Asset Management Looks to AI to Fix its Profitability Problem
I wish them good luck, as they have high expectations for new technology.
Asset management has a profitability problem that it has high hopes AI will fix.
That’s a tall order for a new technology like AI to fix, and I hope asset managers have a “Plan B."
So here’s the problem. While assets under management globally are up 12%, the industry is being dragged down by a revenue increase of 0.02%, with costs rising 4.3%. Add these factors up and asset management profits declined by 8%!
To their credit Asset Managers are mostly “all-in” on AI and are rapidly adopting solutions. A full 72% of asset managers recognize that GenAI is a top strategic priority.
Let’s look at how they hope to pull this off with the Three P’s!
👉TAKEAWAYS
The Three P’s: productivity, personalization, and private markets.
🔹 Productivity:
Asset managers are leaning heavily on estimated efficiency gains of 15-20% across their biggest expenses, which are Sales, Investment Management, trade Execution, and Operations.
See chart featured in the image above. I question whether these large efficiency gains are reasonably attained by GenAI which is essentially new technology. Has any new technology in recent history paid out so quickly?
🔹 Personalization
AI can enhance personalization by expanding the ability to create and manage customized portfolios at scale. In addition, it makes it possible to provide a more highly tailored customer experience, from acquisition through retention, at scale.
Yes, but the assumption is that clients will pay the same or more for this personalized service. It’s clear that clients (you and me) will all know that this personalization is AI-generated, and we’ll expect it at a price that is cheaper than a human, not more.
🔹 Private Markets
AI can enhance the efficiency of private-market deal teams by automating repetitive tasks and synthesizing data for enhanced decision-making. This means greater efficiency and speed in due diligence and analysis surrounding deals.
-Same comments as above. How long will this take to get the GenAI up to deal standards? Remember, the deal docs fall under regulatory purview.
Asset managers clearly recognize GenAI as a strategic priority but look at the bottom chart, do you see the difference? That is for GenAI capital investment which shows asset managers aren’t “putting their money where their mouth is.”
👊STRAIGHT TALK👊
The Asset Management industry will need much more than AI can provide to dig itself out of its revenue hole.
An interesting thing is that if you look closely at Exhibit 3, you’ll see that AI won’t solve many of their more fundamental revenue problems.
Investors are shifting to products with lower fees, including passive funds, and are widely in an environment of compressed fees thanks to fintech!
No amount of AI is ever going to change these factors, and by focusing AI on cost reduction, asset managers are making a big bet on AI “hopium” and efficiency gain projections that may never be realized.
Is this reasonable? Frankly, given how new AI is, I don’t think it is.
Asset managers need to start using GenAI immediately. In a few brief years, AI use will separate asset managers into the digital haves and have-nots, and I pity the have-nots.
Expecting GenAI to fill its 8% profitability drop, however, is wishful thinking.
Thoughts?
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