Asset Managers Face Squeeze as Infrastructure Costs Rise, Reports PwC

The Evolving Landscape of Asset Management

In a striking report released by PwC, it has become evident that asset managers are facing unprecedented pressure on their profit margins, primarily driven by rising infrastructure costs. This transformation marks a critical shift where infrastructure moves from being a back-office function to becoming a central pillar of strategic decision-making for these financial entities.

The Margin Squeeze

Since 2018, profit per asset under management has plummeted by nearly 19%, with forecasts predicting an additional decline of 9.1% by the year 2030. Such statistics underscore the urgency for asset managers to rethink their operational models. Decisions revolving around the development, acquisition, or partnership for infrastructural capabilities have become defining factors of competitiveness in this industry.

A majority of managers (67%) attribute their constrained investment capacities to the compression of commissions, making it imperative to innovate within their infrastructures to maintain market positioning.

Historical Spending Patterns

Interestingly, the insights gathered from over 150 asset managers and 50 infrastructure providers reveal a concerning trend: many are tethered to their past expenditures. Approximately 23% of asset managers allocate the bulk of their technology budgets toward new capabilities, while a staggering 29% focus over 70% of their budget on maintaining existing systems. This indicates a major bottleneck in the ability to harness new technologies, particularly artificial intelligence, which is touted as a potential game-changer in the sector.

The Challenges of AI Integration

However, AI integration is fraught with challenges. Among the surveyed participants, about 24% cited data fragmentation as a major obstacle to effectively deploying AI solutions. Additionally, 17% reported that legacy systems were significantly hampering their progress. Roland Kastoun, the Global Asset and Wealth Management Advisory Leader at PwC, emphasizes the dire state of the sector by stating, "The profits of the industry per dollar managed have dropped by nearly a fifth, while infrastructure expenses continue to escalate. The managers who endure the next five years won’t necessarily be those with the most sophisticated AI, but rather those who tackle the more mundane tasks first."

Perceptions of Market Data

The report also sheds light on the perceived value of market data, where 58% of respondents ranked it as one of the most expensive layers of infrastructure compared to the benefits it yields. This sentiment further extends to concerns associated with regulatory reporting systems (47%) and core technology platforms (46%).

In this rapidly changing environment, around 70% of infrastructure providers are optimistic about increasing their revenue share, with 68% regarding hyperscale cloud providers as the leading emerging threat to traditional asset management firms. Björn Ebert, PwC's Financial Services Leader, notes, "Seven out of ten infrastructure providers expect to capture a larger piece of the pie, indicating a subtle shift in power within the sector."

The Move Towards Hybrid Models

As a response to these challenges, 44% of asset managers are favoring hybrid procurement models, which combine internal capabilities, purchased solutions, and partnerships. In contrast, only 21% prefer to entirely purchase solutions, 18% opt for partnerships, and 13% are developing internally. The report categorizes four emerging infrastructure archetypes: infrastructure orchestrators, digital and tokenization platforms, specialized modular providers, and integrated asset managers. This varied landscape suggests there’s no one-size-fits-all solution, and firms must clearly determine what aspects of infrastructure they want to own, standardize, or outsource to specialists.

Conclusion

Firms that make early and strategic decisions in this evolving infrastructure landscape stand to preserve their margins into the future, potentially mitigating the adverse impact of rising costs. This proactive approach will enable them to adapt and thrive amidst the ongoing transformations in the asset management industry.