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Asset Management 2023: Harnessing AI for Profitable Growth Amidst Rising Costs


Michael Chen

May 6, 2024 - 04:01 am


Asset Management in 2023: Navigating Through Growth and Challenges

The global asset management sector witnessed a significant rebound in the year 2023, with Assets Under Management (AuM) soaring by an impressive 12% to nearly $120 trillion, compared to the previous year's decline. This remarkable surge, however, stood in stark contrast to the industry profits, which saw a dip of 8.1%, laying bare the fragility underlying the sector's advancements.

Despite the broadening realization among asset managers about the disruptive potential of generative artificial intelligence (GenAI), a considerable gap persists between recognition and actionable strategy. A scant 16% of asset managers have successfully outlined and are actively implementing a comprehensive GenAI strategy.

Impressive Growth Amid Global Participation

On May 6, 2024, PRNewswire out of Boston reported a considerable growth in the asset management industry. The AuM increase was felt across the globe, with North America seeing a robust 16% uptick and Asia-Pacific excluding Japan and Australia witnessing a modest 5% growth.

This global financial narrative is framed within the context of 2022's significant 9% plummet in AuM. The bounce-back as reported by the esteemed Boston Consulting Group (BCG) in its 22nd Global Asset Management Report titled "AI and the Next Wave of Transformation" offers a multi-faceted look at the industry's current state and emerging trends.

The Veil Over Industry Vulnerabilities

Despite the growth in AuM, the asset management industry struggled with revenues, which saw a marginal increase of just 0.2% in 2023. Simultaneously, operational costs rose by 4.3%, significantly outpacing revenue gains and leading to a concerning 8.1% decrease in profits.

Dean Frankle, a managing director and partner at BCG and coauthor of the report, warned about the escalating structural challenges within the industry. He emphasized the need for asset managers to leverage artificial intelligence opportunities to maintain competitive advantage, encourage productivity, personalize products, and capitalize on private markets.

Persistent Industry Pressures

Asset managers currently face five fundamental pressures that threaten to reshape the industry landscape:

Reliance on Market Performance

A reliance on market performance to fuel revenue growth has been the bedrock for the industry's growth. Since 2005, a staggering 90% of the industry's revenue growth has been derived from market appreciation.

The Rising Tide of Passive Funds

2023 marked a significant year for passive funds attracting substantial attention. Passive products swept up a hefty 70% of the total global mutual fund and exchange-traded fund net flows, amassing approximately $920 billion—a notable escalation from the 57% average net flows directed at passive products from 2019 to 2022.

Fee Compression Accelerates

Amidst the increasing popularity of passive funds, the industry faced accelerating fee compression. The average fee in 2023 dropped to 22 basis points, which represents a decline from 25 basis points in 2015 and 26 basis points in 2010.

Costs are Spiraling Upwards

The cost curve for the asset management industry pointed upwards, recording an approximate 80% hike since 2010 at a compound annual growth rate of 5%. This upward cost trajectory presents a substantial challenge for the industry.

Innovation Challenges with New Products

Despite concerted efforts to innovate with new offerings, success has remained elusive for many asset managers. A mere 37% of mutual funds launched in 2013 sustained their presence in the market by 2023.

Embracing AI for Sustainable Growth

Recognizing the profound impact and opportunities presented by generative AI, BCG collaborated with the Investment Company Institute (ICI) and the CFA Institute to engage asset managers in a comprehensive survey.

The survey insights are insightful:

Significant Impact of AI

A solid majority, 72%, of the surveyed asset managers forecast a significant or even transformative impact of GenAI on their businesses within a three to five-year horizon.

Strategic Priority for GenAI

Two-thirds of the asset managers recognized the strategic priority of GenAI, showcasing their intent to incorporate this disruptive technology into their business models.

Capital and Resource Allocation

An overwhelming 75% have committed capital and human resources for short-term GenAI deployment, with a noteworthy 29% allocating a significant portion of their innovation budget towards GenAI initiatives.

Defining and Implementing Strategy

Distinct from the recognition of GenAI's importance is the actual implementation of a specifically defined strategy—a metric in which only 16% of asset managers report making concerted progress.

Peter Czerepak, a managing director and senior partner at BCG and coauthor of the report, accentuated the vast potential for innovation that generative AI introduces to the asset management industry. He asserted that realizing this potential will necessitate strategic thought and execution at scale. In a period marked by slowing traditional growth avenues, it has become critical for firms to advance on this transformative path.

The full details of BCG's "AI and the Next Wave of Transformation" can be accessed by the public, offering a wealth of information and guidance for asset managers embarking on their AI journey. The publication is available at this link.

A Partner for Transformation

Boston Consulting Group, standing at the intersection of business strategy, technology, and social impact, has been pioneering transformational approaches since its inception in 1963. The collective expertise of diverse, global teams has been instrumental in empowering organizations to achieve growth, create a sustainable competitive advantage, and contribute positively to society.

BCG's mission extends through a broad spectrum of services, including top-tier management consulting, cutting-edge technology and design, and forward-thinking corporate and digital ventures. The firm's collaboration extends across the organization and all tiers of client teams, all driven by the aspiration to help clients thrive and to forge a better world.

For further inquiries and more detailed information, members of the media may contact Eric Gregoire at +1 617 850 3783 or email: [email protected]

In summary, the BCG report serves as a clarion call for the global asset management industry to recognize and adapt to the evolving pressures of fee compression, cost increases, and the growing demand for personalized and AI-driven investment products. Asset managers who strategically embrace generative AI are the ones poised to lead the industry and pave the way for enduring profitability and innovation.

This comprehensive study by Boston Consulting Group underscores the critical juncture at which the asset management industry stands today. With a delicate balance of challenges and opportunities, the decisions and strategies implemented by asset managers in the near term will set the course for the industry's trajectory in the years to come. The path forward, illuminated by technology and strategic foresight, holds the promise of continued growth and a sharper competitive edge for those willing to invest in the transformative capabilities of artificial intelligence.

(SOURCE Boston Consulting Group (BCG))