Close to 40 students in Columbia University’s Financial Investment Group recently joined Barrie Athol, senior director of business strategy for BNY Mellon Investment Management, for a lecture on the changing investment landscape and the future of finance.
In his remarks, Athol focused in on one trend in particular that’s already imposing major changes in the asset management industry: The rise of the individual investor, and the declining prominence of institutional investors. It’s a trend that’s picked up steam in recent decades, as retirement responsibility has shifted almost entirely from companies to employees—with defined contribution plans becoming commonplace. The insourcing of passively managed assets has also led to price compression in the institutional space; and changing demographics and wealth creation in developing markets have created wealthier individual investors.
All told, individuals now account for more than 90% of net organic growth in the asset management industry1. And it’s having a big impact on how large asset managers must operate.
Athol touched on four ways this trend is broadly impacting asset management:
Investment Products: Institutions look for investment strategies to play specific roles within their portfolio. They want specialized, “best-of-breed” asset managers who will beat industry benchmarks. Individuals, however, are outcome driven. They’re looking for investments that will deliver future income with inflation protection. We’re already seeing a shift away from narrow strategies to broad multi-asset, outcome driven strategies.
Investment Advice: While institutions are self-advised in the construction and management of their portfolios, individuals look to asset managers for holistic investment advice and broad portfolio management help. This makes the relationship between asset managers longer-term and more service-oriented. It requires managers to look at an individual’s overall financial wellness, and a focus on helping them reach their investment goals.
Distribution: Asset managers reach institutional investors efficiently through RFPs and bidding processes. The individual investor market, however, is more fragmented, as individuals are targeted through intermediaries (e.g., financial advisors, broker dealers, etc.). It’s far less efficient. And because of this, the use of financial technology tools will play a big role in helping asset managers reach their target audiences. Managers must invest resources to enhance their distribution capabilities and build relationships with intermediaries if they hope to tap into the individual market effectively.
Regulation: Traditionally, institutional investors are viewed as qualified investors, while individual investors are looked at as consumers. Accordingly policymakers are on their way to creating more regulations to protect these consumers. And these regulations may result in higher costs and effect changes to some of the fundamental ways asset managers operate. Navigating these regulatory changes can be challenging for global asset managers, as they face new regulatory frameworks across many countries.
So, what does all this mean for the future of finance and a company that oversees $30 trillion2 in assets? Athol discussed how BNY Mellon is investing in pivoting to increase its focus on individual investors by more effectively reaching them through brand awareness and technology. “In some ways, we almost have to think, ‘what industry disruptions would put us out of business,’ and work backward from there. It’s both scary, and fun,” said Athol.
Being nimble and forward-looking is a huge source of opportunity, Athol emphasized, and BNY Mellon is looking at how to evolve its strategies to adapt to the changing landscape of asset management. “If you disrupt yourself,” Athol said, “you’re a lot better off than if someone else disrupts you.”
1 Casey Quirk Whitepaper, November 2105: “The Roar of the Crowd: How Individual Investors Transform Competition in Asset Management” (page 4).
2 As of September 30, 2015, BNY Mellon had $28.5 trillion in assets under custody and/or administration, and $1.6 trillion in assets under management.