Asset Management in Transition: Why Size Matters
By Volker Kang
At a time when business conditions are becoming increasingly complex, adaptability is more important than ever. This also applies to asset management.
Whether and how an asset manager masters the current challenges depends not least on its size and its ability to recognize and exploit opportunities. Topics such as technological innovation, a robust and future-proof IT and system landscape, market expansion, compliance and the development of new products and asset classes are particularly relevant.
Harnessing the benefits of AI
AI is regarded as a promising game changer within the asset management industry that can assist asset managers in meeting their growth and efficiency goals. On the revenue side, AI can support with market analysis and portfolio optimization. While from an efficiency perspective, use cases are emerging in the context of generating new client-related insights from proprietary data (e.g. from the CRM system).
Larger asset managers currently tend to implement enterprise-wide AI strategies across investments, operations and client-facing functions. These solutions are built on large language models (LLMs) and leverage rigorous internal and external data. Medium and smaller sized asset managers tend to selectively invest in off-the-shelf AI solutions and Software as a Service (SaaS) platforms.
As a result, ensuring comprehensible and trustworthy AI has become a critical priority for organizations. Given regulators’ expectations, asset managers are required to implement proportionate AI governance frameworks – for instance, the FINMA Guidance 08/2024 on Governance and risk management when using artificial intelligence has been published.
Robust infrastructure systems
In today’s complex investment environment shaped by stricter regulations, a push for operational efficiency, and emerging asset classes, asset managers’ operations must be underpinned by robust IT infrastructure. It must seamlessly support the entire investment process from order capture and portfolio management to risk oversight, reporting, and client communication.
While large asset managers rely on fully integrated end-to-end platforms from major providers and leverage in-house IT teams to develop complementary solutions, remaining players turn to alternative approaches that come at a lower price tag. Mid-sized players pursue a ‘best-of-breed’ approach, combining different systems across front, middle, and back office. Smaller asset managers follow a similar path but, due to a lack of dedicated IT teams, are typically reliant on outsourcing and ‘plug-and-play solutions’ from more cost-efficient providers, complemented by manual approaches where gaps exist.
Rising external complexity has the potential to pose new challenges, making integrated solutions increasingly important even for small and mid-sized players. Against this backdrop, asset managers may seek efficiency gains elsewhere to offset higher investments in costlier but fully integrated solutions.
Market expansion and keeping up with regulatory changes
Considering the different legal entity arrangements across Switzerland, the EU and other global markets, organizational structures among different categories of asset managers differ significantly. Large asset managers with legal entities in the EU are able to serve the EU market with a wide spectrum of products and services by making use of the relevant license and corresponding “passport”. Medium asset managers often leverage white label providers in the EU which allows them to more quickly market EU investment funds across member states. Smaller asset managers without EU products are often excluded from distributing investment funds in the EU.
Generally, asset managers should assess market potential in the EU, but also globally, and define their go-to-market strategy including to consider regulatory requirements and the costs and benefits attached to this. Beyond the EU, the Swiss-UK Mutual Recognition Regime has provided more certainty around marketing arrangements between the two jurisdictions, as well as unlocking new market access arrangements for other entities such as private banks.
Considering that organizational arrangements can be complex, especially where they operate in several jurisdictions from a legal entity, fund, and distribution point of view and an effective approach to capturing and managing regulatory change is needed. As a result, it is important that firms implement tools and workflows.
New product types and asset classes
In recent years, new fund vehicles have expanded the available product mix, enabling asset managers to launch products better aligned with investors’ needs. For instance, the Swiss L-QIF has been introduced which is a flexible investment fund vehicle with a shorter time-to-market compared to traditional Swiss products. Other jurisdictions have introduced similar vehicles. In addition, managers are seeking to provide retail exposure to private assets. In the EU and UK, regulatory updates have led to higher market demand and accelerating fund launches.
From an asset class point of view, strategies other than traditional investments often provide higher margins. Many asset managers have already added private markets and other alternative strategies to their investment platforms, while others are still evaluating such options. Adding a new asset class requires regulatory, operational, and technology adjustments. For new fund launches, asset managers should evaluate the fund domicile, service providers, regulatory status, legal structures, target investors, tax aspects, and distribution options.
It is time to act
As the asset management industry evolves, the size of a firm plays a pivotal role in shaping its strategies and responses to challenges. Larger firms leverage their resources to implement comprehensive solutions, while smaller and mid-sized players adopt more flexible and cost-effective approaches.
Regardless of scale, the path to success lies in embracing innovation, navigating regulatory complexities, and capitalizing on new market opportunities. By aligning their operations with these imperatives, asset managers can secure their place in an increasingly competitive and dynamic industry.
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Volker Kang is a Director in Wealth and Asset Management Consulting at KPMG.
