Across the financial services industry, an ever-expanding regulatory backdrop means the cost of doing business is continuing to increase. That is driving significant change for wealth and asset management firms as they seek ways to reduce costs without compromising on client service. Trends like impact investing, personalisation and bespoke solutions are creating new opportunities, such as the growth in consolidation among wealth managers.
“That rising cost of doing business tends to drive a business model where economies of scale can play to your advantage,” says Nick Ring, CEO for Europe, Middle East and Africa (EMEA) at Columbia Threadneedle Investments. “So economies of scale are the impetus for the consolidation that we’re seeing and that is likely to continue. There will always be small niche providers who can charge a premium for services, but there is a whole load of firms in the middle and it is hard for them to identify how to differentiate themselves other than on service.”
That is creating conditions ripe for consolidation that in turn can drive bigger investments in technology that can help reduce costs further. Yet that is only one part of the picture; consolidation also means that as wealth firms get bigger, they look to engage differently with product providers like Columbia Threadneedle.
“Firms are looking at how they can leverage off their consolidated size but equally importantly, they understand that in order to maximise those economies of scale, they need to be doing business with a smaller number of product providers who can offer a broader range of capabilities,” says Ring. “They’re looking for more of a strategic alignment and partnership-type arrangement, because a) they are big enough to want to move from being in a client/provider relationship, to a strategic partnership relationship, and b) it helps to drive efficiencies within their organisation.”
Product offering expansion
For investment management firms, that means ensuring they are able to meet these evolving client needs by expanding their product suite. That was one of the key drivers for Columbia Threadneedle in its acquisition last year of the Bank of Montreal’s (BMO) asset management business in EMEA, a deal which has seen the combined firm’s assets under management swell to £531bn, according to Columbia Threadneedle Investments and BMO GAM (EMEA) as of 31 March 2022.
“We absolutely understood that however good we were, we can always be better, and we can always improve our proposition for our clients and better position ourselves for that dynamic of a smaller number of consolidated wealth managers wanting to do more business with fewer providers,” says Ring.
We absolutely understood that however good we were, we can always be better, and we can always improve our position for our clients
While Columbia Threadneedle has traditionally offered a range of open-end funds, it didn’t offer any closed-end funds such as investment trusts. Last year’s acquisition gave the company a broader range of investment capabilities and structures, such as alternative assets including European real estate and private equity, and established liability driven investment and fiduciary management businesses in Europe.
“Bringing in the BMO business has allowed us to offer a broader range of capabilities and vehicles in terms of investment trusts, and therefore we can say to wealth managers we can now offer you even more within a single integrated client proposition,” Ring says.
Increased sustainability focus
Another major trend that is reshaping investment managers’ product offerings is the rise in environmental, social and governance (ESG) awareness and an increased demand for sustainable investments. That was another catalyst for Columbia Threadneedle’s acquisition of BMO GAM (EMEA), which shares the firm’s commitment to responsible investment and how that is integrated into its investment approach.
While both firms have long had ESG baked into their DNA, the urgency among wealth managers and end investors to act on the ESG agenda is a relatively recent trend, driven in part by European regulators and the Sustainable Finance Disclosure Regulation (SFDR). The new regulations are designed to increase transparency around ESG products, with funds being assigned different categorisations (Article 6, 8 or 9) depending on the scope of their ESG content. Article 8 funds, for example, can include investments that broadly promote environmental and social goals, while Article 9 funds must target specific sustainable investments.
“Regulators have realised they have an important role to play in driving the utilisation of ESG considerations within capital markets,” says Ring. “That’s a very top-down push, but there is also the bottom-up effect where a lot of individuals are becoming more aware of ESG risks and an appreciation that things need to change and that investors have a role to play in that.”
That top-down pressure from regulators and bottom-up interest among end investors means wealth managers are increasingly demanding more ESG-certified products.
“We’ve been surprised about how quickly wealth managers have embraced this,” says Ring.
“They’re saying that products they have been very happy to invest in for a long period of time, which already had ESG credentials, need to be encased in a formal Article 8 structure – and if you can’t commit to that by a certain date, we will move the money out of the fund.”
Regulators have realised they have an important role to play in driving the utilisation of ESG considerations within capital markets
Columbia Threadneedle’s approach is not to simply split its funds into ESG and non-ESG products, but to integrate ESG risk factors and considerations into its entire investment process across the firm.
“We believe that companies which demonstrate sustainable business models, organisational stability, and the ability to drive change where necessary are best placed to deliver long-term value. In its simplest form, the consideration of environmental, social and governance factors, alongside financial information, allows us to build a holistic picture of the risks and future return prospects of any investments we make. In a more targeted way, it also allows us to select investments that can help achieve specific outcomes when and if desired. These principles have long been integral to our investment approach, but we recognise the need to evolve alongside a growing focus by clients and regulators on climate change risks, green taxonomies and thematic opportunities. We continue to enhance our capabilities, analytics and ESG integration in this regard,” Ring says.
Because of that broad approach, the firm has been able to significantly ramp up the number of Article 8 and Article 9 funds it is able to offer.
“We feel very comfortable with that because our investment process already embraces and utilises those risk factors as an active consideration,” says Ring. “At the same time, we have to acknowledge that not all clients necessarily want Article 9 full impact funds. So, we still need to offer a spectrum of investment propositions, particularly as a global investment management firm. In the US or Asia, for example, we haven’t seen the same bottom-up or even top-down regulatory traction driving investor behaviour.”
Bespoke investment solutions
As well as demanding a greater focus on ESG matters, end investors are also increasingly expecting a more personalised service. That is prompting wealth managers to offer more bespoke investment propositions or model portfolios to different cohorts of clients within their overall client book, says Ring.
“Maybe five or 10 years ago, wealth managers were just buying a range of pooled funds off the shelf that were offered by us or our competitors, depending on what products they wanted,” he adds. “Now wealth managers are taking ownership of the process and saying we’re going to develop the investment proposition or we’re going to hire you as a sub advisor. That means they’re not just buying the pooled fund off the shelf; they are able to work with us and negotiate the exact details of the mandate they want. So that’s creating personalisation in terms of their proposition to clients.”
That is an advantage for firms such as Columbia Threadneedle who have vast experience offering segregated mandates to institutional investors.
“We are used to working with clients to develop bespoke investment solutions, with bespoke reporting on the back end,” says Ring. “In this case, it’s going through to a wealth manager versus going through to a pension fund or a sovereign wealth fund or whoever it might be.”
While asset managers need to ensure they are responding to these evolving global trends, they also need to balance that with maintaining strong investment performance across their funds. For Ring, this means making sure fund managers have the necessary resources to do their jobs properly, while also investing in new talent and new systems to be more effective and organised. That includes investing in the firm’s data science capabilities to ensure fund managers have the information they need to better understand what is going on in the world.
Understanding client value
Fund managers also need to better understand exactly what their clients want, particularly in light of the Financial Conduct Authority’s Assessment of Value initiative, which requires asset management firms to consider the overall value of an investment beyond its performance, such as the quality of service, costs and comparable market rates.
“The assessment of value mechanism is really important for our clients, for both wealth management firms and their underlying investors, because it is a formalised and systematic process that looks at the overall proposition,” says Ring.
This is especially important because investment performance can sometimes be oversimplified, says Ring. Take an income fund, for example. If a client buys such a fund, what they are looking for is an income stream, and capital growth is less important, he says. So, when considering performance of an income fund, you need to consider the income stream and not just the capital.
“We’re always looking at the overall proposition that we’re making to our clients, and then ensuring and validating that we’re delivering on that with investment performance at the heart of it,” Ring says.
Despite the growing demands clients place on wealth and asset managers, companies that act strategically to meet their needs will be able to provide greater value to clients for the long term.
To find out more, visit columbiathreadneedle.com
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