⮚ Investors turn to passives and go digital

The buy-side landscape is becoming more competitive, as passive products continue to cajole investors away from active managers.

Broadridge data shows the share of active funds managed globally fell below 70% for the first time down to 69% as of 1Q 2024 in marked contrast to passive products that now control 31% of long-term assets. ²

Investors are also taking a more digitalised approach to asset allocation.

Whereas previously, retail investors would have asked their local broker or independent financial advisor (IFA) to help them with portfolio construction, nowadays people are turning to robo-advisors and online platforms for advice.

At the same time, investors – both retail and institutional – want fund processes, whether it is subscriptions, redemptions or reporting (I.e. about returns, risk, etc) to be done digitally and quickly, and ideally through an app. This is forcing buy-side firms to move away from legacy technology stacks in favour of more modern systems.

⮚ Cost pressures are not being reversed

While AuM levels have been resilient, the industry’s operating costs have increased exponentially over the last15 years.

According to Boston Consulting Group (BCG), asset managers’ costs have jumped by 80% since 2010, ³ with a lot of this attributable to post-2008 crisis/Covid-era regulations (i.e. AIFMD [Alternative Investment Fund Managers Directive], MiFID II [Markets in Financial Instruments Directive II], Dodd-Frank, DORA [Digital Operational Resilience Act], etc.).

Additionally, investors are taking a hard line on active managers’ fees, especially as a lot of firms are still struggling to beat their benchmarks.

Whereas the average active manager charged 26 basis points (bps) in 2010, this fell to 23 bps in 2023, and few people are betting on this trend reversing anytime soon. ⁴

⮚ New risks come to the fore

The industry is busy tackling new risks, which are having an adverse impact on firms’ costs.

Once considered a marginal issue, cyber-security is now a priority for buy-side institutions of all sizes. This comes as the International Monetary Fund’s Global Financial Stability Report calculated that nearly one fifth of all reported cyber-incidents over the last 20 years have impacted the financial sector, causing $12 billion in direct losses, of which $2.5 billion has occurred since 2020. ⁵

With the emergence of new technologies such as Blockchain and artificial intelligence (AI), cyber-risks are only going to intensify.

Having navigated a succession of black swan events lately, investors have made it abundantly clear that buy-side firms should be allocating more resources to ensuring that their operational resilience is fault-proof during times of crisis.

In addition to investing into their own systems and infrastructure, buy-side firms are also having to conduct detailed risk assessments on their critical third- and fourth-party IT vendors.

⮚ Making for a positive user experience

Buy-side firms are making headway on digitalising client experiences, with 14% of respondents to Broadridge’s survey describing their progress here as being advanced, while half said their progress is intermediate.

However, the gulf between the leaders and non-leaders is stark, with 47% of the former saying their progress on digitalising customer experiences is advanced, versus just 4% of non-leaders.

Sixty-five percent of buy-side firms said they are currently making moderate or large investments into AI with respondents telling Broadridge that they intend to boost spending on the technology by 19.7% over the next two years.

A further 60% of firms added they are currently investing into Generative AI.

Forty-one percent of respondents said they are prioritising investments into AI so as to enhance customer interactions. Through Generative AI or Large Language Model (LLM) tools, firms can answer complex client questions, construct portfolios or even produce hyper-personalised reports for customers.

At Broadridge, solutions such as DistributionAI and Global Demand Model, both of which are powered on next generation AI, are being used extensively by buy-side clients to help them optimise and refine their distribution strategies.

Without making meaningful investments into their digital capabilities, buy-side firms will struggle to win mandates moving forward, especially from the fast-expanding pool of digital native investors.

⮚ Streamlining operations through digitalisation

Digitalisation – if done well – can help firms obtain cost synergies.

According to the Broadridge Survey, 84% of buy-side firms are either making a moderate or a large investment into cloud platforms and applications, and this is fairly evenly balanced across both leaders and non-leaders.

The Broadridge study added that buy-side firms plan to increase spending on cloud platforms and applications by 23.8% over the next two years.

By investing into cloud solutions, buy-side firms can benefit from having extra scalability and flexibility, allowing them to adapt to changing market dynamics and regulations. A firm’s operational resilience can also be strengthened by using cloud technology.

Eight-one percent of respondents to the survey said they are making either moderate or large investments into data analysis and visualisation tools. The study continued that firms intend to boost spending on data and visualisation tools by 20.2% over the next two years.

Breaking down data silos and ensuring that data is well-structured, centralised and easily accessible across the entire business will help firms not just eliminate inefficiencies within their organisations, but it can also reduce the chances of mistakes or errors happening.

An effective cloud and data management strategy will enable firms to optimise their operations, allowing them to make meaningful savings as a result.

⮚ Using digital to get a grip on risk

The industry is taking new risks, such as cyber-crime, increasingly seriously.

The Broadridge survey found that 82% of respondent are making either moderate or large investments into cyber-security technology. Over the next two years, respondents on average said they will increase their cyber-security budgets by 27.7%.

A failure to invest properly into cyber-security measures can increase the risk of being hacked, exposing buy-side firms to financial losses and even regulatory scrutiny, if the authorities conclude that an organisation did not have the appropriate controls and procedures in place.