How Can AI Help Asset Management Firms Survive the Shift to Passive Investing?

Why Are Asset Managers Losing Money Despite Managing $119 Trillion in Funds?

The 2024 Global Asset Management Report highlights an 8.1% drop in industry profitability despite record assets. Learn why BCG experts argue that adopting AI for productivity, personalization, and private markets is essential to overcoming rising costs and fee compression. Read the full analysis below to discover the “Three Ps” of AI implementation that can reverse the current profitability slump and future-proof your firm against systemic industry pressures.

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In 2023, global asset management firms collectively were financial stewards of approximately $119 trillion in investor funds. Yet overall profitability decreased by 8.1%, raising concerns about the future health of the industry. Boston Consulting Group professionals undertake a thorough examination of the asset management sector in this detailed yearly report; they emphasize the challenges firms face and how they must adopt AI technology into their models. Investors, fund managers, and financial executives seeking an informative assessment of the future of asset management will find this an authoritative analysis.

Take-Aways

• Asset managers face a challenging environment of reduced profitability brought on by systemic forces.
• Firms should apply AI technology to help alleviate the financial pressures the industry faces.
• AI can also deliver efficiency and customization across the asset management ecosystem.

Summary

Asset managers face a challenging environment of reduced profitability brought on by systemic forces.

Global asset managers are grappling with the challenges of a rapidly transforming industry. In 2023, they saw a significant 12% increase in the value of assets under management from 2022. While that overall turnaround is impressive, other numbers paint a different story: Firm revenues expanded only 0.2% in 2023 while expenses increased by 4.3%, and this combination proved negative for profitability, which fell by 8.1%.

“In the face of these pressures, asset managers will need to rethink the way they operate in order to maintain the growth and profitability of past years.”

With this mixed set of financial metrics, financial stewards face several drivers shaping the current and future landscape of asset management:

• Sluggish revenue expansion has become far too dependent on market value growth. From 2006, market gains have accounted for 90% of revenue.
• Investors continue to move money from actively managed funds into passive funds. For example, in 2023, investors poured 70% of their assets into passive vehicles, compared to 57% in the period from 2019 to 2022.
• The industry is experiencing price contraction. In seeking lower fee offerings, investors moved $1.3 trillion into money market funds and $200 billion out of equity funds.
• Since 2010, costs have skyrocketed 80% and are growing at a 5% compound annual growth rate.
• Despite asset managers’ efforts to bring more investment vehicles into the market, a little more than just one-third of all mutual funds started in 2013 were still around in 2023.

Firms should apply AI technology to help alleviate the financial pressures the industry faces.

Financial managers must focus on the “three Ps — productivity, personalization, and private markets,” for which they can use artificial intelligence (AI) solutions.

“Waiting is not an option when it comes to investing in AI. The technology is rapidly developing, and asset managers that do not start their journey now risk being left behind.”

From the productivity perspective, asset stewards can apply AI to automate processes. For example, investment teams can use AI to analyze and disseminate data quickly, which would streamline operations and facilitate more informative decision making on asset allocation. With AI delivering greater efficiency, overall costs for firms can decline significantly.

AI can also deliver efficiency and customization across the asset management ecosystem.

Relative to personalization, AI can contribute in the sphere of “customized portfolios.” AI can emphasize theme-based and curated investment choices, which allows managers increased flexibility in providing clients with an expanded range of investment options. AI can expand a firm’s ability to offer tailored investment solutions to more clients, rather than the traditional model of only customizing for a select few clients.

“Improved personalization can facilitate the development of products tailored to the unique needs of customers, enhance the customer experience, and enable asset managers to distinguish themselves effectively from competitors.”

For private markets, AI can offer asset managers a data analytics tool that can deliver efficiency gains during the due diligence process of strategic mergers and acquisitions. Experts indicate that using AI can reduce the time dedicated to due diligence by as much as 30%, particularly in developing investment committee memos and other documentation.

“AI is poised to transform the landscape of asset management, marking the beginning of a new era of innovation and efficiency. The AI journey will take several years and require significant commitments and investment.”

AI will prove a transformative tool in achieving success; however, managers must adopt this technology rapidly. Firms willing to invest in these resources now will gain an important competitive advantage.

About the Author

The Boston Consulting Group is a leading global consulting firm.