Key Market Dynamics:

The emergence of products like ETFs, alternatives, and index-correlated funds have triggered robust customer demand. However, these products often yield lower fees compared to traditional active management. Investment management firms have integrated these innovative products along with their conventional offerings, utilizing existing infrastructure for operations, regulation, risk management, and sales. Through the largely bull market and low interest rate environment, firms were able to sustain this business model even as assets under management diminished or fees decreased.

However, the current inflationary environment coupled with higher capital costs have disrupted this equilibrium. The intersection of declining assets under management, ongoing fee compression, and heightened customer expectations underscores the urgent need for firms to enhance their efficiency. One Chief Investment Officer pinpointed 2024 as “the pivotal moment to prioritize operational efficiency.”

Yet, these changes come at a cost. Firms are burdened with lower expenses and high capital costs, in other words, “cash is tight,” so investment management firms face tough choices regarding where to allocate their resources. Should they focus on customer acquisition, streamline back and middle office operations, invest in sophisticated tools for risk and investment, or fortify their regulatory frameworks?

Moreover, a significant portion of leaders in the asset management industry are retiring, having experienced substantial bull markets and reaped the benefits of active management fees during their careers. 2023 witnessed notable changes among top leadership with several more expected in 2024. The readiness of the new leaders to embrace necessary technological and operational changes remains uncertain.

Here are some of our client’s’ insights across the business:

Equities:

A more balanced risk-reward outlook

Despite a stock market rally at the end of 2023 based on a resilient economy and easing inflation, the higher rate environment will probably depress equity valuations in the coming year. Consequently, equity investments are likely to have binary performance, delineated between rate-sensitive sectors and more resilient, quality-driven investments. This means there will be a heightened focus on due diligence in research and valuation practices.

Recruiting is apt to be focused on Analysts and Portfolio Managers who can use technology to access information about sectors and companies at a higher level than their competitors.

Fixed income:

Bonds are back!

The resurgence witnessed in the bond market amidst the backdrop of economic and monetary policy uncertainties in 2023 is anticipated to persist in 2024, barring significant interest rate cuts. While most fixed income sub-sectors are poised for favorable performances, caution is advised, especially concerning loans and certain commercial real estate sectors. The latter faces heightened challenges due to escalating capital costs and lingering post-pandemic occupancy struggles, potentially necessitating intervention via "rescue capital." Additionally, loans will likely show some stress, with the combination of the rate environment and some “convenient lite” underwriting practices over the past few years.

Like equities, technology is making information in the bond market more efficient, and teams will need to have the skillset to access this information to be competitive.

Alternative Investments:

A hedge against downside risk

Clients express a consensus on the role of alternative investments in diversifying portfolios and mitigating downside risks, particularly those less correlated to equities. However, exceptions emerge in the form of some real estate and loan funds, echoing the concerns raised within the fixed Income segment. Additionally, rising geopolitical risks have steered attention towards alternative avenues like gold as a potential safeguard against market volatility.

Alternatives are a bit behind as an overall sector when it comes to technology and information efficiency. In 2024, alternative investments will not be as scrutinized for operational efficiency as traditional offerings.

Firms continue to roll out alternative offerings, and recruiting there will continue. There is a need for distribution, especially for individuals who fully understand alternative products and how they fit into client portfolios.

ETFs:

Trending toward the traditional.

In 2023, clients experienced positive inflows, fostering economic optimism; however, they acknowledge the need to ground this positivity in reality for the year ahead. Looking to 2024, there is an awareness of a potential market downturn.

There is a discernible shift among clients favoring simplicity, steering assets towards traditional products like treasury and dividend ETFs. With intermediaries driving up to 95% of the business, the ability to comprehend and articulate strategy and risk is paramount for effective advisor engagement. If one cannot educate the client base properly, selling these products becomes an uphill battle.

Fee compression remains a concern, notably in the increasingly commoditized ETF space where clients prioritize consistency. Generating substantial asset flow in the ETF sphere poses a challenge, offering funds above beta pricing demands efficacy. Firms must strategically develop products, cognizant that about 30% may not yield success. While 2023 saw many product closures, clients see opportunities in certain differentiated ETFs. Firms see assets traditionally allocated into enhanced or strategic beta products continue to shift towards higher-fee, actively managed and alternative alpha-producing ETFs into 2024.

All eyes are also on the newly launched spot Bitcoin exchange-traded funds, and there is also a focus on using direct indexing in portfolio construction.

Recruiting will focus heavily on product innovation and distribution in 2024, with the continued testing of new products that fit the ETF framework.

Operations:

Fail to invest in technology at your peril.

Investing in technology is imperative for firms, especially amidst challenging performance and margin constraints. Without the right technological tools and coordinated processes, investment managers risk failing to meet both client expectations and internal efficiency targets. In broad terms the evolution of Gen AI (like many other sectors) is reshaping the very fabric of how investment management firms function. Specifically, it is revolutionizing cross-functional teamwork and enhancing automation capabilities across various areas such as research due diligence, reporting, back-office operations, and sales support.

Furthermore, 2024 will witness continued growth of the trend for shifting in-house operational procedures to outsourced middle- and back-office service providers. However, while these strategic initiatives are driven by cost-saving intentions, firms must very carefully assess both choosing the right organization to partner with (“one size definitely does not fit all”), as well as the long-term expenses associated with outsourcing operations. If internal talent isn’t adequately trained in the controls and processes for effective oversight management, then the cumulative costs of outsourcing can swiftly escalate, likely erasing the initial cost benefits.

From a talent perspective, as more and more organizations transform outdated middle and back-office operations, the demand for individuals with a hybrid mix of specialist operations technology expertise and business enablement experience will become increasingly acute.

Risk & Compliance:

Three times greater regulations than a “typical” year.

The SEC and DOL ratcheted up their regulation requirements to an unprecedented degree for 2024, with a focus on buyside firms. In a “typical” year investment management firms face three to five new regulatory changes. This year there will be nineteen new regulatory changes. These requirements will put tremendous pressure on risk and compliance teams at asset management firms.

Firms will likely need to bolster their risk and compliance ranks to meet these demands. Interestingly, we are finding that the regulators have become competitors for talent, with higher salaries and strong benefit packages. In the past, it was typically a “one way” recruiting dynamic, with regulators moving to the private sector.

Distribution:

Tools to leverage time for customer maintenance and acquisition.

The theme for distribution is also about efficacy for 2024. Customer acquisition must become more efficient, allowing salespeople to make more regular contact with clients and prospective clients. This included sales tools for getting market and investment information to salespeople quickly and easily. Using AI and other tools for tasks like RFP’s and some onboarding will allow more time for customer service and acquisition. These tools can also be used to educate the sales force so they can better add value.

Individuals who can adapt and embrace technology are in demand. Leveraging the information from technology to better serve customer needs is the recruiting trend for 2024.

Wealth Management:

The Wealth Management Sector has now weathered more than a decade of transformative change, and 2024 is shaping up to be no different. The sector will continue to adapt on several fronts including navigating a higher interest rate environment, dealing with increased expectations from savvy investors and a new generation of investors, an ever-evolving regulatory landscape, and a volatile market environment. The good news is that economic conditions are underscoring the real value of financial advice to consumers. Improving operating efficiencies and margins remain top of mind, and the industry will continue to accelerate digital transformation to reap benefits from technology and tools.

Talent trends in the C-suite will see a focus on executives with broad-based leadership experience, a bias for innovation, adaptive thinking, and strengths that straddle both strategy and execution.

Odgers Berndtson’s Asset, Wealth and Alternative Investment Team provides executive search and assessment services in investments, operations, risk, compliance, and distribution.

If you have any questions, feel free to reach out.

All the best for 2024,

The Asset, Wealth, and Alternative investment Team at Odgers Berndtson