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The investment management industry is currently facing significant disruptions due to geopolitical tensions, technological advancements, and evolving client behavior. The post-war liberal economic order, which has dominated global markets for the past 80 years, is now experiencing uncertainty due to multiple shifts, including those in economic policy. Additionally, breakthroughs in artificial intelligence are accelerating changes across industries and daily life. Furthermore, changes in client behavior are compelling managers to embrace private market investing, which requires adopting a still maturing operating model and technology stack. These pressures necessitate, with urgency, that money managers possess the inherent flexibility to adapt to current challenges and be prepared for future ones.
To further explore this topic, we are introducing a series on how to leverage transformation to engrain enterprise resilience into an organization’s DNA. Giving recognition that readers will come from small to large firms, and at various levels of influence and functions, not all suggestion may be applicable, but we hope this series will broaden your view of transformation and provide some insights.
Enterprise Resilience starts with the front-office and refers to an organization's ability to continuously adapt and thrive amidst market fluctuations and global uncertainties. This capability is led by value creation strategies designed to maintain a competitive advantage within a defined market timeframe. Resilience applies to all functions of an organization: front, middle, and back-office. In a recent post regarding Organizational Health, McKinsey mentions an apropos question that firms should ask themselves: "Are we able to continuously adapt and renew in the rapidly changing external landscape?".
Understanding the alpha generation process is the North Star of our industry. If we are going to plan to build resilience through transformation, we will need to get a grounded perspective of how firms are expanding value creation in the face of disruption. In this post, we wlll cover some archetype examples and secondly, we will propose an Enterprise Resilience Framework that will be fully defined in future posts.
Enterprise Resilience starts with the front-office and refers to an organization's ability to continuously adapt and thrive amidst market fluctuations and global uncertainties.
Money managers will select their strategy in alignment with several factors including gaps in current product offering, investment philosophy, client feedback, and their view of the markets. These capabilities are comprised of new product development, M&A, building scale, and many more. We will start with value creation archetypes that generate alpha, and cover strategies such as talent management, operational improvements, and technology innovation in later posts. Starting with a manager's core competencies will ensure that all of the downstream value chain solutions are aligned with the front-office investment strategy. As you are reading these examples, keep in mind the potential operational and technology challenges that may arise with each archetype.
Expansion of Value Creation: This refers to the launch of new products from the ground up. Trends of this certainly include launching private capital products as investors seek risk diversification and higher returns. We should also consider the industry's transition from mutual funds to ETFs, as a mechanism to manage fee compression. Finally, we have also seen managers start to offer products that offer exposure to fixed income markets, vehicles to gain access to foreign markets, and retail tax optimization products.
Value Creation through Acquisition: We have seen examples of managers entering new markets through M&A. Some have fine-tuned their ability to efficiently integrate acquired firms. They utilize an agile digital core and are experienced in maximizing operational efficiencies. M&A can also be utilized as an impetus for a broader transformation, but we have seen firms simply plug-and-play the acquired investment platform to the existing eco-system, without platform consolidation or workflow optimization. Either way, they gain access to value in the form of expertise, new clients, and innovative technologies that they want to build on.
Value Creation by Regional Expansion: The Financial Times reports on the growing dominance of American asset managers in Europe, highlighting their ability to outcompete European rivals due to scale, diverse product offerings, and technological advantages. US firms like BlackRock and Goldman Sachs have secured major pension fund mandates in the UK and Europe, benefiting from trends such as the shift to low-cost passive investing, private markets, and exchange-traded funds (ETFs). Over the past decade, US asset managers have doubled their assets under management in Europe, reaching $4.5 trillion by September 2024. We will keep an eye on this and other global trends as the year develops.
Value Creation through Optimization of Distribution Channels: In 2025, the global ETF market is projected to continue its expansion, potentially reaching US$30 trillion by 2029. While specific AUM growth numbers vary across different reports, the general consensus points towards a significant increase in assets under management (AUM) for ETFs, driven by factors like rising investor interest, new product innovation, and expanding distribution channels.
In the private markets space, we are seeing managers pivot and evolve their distribution channels in response to market intrinsic challenges such as product complexity, platforms that are optimized for public products, and operational challenges that limit scale. We see opportunities for AI and other types of tech innovation to bridge these gaps.
Value Creation through Scale: In the wealth management space, some firms seek to increase revenue by lowering fees to attract new customers and rely on volume to generate greater revenue. This has also been done heavily through M&A. At the center of building scale is your Digital Core. This means that tech innovation and modernization can be required to build exponential scale.
Value Creation through Strategic Partnerships: In recent months we have seen a flurry of firms form partnerships to leverage the expertise of existing players in the private markets. Here are some recent notable examples, including partnerships with the goal of offering private products to retail investors. There are multiple challenges posed by cross-firm collaboration including cybersecurity, compliance, and allowing for efficient collaboration.
This is the bedrock of the business more than an archetype or trend. The phrase "run the bank, change the bank" comes to mind as second nature in the banking industry. For the purposes of this conversation, it would be more accurate to say, “run the enterprise, change the enterprise." Effectively, this is the ability to walk and chew gum at the same time. Running the enterprise includes growing the business through existing products, client retention, and the management of risk for live mandates. Firms need to ensure that they are staffed appropriately for change and BAU occurring simultaneously.
Now that we have an idea of the some of the challenges we are up against, let us lay the groundwork for a solution. Transformation can be a one-time change for an organization, followed by an indefinite period of maintaining the status quo. Alternatively, it can be an opportunity to embed long-term resilience characteristics within the enterprise. Considering the examples above and the holistic challenges they present, we propose a framework to set organizational goals that enable transformation to foster resilience. In this model, value creation strategies are supported by capabilities in four Resilience Pillars: Human Capital, Cost Optimization, Operational Efficiency, and Enterprise Risk Management. These pillars rest on the Digital Core Foundation and depend on it for enablement. The entire enterprise, including these pillars and foundation, must be aware, aligned, and actively working to support the defined resilience strategy. Future posts will delve deeper into defining these pillars and outline how they can support enterprise resilience.
In summary, this series will explore the broader perspective of transformation and its role in building resilience. Traditionally, transformation has been associated with cost reduction, outsourcing, platform consolidation, and operational improvements. However, achieving enterprise resilience requires a holistic and forward-looking approach. Instead of focusing on the destination, we will shift our attention to building the vehicle for our journey.
Mark Aguilera
CEO and Head of Advisory Practice
TorreBlanc
