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Regulatory changes and digitization have had a major impact on the profit margins of asset management companies in the U.K.
Some leading asset management companies are taking the offshore route to optimize costs similar to that of the financial services industry
Robo-advisory is gaining popularity among the new generation of investors
Authorized funds in the U.K. operating at an Asset Under Management (AUM) of nearly GBP 900 Billion in June 2015 has since seen major outflows due to a combination of regulatory uncertainty, volatile markets and macroeconomic pressures. Assets in this industry have fallen by nearly a fifth (GBP 200 Billion) over the past year. And with the Brexit debate raging on, the U.K. asset management industry is feeling the pinch even more. Regulatory changes such as the Markets in Financial Instruments Directive (MiFID) II and the proliferation of technology-led products and platforms have further compounded the problem. Asset managers are trying hard to avert their top-lines and bottom-lines from sinking further. A Mckinsey report states that asset management companies are set to fall by a third in the next three years due to an expected plunge in asset class returns, regulatory changes, intense competition and digitization.
But there’s one surefire way for asset managers to overcome these challenges. They can follow in the trail of the financial services industry and explore cost-efficient options via the offshore route. A few leading asset management companies have already adopted the offshore channel and are optimizing their back office and core operations’ cost. Analytics and automation have been the key leveraging factors here. For front office, many are setting up offshore research centers or outsourcing to specialist financial researchers. Such measures have not only brought down costs, but have also facilitated quality standards across the global operations of asset management companies.
In recent years, robo-advisory services have also drawn significant attention in the asset management industry. According to an AT Kearney report, assets invested through robo-advisory are likely to surpass 5.5 percent of total assets by 2020 from current levels of less than 1 percent. By leveraging robo-advisory services, asset managers can cater to the next generation of investors. Some of the biggest names in asset management have already set up their robo-advisory arms and seen a significant impact in the last one year. The target segment in this category are small investors who invest anywhere between GBP 3K and GBP 30K in the short or long term.
However, there’s a downside to robo-advisory services. As the fee charged for these services is much lower than most financial advisors, it can make a dent in the revenue of asset management companies. And to top it all, customers may miss the personalized touch of a human advisor who can assuage their fears when the markets fluctuate!
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