Consumer choice is becoming ever more fragmented in an asset management industry that has little or no barriers to entry – for traditional players and entrants from other vertical industries. In such a highly competitive marketplace, with continuing downward pressure on asset management margins and an investor community that is understandably still a little nervous after years of market shocks, engendering feelings of trust and best practice among investors can be decisive in the bid to increase net inflows of assets.
In the continual search for alpha as a means of attracting investment, it is often overlooked that compliance can be an effective selling point for asset managers. An asset manager that can prove that it is effectively managing all applicable regulation is an appealing option for prospective investors, and will increasingly be so in the future.
If an asset manager has solid, verifiable processes with which to convince a retail investor concerning its internal controls, its regulatory compliance regime will grow in influence, as investment profiles become more risk averse. If an investor’s risk band moves up one notch, for example, triggering an alert to the investor regarding the impact of this change on the client’s investment risk profile, such internal controls will increase the levels of trust in prospective investors.
In my experience, the regulatory story comes into its own in the latter stages of the pitch process, when retail investors (but also institutional investors, consultants and trustees) have already drawn up a shortlist of asset managers that match the performance and fund profile that they are seeking. Operational efficiency is climbing up the due diligence agenda for institutional investors as well as the need for clear, continuous and accurate communications. Adequate returns are no longer enough: investors want to see transparent operations, including compliance.
Many asset managers still consider investment in regulatory technology as a cost centre and a necessity rather than a value-add. It is generally not perceived as making an investment from which a return will be derived, in the same way as perhaps a front office system might be viewed. Yet it can deliver substantial returns through improved process efficiency and investor reassurance through the reduction in operational risk.
Asset managers need to go beyond the box-ticking aspects of regulation and deliver a compliance service that has a perceived value. The bottom line is: it will help you win mandates.