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Easing the pressure & cooling the heat
Easing the pressure & cooling the heat
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Easing the pressure & cooling the heat

06/03/2017

A host of new challenges will impact our industry over the next decade. Mitigation of cost pressures and dealing with climate change risk are high on the agenda

Easing the pressure

 

Active asset managers are facing huge pressures on fees as low-cost alternatives, such as index tracker funds, proliferate. Fees are likely to suffer further compression following regulations such as MiFID II and PRIIPs. In parallel, smaller players and challengers will struggle as the market is likely to remain dominated by the largest firms.

Cost savings will be necessary if firms are to meet the challenge of fee pressures. This could be achieved through streamlining technology systems to increase business efficiencies. A number of asset managers have multiple business units operating in silos with separate IT architectures. The cost of running these systems in tandem is very high. Firms should look towards simplifying their operations, and integrating their IT into a centralised system.

Fee pressure is also an opportunity for managers to test innovative and disruptive technology. Many technologies such as blockchain are capable of bringing more efficiency and eliminating manual processes, allowing staff to concentrate on high value tasks.

This will ultimately cut asset managers’ costs and help ensure value for money at the consumer level. Such cost rationalisation will help retirement schemes meet their liabilities in this zero interest rate world, at a time when their stakeholders are increasingly living longer.

Simplifying the buying process for investors is also being explored by market participants. Today’s fund distribution business models need to be streamlined if asset management firms don’t want to be outplayed by a new wave of players leveraging in a growing technological environment. It’s important to recognise that ordinary investors’ expectations have shifted severely, and the technology behind new acquisition channels needs to be created or improved. This includes enabling investors to allocate capital via technology devices, or Apps, which allow fund investing to be made with ease.     

 

Cooling the heat

 

Emerging challenges such as climate change risk cannot be ignored but many firms are still unprepared. The Stern Review, a UK government report released in 2006, estimated that the cost of climate change to countries’ economies could be anywhere between 5% and 20% of GDP.

Governments have taken note by engaging in initiatives such as the Paris Agreement, but also through launching regulatory taskforces. The Financial Stability Board (FSB), for example, has established a body to specifically create climate-related financial risk disclosures.

Some countries and international organisations have been particularly proactive. For instance, under article 173 in France, it is now mandatory for institutional investors to report on the weight of climate change risk in their portfolios. The United Nations’ Principles for Responsible Investment (PRI) have been signed by more than 360 institutional investors with USD 24 trillion in assets. They call for governments to enact carbon pricing that “helps redirect investment commensurate with the scale of the climate change challenge” and develop plans to withdraw subsidies for fossil fuels.

Efforts are being made to decarbonise the world economy, and it could be argued that companies which are heavily reliant on certain fossil fuels are likely to face existential threats to their businesses. Some forward-thinking US investors are divesting from these companies, not necessarily because they have a green agenda, but because they recognise the investment risks of being exposed to such companies over the long term.

 

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