Digitisation and Fintech: The Asset Management Industry’s Fight for Survival and Transformation
The asset management industry faces imminent consolidation, with 16% of firms at risk by 2027, driving the urgent adoption of AI, blockchain, and fintech solutions to enhance efficiency, diversify products, and meet evolving client demands amid rising costs, regulatory pressures, and cybersecurity challenges.
The asset management industry stands at a critical crossroads, driven by relentless technological advancement, mounting client expectations, and escalating competitive pressures. As the sector grapples with rising costs and the looming threat of consolidation, digitisation and fintech innovation have become not just competitive advantages but survival imperatives. According to PwC, 16% of asset managers are at risk of closure or acquisition by 2027, double the historical rate. The firms that succeed will be those that strategically harness AI, blockchain, and advanced analytics to transform operations, diversify offerings, and deliver seamless client experiences.
The Rise of Fintech: Shaping the New Asset Management Landscape
Fintech’s penetration into asset management has been swift and transformative. Over the last decade, technological tools have permeated every aspect of financial services, compelling asset managers to enhance efficiency and diversify their products to remain competitive. The urgency is palpable: 23% of operations costs are now spent on outsourcing, yet operational inefficiencies persist, particularly for smaller firms that struggle to keep up with the pace of technological change.
Client expectations are evolving just as rapidly. A PwC survey found that nearly 40% of institutional investors are planning to invest in tailored indexing products, signaling a shift toward more personalised investment solutions. On the retail side, the trend is even more pronounced: 49% of millennial and Gen Z clients are already working with a second investment firm, and 27% are likely to switch firms within the next 12 months, according to a J.D. Power survey.
The message is clear: asset managers must offer improved terms, flexible options, and seamless digital experiences to retain and grow their client base. However, the complexity of integrating new technologies into legacy systems remains a significant hurdle. Tech spending is a major contributor to operating expenses, and firms are under pressure to ensure that these investments translate into improved financial outcomes.
Operational Challenges and Digital Solutions: Bridging the Gap
Asset managers face several key operational challenges, from improving investor accessibility to addressing cybersecurity risks and streamlining administrative processes. Here’s how technology is stepping in to provide solutions:
AI-Powered Customer Interactions: Generative AI is streamlining customer onboarding and relationship management. AI chatbots can now handle the majority of straightforward customer inquiries, reducing labor costs and improving efficiency. The challenge lies in ensuring these AI solutions can handle a wide range of use cases without frustrating clients—a critical factor in adoption.
Blockchain and Tokenisation: Distributed ledger technology (DLT) is poised to revolutionise asset management by democratising access to new asset classes. Blockchain-based solutions enable fractional ownership of traditionally illiquid assets, such as real estate and private equity. Platforms like Arrived, which allows fractional investment in rental properties, exemplify the potential of this technology.
Enhanced Reporting and Transparency: Clients demand greater transparency and real-time insights into their investments. AI-powered analytics and robust reporting tools are helping asset managers meet these demands. The need for transparency is underscored by a Plaid study, which found that 76% of clients trust financial firms more when privacy practices are clearly explained.
Cybersecurity: A Growing Threat in the Digital Age
As asset managers embrace digitisation, cybersecurity risks loom large. Data breaches, fraudulent transactions, and compromised investor information can have devastating consequences. Firms are increasingly turning to multi-factor authentication, secure portals, and AI-driven monitoring tools to mitigate these risks.
The shift away from email communication toward secure portals is critical. Monitoring software that tracks client interactions, data requests, and login patterns is becoming standard. For internal operations, credentialed workplace platforms are essential to safeguard sensitive information and maintain regulatory compliance.
The stakes are high: a recent RSM US report estimates that $5.4 billion per year is spent on compliance in the asset management industry. As the regulatory landscape grows more complex, firms must invest in technologies that automate and streamline compliance processes.
AI: The Engine Driving Efficiency and Innovation
Artificial intelligence is rapidly becoming the backbone of asset management operations, from data analytics to portfolio management. AI-driven tools are helping firms process massive datasets, identify correlations, and generate actionable insights. Here’s where AI is making the most impact:
Data Analytics and Processing: AI-powered data scraping and cleaning tools are improving the accuracy and efficiency of data analysis. This is particularly valuable for identifying investment opportunities and managing risk. AI can process vast amounts of data, revealing patterns and insights that would be impossible for human analysts to detect.
Sales Intelligence: AI is enhancing sales processes by automating outreach, providing upsell recommendations, and identifying new prospects. Tools that integrate AI with CRM systems can improve the efficiency and effectiveness of sales teams, driving revenue growth.
Portfolio Management: AI is aiding portfolio managers by surfacing unexpected correlations and generating forecasts based on alternative datasets. In credit strategies, for example, AI models are being used to predict default probabilities with greater accuracy, helping firms manage risk more effectively.
As AI adoption increases, firms must strike a balance between automation and human oversight. Regulatory pressures and the need for accountability mean that human decision-makers will still play a critical role in AI-driven processes.
Fintech Trends for 2024: A Glimpse into the Future
Looking ahead, several fintech trends are set to shape the asset management industry in 2024 and beyond:
Diversified Asset Classes: New technologies are enabling asset managers to offer a wider range of investment options, including cryptocurrencies, private assets, and fractional ownership of real estate. A Grant Thornton survey found that 55% of CFOs are exploring AI applications to expand their product offerings.
Investor-Manager Relationships: Technology is redefining the relationship between investors and asset managers. Clients expect quick, chatbot-driven responses for basic queries, while reserving complex discussions for human advisors. Bridging this gap will be crucial for firms looking to maintain client loyalty.
Distributed Ledger Technology: Blockchain and tokenisation are poised to transform fund distribution and administration. By automating processes through smart contracts, firms can reduce costs, improve transparency, and speed up transaction settlements.
Real Estate’s Evolving Role: Despite ongoing challenges in commercial real estate, the asset class remains a valuable component of diversified portfolios. AI, sensor technology, and platform integrations are enhancing the management and valuation of real estate assets, offering new opportunities for investors.
The Road to 2030: Asset Management’s Digital Future
By 2030, the asset management industry will be unrecognisable compared to today. AI-driven automation will handle many back-, middle-, and front-office tasks, freeing human advisors to focus on innovation and client relationships. Clients will have greater control over their portfolios, with AI-powered tools enabling real-time adjustments and personalised strategies.
Distributed ledger technology will facilitate the tokenisation of a wide range of assets, improving liquidity and access for investors worldwide. As a result, firms that adopt blockchain and other fintech solutions will gain a competitive edge in an increasingly crowded market.
However, the road to this digital future is fraught with challenges. Regulatory burdens, cybersecurity risks, and the high cost of technology adoption will test the resilience of asset managers. Firms that fail to adapt risk being swept up in the wave of consolidation predicted by PwC.
M&A and Private Equity: A Landscape in Flux
Consolidation is already reshaping the industry. Since 2021, M&A deal values have consistently exceeded $50 billion annually, although deal counts fell from 470 in 2022 to 356 in 2023. High interest rates have slowed dealmaking, but a backlog of potential transactions could drive activity later in 2024.
Private equity (PE) investors remain active in the sector, attracted by the mature, client-rich profiles of asset management firms. In 2023, PE deal values in asset management reached $94.8 million, nearly triple the median deal size in 2022. As firms seek to enhance their digital capabilities, PE-backed buy-and-build strategies are likely to proliferate.
The asset management industry is at a tipping point. The forces of digitisation, fintech innovation, and client demand are reshaping the landscape. Firms that embrace these changes will thrive, while those that hesitate risk extinction. At LupoToro Group, we believe that strategic adoption of AI, blockchain, and advanced analytics is the key to navigating this transformation.
The future belongs to those who can combine technological prowess with human expertise, delivering personalised, transparent, and efficient services in a rapidly changing market.
