Top Industry Developments in August
Industry Developments
Alternative Investments
Investor Trends
Advisor Trends
Retirement
Brief Summaries of the Headlines
Industry Developments
Asset management industry prioritizes adoption of Generative AI; sustainable investing still a priority despite slower integration of ESG components in portfolios
The asset management industry is navigating significant complexities due to economic, technological and market changes, according to a survey. The survey highlights the increasing role of generative AI in asset management, with widespread adoption for various operational and decision-making processes, including personalized financial advice, market trend analysis, portfolio optimization, and risk assessment.
Asset managers are still prioritizing sustainable investing, with 51% citing it as a key focus and 39% seeing it as a business opportunity. However, their expectations for ESG integration in portfolios have moderated compared to previous years. They now forecast a slower increase, with 27.5% of portfolios integrating ESG components by 2025 and rising to 33.9% by 2027.
The survey also noted a more optimistic outlook on private markets among US respondents compared to European ones. Furthermore, the importance of index providers is expected to grow, with a significant number of managers foreseeing greater reliance on AI-enhanced and customized indexing solutions.
Source: Index Industry Association
Evalueserve Viewpoint: Asset managers need to focus on building AI capabilities to stay competitive in an evolving market. AI can streamline processes, enhance decision-making, and personalize client experiences. Additionally, the shift in focus from ESG may require asset managers to adapt their offerings and comply with evolving regulations. The optimistic outlook on private markets provides US-based asset managers with an opportunity to broaden access to these markets. Lastly, the rising importance of index providers may prompt asset managers to partner with such providers to provide customized solutions with the help of AI.
A persistent gap exists between fund investors’ returns and total fund performance over the past decade, highlighting the impact of market timing errors and the benefits of diversified allocation funds
A study by Morningstar revealed that investors earned a 6.3% per year dollar-weighted return over the past 10 years, which is 1.1% lower than the total returns generated by those funds. This gap is largely due to investors’ timing errors, such as investing just before a downturn or withdrawing funds before a market recovery, particularly highlighted in 2020 during market fluctuations. The study also noted that diversified, all-in-one allocation funds, like target funds, generally allowed investors to capture a higher percentage of total returns due to their automatic rebalancing and encouragement of a buy-and-hold strategy, often used within retirement plans like 401(k)s.
The study also differentiated the investor returns of open-end funds and ETFs, finding slight differences in performance gaps. Interestingly, the study found no correlation between fees and investor return gaps, suggesting that factors like a fund’s simplicity and usage context might play more significant roles in achieving optimal returns.
Source: Morningstar
Evalueserve Viewpoint: This presents an opportunity for retirement recordkeepers and wealth management institutes (such as banks, stock-brokers, advisory firms) to educate investors on investing strategy through various channels such as webinars, podcasts and digital platforms for knowledge sharing. Furthermore, asset managers can expand their product offerings to include diversified options such as target funds. Since fund simplicity plays a significant role in receiving better returns, these firms can create user-friendly investment solutions that are easy to understand to help improve overall outcomes.
Alternative Investments
Financial providers hold $1.4 trillion in alternative assets, expected to reach $2.5 trillion by 2028. Strategic partnerships key for asset managers to tap into retail growth
Alternatives providers perceive a tremendous opportunity to gather retail assets—Cerulli estimates that U.S. financial advisors own $1.4 trillion in less than fully liquid alternative investment assets and projects they will boost this total to $2.5 trillion by year-end 2028. While alternatives providers estimate that just 13% of their assets under management (AUM) is sourced from the retail channel, they expect it to climb to 23% in the next three years.
To capitalize on this trillion-dollar opportunity, alternatives providers and asset managers are increasingly aligning through strategic partnerships. Around 53% of asset managers report they currently rely on such partnerships and 50% of these managers are planning to increase this reliance. While partnerships provide alternative providers with a legitimate avenue to reach retail investors, it is crucial to carefully evaluate potential risks, such as cultural differences, overestimating partners' ability to distribute products, and the compatibility of the brand and investment offerings with advisors.
Source: Cerulli
Evalueserve Viewpoint: The growing shift toward alternative assets will compel firms to adapt. Asset managers may need to invest in expertise and infrastructure to provide and market alternative investments to retail clients, or form partnership with financial firms who specialize in alternative investment solutions to expand their reach. Alliances formed to reach retail investors will need to be carefully selected to mitigate risks such as cultural differences and brand incompatibility.
Private markets forecasted to hit $65 trillion by 2032, capturing 30% of AUM, amid rising demand for institutional and retail clients towards higher returns despite lower liquidity
According to analysis by Bain & Company, private markets AUM is expected to grow at a CAGR of 9-10% to reach $65 trillion by 2032, accounting for 30% of all AUM. This growth is attributed to a shift to private markets as returns from public markets diminish. The report indicates a significant increase in demand for alternatives from institutional investors. Retail investor involvement is also expected to rise, with their share of AUM expected to rise from 16% in 2022 to 22% in 2032, driven by their need for diversification and higher returns despite lower liquidity.
Asset managers are responding by developing products like intermittent liquidity offerings and interval funds tailored for retail clients. Major firms such as BlackRock, Goldman Sachs and Aperio are expanding their private market ETF offerings, reflecting a trends towards blending traditional and alternative asset management and focusing on specialized products for HNW clients to achieve scalability.
Source: Investment News
Evalueserve Viewpoint: The projected growth in private markets provides an opportunity for asset managers to develop sophisticated and personalized products to cater to the rising demand from both institutional and retail clients. Products such as liquidity offerings, interval funds and private market ETFs may become more widespread as these firms expand their offering.
Investor Trends
European investors saved over £77.4bn since 2011 by choosing index funds over active funds, highlighting cost efficiency and persistent expense ratio gap
A new survey by Vanguard found that European investors have saved over £77.4 billion in investment costs since 2011 by opting for index funds, including ETFs. This highlights the cost efficiency of index funds compared to actively managed funds.
The analysis compared the assets in indexing with the expense ratios of active and index funds. Despite a decrease in expense ratios over the past 12 years, the difference remains substantial: 1.05% for active funds versus 0.21% for index funds.
Stephen Lawrence, head of indexing research at Vanguard, emphasized the benefits of index funds, including low fees, better-than-average performance, and competitive price pressure. While skilled active managers exist, their benefits are often offset by higher costs. The researchers predict that low-cost funds, both active and index, will continue to be crucial for investor portfolios, while high-cost funds will become less relevant.
Source: Funds Europe
Evalueserve Viewpoint: The savings from index funds highlight the cost efficiency of these funds. Asset managers can reassess their index fund lineup and promote these strategies can provide through their marketing messaging. Moreover, firms can educate clients about the cost-benefit trade-off between active and passive funds through various channels, such as articles, videos, and workshops, to capitalize on the enduring popularity of cost-effective solutions.
Predicting large wealth transfers may disappoint younger generations as older generations are less likely to leave wealth; passing down knowledge and open communication key to success
A study by Northwestern Mutual reveals a mismatch between younger generations' expectations of inheritance and older generations' plans to leave one. While 38% of Gen Z and 32% of Millennials expect an inheritance, only 22% of Gen X and 28% of Millennials plan to leave one.
Among those planning to leave an inheritance, 68% say it's a top financial goal, with younger generations prioritizing it more. Most plan to leave it to children and grandchildren. However, communication about inheritance is lacking, with many parents not discussing it with family. Around 40% of Boomers and 65% of Gen X lack a will.
Overall, while a large wealth transfer is predicted, younger generations might be disappointed due to older generations' plans. Leaving financial knowledge could be an even more valuable asset to pass down. Open communication about money and goals is crucial for successful intergenerational wealth transfer.
Source: PRNewswire
Evalueserve Viewpoint: The mismatch in expectations of younger generations and the likeliness of older generations to leave wealth provides an opportunity for wealth management firms to position themselves as partners in facilitating open conversations among families to help avoid disappointment among younger generations, and potentially help older generations establish clear financial plans for the transfer and management of their wealth. Firms can also utilize this opportunity to impart financial literacy through financial advisors and ensure that younger generations are financially prepared for the future.
Americans now view $2.5 million as wealth standard across generations, up from previous years; financial planning emerges as essential for achieving goals
Charles Schwab's 2024 Modern Wealth Survey reveals that Americans now believe it takes an average of $2.5 million to be considered wealthy, up slightly from previous years. This perception varies by generation, with Boomers having the highest threshold and younger generations having lower ones. The average net worth required for financial comfort is $778,000. Californians have the highest threshold for wealth, while respondents in Atlanta, Chicago, Houston, Phoenix, and Dallas have lower thresholds.
Around 21% of Americans believe they will be wealthy, with younger Americans being the most optimistic. However, fewer than one in five Americans feel they are currently on top of their finances. Americans generally give themselves passing grades for their personal finances, especially those with a financial plan. The survey underscores the importance of financial planning, noting that those with a plan feel more confident about their financial future.
Source: Charles Schwab
Evalueserve Viewpoint: The rising wealth expectation can lead to an increase in client demand for more robust financial planning services that spans clients’ entire financial lives, including tax and estate planning, healthcare and more to achieve the higher wealth goals. To capture this opportunity, firms may engage with clients with varying thresholds, which makes it important to provide personalized services to meet demands.
Regulatory
Advisors struggle as unclear definitions of “performance” in the SEC Marketing Rule lead to significant compliance challenges and increased SEC scrutiny
A study by the CFA Institute and Investment Adviser Association found that the biggest challenge for advisors in complying with the SEC's Marketing Rule is determining what constitutes "performance" that must be presented on a net basis.
The lack of a clear definition has led to confusion among advisors, as they are unsure whether yield, contribution to return, attribution, and other metrics should be considered performance. This uncertainty can lead to compliance issues and potential SEC scrutiny.
Other challenges include calculating investment-level net returns, restricted use of hypothetical performance, determining what is considered "extracted performance," and determining which fees to use to calculate net returns.
Analysis of Form ADV filings show that larger advisors are more likely than smaller ones to engage in advertising practices allowed under the rule, such as including performance results and hypothetical performance.
The CFA Institute report provides firms with a benchmark for their compliance practices, which is particularly important given the lack of interpretive guidance from the SEC.
Source: ThinkAdvisor
Evalueserve Viewpoint: The lack of SEC guidance necessitates the need for advisory firms to enhance their compliance processes, seek expert advice on regulatory interpretations, train staff accordingly and closely monitor industry practices to ensure alignment with best practices. Advisors that can effectively navigate the complexities of the rule may be able to see better results.
Retirement
Women face stark retirement challenges with significantly lower savings than men, attributable to the gender pay gaps and conservative investment strategies
A new study by Prudential reveals that women face acute retirement challenges with less than a third the median savings of men. Gender pay gap is attributed to be the main reason for such retirement savings shortfall for women. In America, women today still earn roughly about $0.80 cents to the dollar compared to men and are nearly three times as likely to delay retirement due to caregiving duties. And when it comes to investing for retirement, women tend to be more conservative in their approach, thus hampering long-term performance.
In addition, women are living longer than men on average by six years which makes it fundamentally more challenging for them. Many women feel less financially secure because they often spend time out of the workforce to raise families, which can lead to lower pay and fewer working years, resulting in smaller 401k balances.
Source: Investment News
Evalueserve Viewpoint: Retirement providers could look to target women inciting them to enroll into retirement savings products and other professionally managed account solutions. This will be a win-win situation for both as firm gets more AUM to manage generating additional stream of revenues and women are able to build a large retirement corpus with professional guidance.
Automatic enrolment and escalation of contribution rates show less effectiveness in 401(k) plans, with high opt-out rates and job changes undermining potential benefits
A recent paper published by National Bureau of Economic Research (NBER) revealed that two of the most widely used mechanisms to improve participation in 401(k) plans: automatic enrolment and automatic escalation of contribution rates – may be much less effective than earlier estimated. Previously, auto enrolment was credited with boosting savings rate by 2.2% of income, but the new paper puts the figure at just 0.6%. When combined with auto escalation, the rate goes up to 0.8%. Primary reasons include workers in plan without automatic features tend to choose higher savings rates over time, so the benefits of those features might be relatively small.
The second reason is that workers opt out of auto escalation at a surprising high rate, as high as 60 percent at the first year and even higher thereafter. By the third year, only 29 percent of workers are in the default contribution rates set by auto escalation. The other two reasons have to do with leaving jobs. People often quit before the matching contributions provided by employers are fully vested, which has the net effect of reducing their retirement savings. Moreover, 42% of 401(k) balances are taken as cash outs when people leave one employer.
Source: Investment News
Evalueserve Viewpoint: DC Consultants and Retirement Providers are actively promoting auto-escalation and auto-enrolment as default features for participants. With time, as lesser benefits are observed, plan sponsors may stop opting for these functionalities and focus on improving retirement awareness of employees through other mediums of knowledge sharing (such as dedicated financial awareness portals, webcasts / podcasts, advisor engagement etc.). AWM firms who build robust financial wellness solutions could monetize their digital platforms on a per participant fee basis (such as $1 per quarter per participant) to promote retirement awareness.
We hope you find these interesting and insightful. If you want to know more about our Asset and Wealth Management offerings, check out our webpage below.
Sales Trainee @L'Oréal India PPD | MBA (Marketing & Operations) @Thapar School of Management
5moVery informative
Delhi University
6moThe usage of artificial intelligence is too advanced and advantageous that nobody can beat and employment nt opportunities are also increased due to it 🔥