Anticipating the seismic shift in asset management

A colleague and I recently had a debate about who would win in the race to be the disruptors in the asset management industry: the large players, the small boutiques or firms from outside the market. 

For some time now, commentators have anticipated a seismic shift in what has long been an ultra-conservative business, but as yet the tectonic plates are straining but not moving.

One reason for this inertia is that there are currently substantial barriers to entry in the asset management industry, so the advantage to the incumbents is considerable. The costs and challenges associated with regulation and pressure on fees are reducing profitability and making market entry a less attractive option compared to many other lines of business. For a firm with no experience in asset management, it is a difficult industry to break into.

In this sense, it would be easier for one of the incumbents to unsettle the industry, but will it be one of the large players or a small firm? There is something of a polarity in asset management at present, with a reducing number of investment powerhouses and a proliferation of specialist firms like Woodford Investment Management or Nutmeg. The middle ground has largely been eroded over the last ten years.

The bigger, more established firms generally have the global reach, the investment power, the strong brand and the experience, so should be well placed to lead change and disruption in the industry. On the other hand, the small boutique firms should have the agility and more freedom from the shackles of legacy systems with which to innovate; but do they have the resources and the tenacity to see through substantive change?

One of the biggest disruptors at present, it might be argued, is Vanguard – cutting fees to the bone on its passive funds. They are offering a cheaper and more transparent service in the US at the moment, but it’s making the industry globally think about what might happen in their market.

My view is that the disruption is more likely to emerge from the ranks of the smaller players. Despite their lack of resource and market power, I see their potential as innovators positioning them to lead the charge. The large incumbents have been around long enough to make their mark, yet their size and lack of agility has hampered them to date.

One thing is for sure: the need for change in asset management is undeniable and the plates will buckle sooner rather than later.