (TFM) approach, which involves managing risk and asset allocation across public and private investments. To be effective, however, TFM requires better data. As a result, we expect to see asset managers looking to higher tech solutions for better data analytics and predictive capabilities.

The past few years has seen considerable merger and acquisition activity, and asset managers are seeing the benefits of technology to facilitate post-merger integration. Over the longer term, we expect to see AI and machine learning become more embedded in risk analytics and the investment process for efficiency and performance gains across the board.

Strengthening cybersecurity

While cybersecurity was identified as a risk for organizations and the industry overall, it does not stand out as an exceptional risk area. The fact is, organizations are managing so many heightened economic risks that cybersecurity has dropped out of the headlines. Still, it is a significant risk area for asset management companies to keep top of mind. The asset management firms we spoke with demonstrate nearly unanimous commitment to increasing cybersecurity investments over the next year, two years, and five-year periods.

Customer appeal remains crucial

In terms of opportunities ahead, many asset managers we talked to see focusing on their customers as a crucial area, whether increasing the penetration of their existing client base or reaching new investors, both institutional and retail. As customer expectations grow and evolve, we can expect to see continued investment in front-end client experience enhancements, including more digital touchpoints, better access to reporting and assistance, and a wider range of customized solutions.

As competition from self-serve and alternative investment platforms increases, asset managers will be compelled to invest in digital strategies to reach and retain younger, millennial investors. Alongside optimal CRM solutions, investment in data analytics will provide industry leaders an ability to better respond to evolving client journeys across ever smaller demographic cohorts.

Another driver of digital capacity that comes through in our discussions with asset managers is the renewed focus on managed accounts. Customizing portfolios to meet individual client needs and long-term objectives requires innovative technology and digital capabilities for actionable information on valuations, liquidity and secondary market transactions.

Technology for the long-term

With the market as it is, asset managers will need to be both creative and patient to weather the storm and deliver the investment performance customers expect. Technology investments will be crucial to both achieve stability and maintain a competitive edge. Better data translates into better products and technology integration brings cost reduction opportunities.

Looking forward, a key consideration is to keep the channels of communication with investors open. Their portfolios will be affected by markets, so helping ensure they are aware and informed is important to maintaining trusted transparent relationships. From a technology perspective, those same conversations tell you what your clients are interested in, which helps focus and maximize CRM investments. Doubling down on data analytics can also help you understand client journeys better and customize products and services to meet their needs.

KPMG's Asset Management team can help future-proof the road ahead, with a tailored technology strategy for your business and implementation support.