How asset managers can create strategic distance with technology

Asset managers are investing more in technology but not necessarily with an optimal strategy. These investments have been growing by approximately 6 percent per year, according to McKinsey’s 2021 Global Asset Management Survey. Most asset managers focus their technology investments on coping with complex legacy technology estates that are increasingly expensive to maintain. But asset managers are more likely to build resiliency and meet today’s challenges if they pursue new efficiencies in maintenance spending—for example, moving on-premises technology to the cloud—and use the freed-up resources to invest in revenue growth opportunities.

Besides the cloud, the most promising technologies involve artificial intelligence (AI) and automation. All three of these are likely to make many asset managers uncomfortable, given the industry’s risk-averse nature and conservative pace of adopting technologies. But asset managers are more likely to stay competitive if they move outside their comfort zones and explore these technologies.

A few leading asset managers have already put these technologies to use and serve as strong examples of what can be achieved and how to create strategic distance from competitors. Based on our analysis of their experience, we estimate that an average asset manager making similar investments in technology has the potential to improve efficiency and operational performance by as much as 30 percent while launching new products in one-fifth its previous time to market or even faster.

Improving efficiencies

Most asset managers have at least begun to invest in technologies to drive efficiencies and better control costs. Among the leading asset managers with this focus, three main strategies have emerged:

Shifting tech costs from fixed to variable. By making costs increasingly variable, asset managers can improve their flexibility to respond to market dynamics and evolve their strategies. One way to convert fixed costs into variable costs is to use outside vendors when they have superior capabilities. Asset managers are already outsourcing tasks: industry-wide, the share of operations costs going to outsourced operations increased from 18 percent to 23 percent between 2018 and 2021 according to our survey (exhibit). However, some firms that outsource work are struggling to lower costs, which implies that outsourcing alone is not an effective lever.

Another way to move to variable costs is to migrate to cloud. The industry is still in the early stages of this migration: more than half of respondents to a recent survey of top financial institutions said they expect to shift at least half of their workloads to the public cloud over the next five years.[1] Many asset managers have told us that they are following similar trends.

Reducing technical debt to facilitate modernization. Most organizations are experiencing growth in technical debt—the off-balance-sheet accumulation of all the technology work a company needs to do in the future. According to a separate McKinsey survey on technical debt, 60 percent of CIOs said their technical debt increased over the past three years. Fighting this growth takes investment, but many firms are behind the curve: 57 percent of CIOs indicated that they have allocated 10 percent or less to reducing technical debt, while just 8 percent reported spending 21 percent or more. These leaders in technical-debt reduction are vastly improving their capacity for modernization.

Automating for leaner operations. Five years ago, we suggested that technology would drive operational scale, and this is proving to be the case. Top-performing firms in North America, for example, are investing the most in applications and associated automation capabilities (53 percent of their IT budgets, versus a survey average of 46 percent). A likely enabler is their lower operations costs: 1.2 basis points of AUM, versus a survey average of 1.4. Automation at these leading firms frees up staff, enabling the redirection of human resources toward higher-value analytics and engineering tasks.


Unlocking growth

So far, not many asset managers have begun to invest in technology to power growth, leaving a significant opportunity for leaders in this area to widen their advantage. Those that have adopted this approach have left behind the old thinking that technology is an enabler of business strategy or, worse, a cost center. Instead, they view technology as the acceleration force for business growth and are investing in three key areas: AI-enabled analytics, product velocity, and unified platforms.

AI-enabled analytics. Firms are pursing tangible bottom-line impact from using AI to enable analytics. Asset managers that have employed distribution analytics models (e.g., propensity to buy and next best product) have seen their flows grow by as much as 20 percent annually and their redemptions fall by 5 to 8 percent.

Early efforts to use generative AI in investment management have focused primarily on helping advisors to answer customer questions more quickly and accurately and to offer consistent advice based on the company’s own research. Because these analytics depend on timely, high-quality, and easy-to-access data, leading firms are also modernizing the underlying data foundation.

Product velocity. To bring new investment products to market faster, leading firms are building speed and agility with a foundation of flexible technology tools, an operating model that tightly integrates business and technology talent, and hyper-automation of rote tasks. These companies can quickly build customized products to differentiate themselves in areas such as distribution, client service, and investment management.

Platform plays. Until recently, asset managers have managed private and public investments separately. Today, however, unified platforms offer a consolidated view across private and public holdings in order to enable integrated performance monitoring, trade execution, and risk operations. In this way, asset managers can quickly implement holistic investment strategies.

As part of this move to a unified platform, asset managers are taking the opportunity to review whether specialized vendors might be able to deliver better services to end users—that is, the firm’s customers—in areas such as fund administration and accounting. Even though investment managers are moving toward more comprehensive platform ecosystems, specific capabilities (e.g., pre-investment analysis, reconciliation) will continue to exist. Most likely, the platform space will consolidate to a handful of end-to-end infrastructure providers.

To unlock efficiency and growth, asset managers need to take a wider perspective than the defensive approach of managing technology debt. Greater opportunities arise from a mindset of building technology wealth. The boards and executives that are already adopting the wealth-building outlook expect direct returns from technology and data investments, an objective that requires cleanly attributing business performance to technology. This approach can put strategic distance between an asset manager and its traditional competitors while equipping it to meet newer, more nimble attackers.

[1] Chhavi Arora, Aaron Bawcom, Xavier Lhuer, and Vik Sohoni, “Three big moves that can decide a financial institution’s future in the cloud,” McKinsey, August 3, 2022.