As a new decade comes upon us, significant changes loom on the horizon for asset allocation and the institutional investment industry. There is an increasing focus on data and transparency — especially as it pertains to fees — new innovations in technology that are changing the landscape, and even evolving business models. It’s an exciting time but also a potentially daunting one; with that in mind, here are five key trends we see evolving over the course of 2020.
The institutional investment industry is in the midst of rapid consolidation, as assets continue to be concentrated among a smaller group of the very largest firms. A big reason for this trend is the strong M&A activity in the investment consultant world that is shrinking the number of independent firms. This in turn is pushing asset flow to the biggest firms with the most resources and scale while smaller consultants carve out their own niches.
The share of client relationships by the largest 20 U.S. investment consultants grew to 81% in 2018 and we expect to see this trend continue, as the M&A boom shows no sign of slowing down in 2020. This means smaller and independent consultants will need to utilize technology in order to create efficiencies, drive customer engagement, and optimize data mining to better service clients and potential clients.
Increasing Fee Pressure
As noted above, there is a regulatory push to focus on data transparency, specifically post-negotiated fees data. Most major geographies have introduced or will shortly introduce regulations to shed light on fee models. Full transparency over investment activity and products will exist at all levels.
This means it will be of critical importance for investment consultants to have the ability to analyze actual fees, and across all plan types and investment styles, not just public pension funds. Doing so will help them to better meet the client’s investment objectives and act as a differentiator in an increasingly consolidated landscape.
Having access to this data can also help an investment consultant create much more detailed and in-depth presentations to clients and potential clients. Being equipped and ready to answer any questions at the table shows that an investment consultant is an indispensable part of driving a client’s growth and acts as a trusted partner.
The Rise of the OCIO
A mere decade ago, the OCIO (Outsourced Chief Investment Officer) model was relatively uncommon. But in recent years it has picked up significant interest and is now a hot market.
According to one calculation, assets under full or partial discretion by an OCIO firm grew to $1.56 trillion in 2017, with U.S.-based assets alone accounting for more than $1 trillion. There are further projections that U.S. OCIO assets will increase by $671 billion over the next five years.
The increase in popularity of the OCIO is due to several overarching factors, including small organizations with limited staff that find it more efficient to outsource the CIO function, improving governance, and improving investment portfolio performance.
This trend is why many investment consultants are now starting to offer OCIO services. For many, it is a natural extension of services that they already offer on a non-discretionary basis. Consultants are well positioned to offer OCIO services, and if done properly can be a great value-added service to provide for clients.
Evolving Performance Metrics
As markets evolve, the performance metrics used to evaluate organizations are also evolving. In periods of higher market volatility like we’ve experienced in the past several years, it’s imperative for investment consultants to be able to easily monitor performance on a more timely basis to ensure that portfolios are meeting objectives. It is also becoming evident that monitoring performance metrics is evolving to include risk factors, sustainability (ESG), and management fees in addition to returns.
Technology as a Key Enabler
The growth of the retail investment market, supported by advanced portal technology freely available to retail investors, is no doubt putting pressure on institutional consultants to deliver a more “retail-like” experience to their asset owner clients. With asset owner investment staffs and boards getting younger, the expectations for more timely and dynamic access to their institutional portfolio data is growing.
While there are definitely challenges of delivering a more retail-like experience in an institutional investment environment, technology will become a key enabler in making this a reality. Streamlining data aggregation with advanced collection and reconciliation technology, employing intelligent substitution of proxy data for hard to value assets and delivering portfolio data through a modern and interactive portal platform will all require an investment in technology.