The Big Recalibration: How Can Investment Pros Stay Viable?

For nearly 95 years, employees of the UK investment consultancy Hymans Robertson could be certain of one thing: Their profession required formal business attire. Employees, primarily actuaries, came to work in suits.

But not anymore. Since September, Hymans Robertson no longer has a strict dress code, and the rationale for this change reflects a wider trend in the investment business: It now employs more software programmers than it does actuaries. “We had to work hard to integrate everyone, because the tech people have their own culture. This has been most obviously demonstrated by the clothes that they wear. Actuaries tend to wear suits, and tech people don’t. So one of the things HR has had to grapple with is our dress policy,” says Douglas Anderson, partner at the firm.

For the last five years, Hymans Robertson has been positioning itself as a de facto robo-advice firm, using its Guided Outcomes system to build a platform that encompasses all aspects of defined-contribution (DC) solutions. And that type of positioning requires new types of talent and skill sets. “We’ve always been successful in the past with defined-benefit schemes, but the market is mature and expected to shrink, so employment opportunities would shrink along with it,” explains Anderson. “Our feeling was that we had to be big in DC schemes in order to replace jobs that were lost from the defined-benefit market.”

Hymans Robertson is not alone. Technology is increasingly becoming a critical game-changer in all aspects of finance. Deutsche Bank’s chief executive John Cryan said in September that a large number of employees will eventually lose their jobs as technology makes their roles obsolete. And you only have to look at BlackRock’s Aladdin software, the risk and operations platform now being used by 85 asset management clients managing an aggregate $18 trillion (or 6% of the world’s entire financial assets) to realize that the world’s biggest asset manager could potentially become one of the world’s biggest technology players as well.

Technological drivers are only some of what’s changing in this business, however. The asset management industry is undergoing an arguably painful evolution. The cost of doing business in a low-yield and politically uncertain world has increased as has pressure on fees. Active managers have come under attack for their fee structures, with passive investing growing 4.5 times more than the active management mutual fund industry in 2016, according to data compiled for FTfm by Morningstar.

As a result of squeezed margins, the industry is consolidating. The dust is still settling from the mergers of Janus Capital Group and Henderson Group, Standard Life and Aberdeen Asset Management, and Amundi’s $4.1 billion purchase of Pioneer Investments. Industry participants expect more consolidation to follow, as well as more change.

“The impact of change is going to be profound. At the highest level, revenues are under attack,” says Jeff Levi, principal at consulting firm CaseyQuirk. “Fee pressure, slowing organic growth rates, an inability to rely on capital market returns to grow a business, and rising costs of doing business mean that firms are searching for ways to be more efficient, effective, and differentiate[d].”

Levi believes three broad value propositions will emerge in asset management. One will be investment driven: firms that are premium providers offering high-quality, tailored, active products, able to generate high fees because of their premium service. The second value proposition will focus on customer experience, with business models about providing solutions and focusing on quality of experience for clients. The third value proposition will include traditional active managers charging low basis fees for their active products, focusing more on volume than on fee revenue. Such positioning can already be seen in the market. In October, the £233 billion giant Fidelity Investments announced that it will be cutting its management fees and introducing a performance component across its range of active equity funds.

Whatever value proposition a firm is working toward will have widespread implications for careers.

“You’ll see more diversity and people who have dabbled in other careers outside of finance before getting into the buy side,” says Levi. “There will be a wave of people attracted to the buy side because it is an industry going through such dramatic change. On the flip side, compensation will go down and firms will need to recalibrate their organizational makeup.”

The Rise of the Data Scientists

Understandably, most of the new entrants will be people with science backgrounds.

“Low-cost asset management products need to leverage technology and their workforce. Traditionally, firms used to recruit people with very standard and monolithic skills with finance backgrounds. Very rarely would firms recruit talent from other industries. But that is changing,” explains Violetta Senda, CFA, digital strategist specializing in innovation at Avanade. “Asset management firms need very precise and very focused skills capture related to data science, engineering, mathematics, physics, and anyone who can help them build underlying models [that] would use data as analytics, and the programming skills to build artificial intelligence and produce good portfolio results.” [For a more in-depth report on the influence of data scientists, see “Speaking Data Science with an Investment Accent.”]

Robin Creswell, managing principal at global asset manager Payden & Rygel, believes there will be less opportunity in the investment business for those without specialist degrees, meaning history graduates will find it more difficult to knock on the door. “We are seeing a much greater focus on people having a master’s in finance or coming from science backgrounds,” he says. “The CFA [charter] is also becoming a minimum threshold for an increasing number of roles. We’re way past the point where people need to be able to use just Excel spreadsheets. I would think that over the next 10 years, programming and the ability to manipulate data are skills that will be quite essential.”

But Creswell suggests that there could be a bifurcation of career paths. In a world increasingly driven by data science, those who manage money will be separate from those who manage businesses. “A career where you end up managing the business needs creative thinkers,” he says. “It’s much more important to have the interpersonal and interactive skills and really understand clients and their needs. For that, a classical background may remain relevant. But I’m making a distinction between managing the business and managing the money.”

With the rising importance of social media, there will, of course, also be a need for communicators, particularly in marketing and branding roles. Creswell is concerned, however, about the potential misuse of social media. “There is an interesting aspect around social media and the distribution of financial services,” he says. “Should it be a popular celebrity climb to the top? I would suggest that Tulip Mania and the South Sea Bubble are both examples of popular delusions, and there are lots of examples of where early popularity contests ended in disaster. If media is about building a better pipeline to a more clearly or regular way to tell people what they are specifically investing in, or for transparency’s sake, then that’s a good thing. But if it crosses into a raw land grab, then it becomes something we need to talk about.”

Client-Driven Changes

In a DC-driven world, diversity is becoming an important issue for clients, who are pushing for change in the workforce across lines of gender, race, and sexual orientation, among other considerations.

“Asset management firms are making their products more accessible to the general public,” explains Emma Wallis, head of news and insight at talent management and consulting firm The Buy-Side Club. “In the DC world, individuals have much more sway over their managers, while robo-advice means an opening up of the investment industry. A related trend will be to focus on diversity as asset management becomes more accountable.”

Sarah Dudney, client partner at The Buy-Side Club, believes asset managers will have to compete to attract talent. “Asset management needs to appeal to young people and show them that this is an industry worth considering,” she points out. “Not all roles in asset management need a first-class math and economics degree from Oxford.”

Wallis is also concerned about a scarcity of talent. “If large asset managers need to strengthen their regulatory reporting, compliance, and risk management teams, the challenge arises when multiple firms are looking to hire from the same talent pool,” she says. “This results in firms either hiring people from different disciplines within financial services or outsourcing to consultants, bringing in expertise to help prepare for upcoming regulation.”

Stuck in the Middle

But where do these developments leave professionals who are midway through their careers? One talent scout says there will be growing pains.

“Everyone in the asset management industry today is going to have to adapt to some degree to these new behaviors and new ways of interacting,” says Iraj Ispahani, chief executive of Ispahani Advisory, a business strategy and talent management firm. “People will have to unlearn bad habits and learn more efficient habits. There are likely to be fewer people in the industry.”

He believes organizations must invest and support experienced people through these transitions. “People feel very insecure now,” Ispahani says. “They see the world around them changing, but they don’t actually know what they need to do to adapt, because the asset management firms themselves aren’t clear.”

Industry Disrupters

Inevitably, some job functions simply won’t be around in a few years’ time. Back-office jobs in particular will see the most dramatic change. TAINA Technology, an artificial intelligence company, is one of the new disrupters affecting jobs in the industry. TAINA chief executive Maria Scott says she has seen some redundancies take place at client firms that have automated their back-office compliance function. But her company is taking over mundane tasks that have high error rates and are not particularly rewarding for staff.

“People don’t like doing these roles,” says Scott. “For educated people with ambition, they aren’t jobs they want to be doing for the rest of their careers. And because we save so much money for the institutions, they tend to give [their employees] good packages and they tend to go and retrain. This is a natural evolution, but for smart people, it’s better to have the opportunity to go into higher-value-add roles.”

Another example of a potential disrupter is Havelock London, the technology-driven start-up asset manager that is waiting for approval to launch its first product in the United Kingdom. “What we are looking to do is to build a business that combines traditional investment management with forward-thinking data science and technology, in order to deliver different cost-effective solutions,” says Neil Carter, co-founder and chief commercial officer. “We’re not trying to replace anyone, be a ‘me too’ investment manager, or have a ‘me too’ pricing structure.”

The firm is not a quant-driven shop but instead uses data about a smaller number of themes to make qualitative decisions, starting from the bottom up to identify those themes and deciding whether or not to invest or adjust weightings. “We want to have a huge amount of data and knowledge about a smaller number of themes,” says Carter. “Our edge will be driven largely by our ability to apply data science techniques to managing money.”

He believes it is important for firms to recognize the need to attract new recruits, particularly those being wooed by tech firms. “There could well be a talent shortage, with companies competing for the best talent around. And so you have to differentiate yourself as a business and ensure you have a culture where talent has the freedom to explore some of their theories,” Carter says. But candidates will have to impress the firm as well. “The profile of people we’d be looking for is not just people who have great qualification in theory in data science, or brilliant master’s or PhDs,” he notes. “We would also be looking for experience in applying that to investment management and to the universe that we invest in. We want people who are multi-skilled and enthusiastic.”

From Levi’s perspective at CaseyQuirk he believes that institutions cannot afford to be complacent: “Leadership at many firms have retirement in sight, and many view change as presenting more of a risk than a reward,” he says. “However, many parts of the asset management industry are facing disruption, and empowering that next generation of leaders will be critical to staying at the forefront of the industry.”

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All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.

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