Audit insights: investment management
More than half of people aged 21–30 have no pension or make minimum contributions. Despite this, investment managers are not successfully encouraging people to save. In this Audit insights report, external auditors and ICAEW specialist staff explore whether the investment management industry is fit for purpose and use their expert knowledge to identify what changes need to be made.
In this Audit insights report, external auditors and ICAEW specialist staff explore whether the investment management industry is fit for purpose and use their expert knowledge to identify what changes need to be made.
Investment management companies help individuals finance their everyday lives and their futures through products such as pensions and investments. As life expectancies increase and public pension provisions decrease, the number of customers who desperately need investment management services is growing.
The industry must be able to meet those needs, but against a background of ever-increasing regulation and disruptive technology, old ways of operating no longer suffice.
This Audit insights report brings together the expert insights of investment management audit specialists from: BDO, Deloitte, EY, Grant Thornton, KPMG and PwC.
Their insights focused on three key questions that are fundamental in understanding whether investment managers are fit for the future:
Will investment managers meet our ever-increasing needs?
As demographics change and defined benefit pensions disappear, more people than ever before are facing an uncertain retirement and have an acute need to save and invest. Investment managers must be ready to use their expertise and experience to serve customers across the financial spectrum with products and services that are valuable, affordable, appropriate and ever more personalised.
As generations increasingly live apart, more people will have to pay for long-term care, all while state pensions are decreasing, and people are having to work longer before claiming them. Many individuals now build up multiple company pensions, and are unlikely to know what their retirement income will be. Meanwhile, UK interest rates remain low, the government frequently intervenes in long-term savings and many new companies are entering the market.
This overall trend offers long-term savings product providers distinct opportunities to serve society. However, to do so they must deliver services that meet customer needs, and combat widespread disengagement and feelings of disenfranchisement. Investment managers must recognise why people find it difficult to make financial decisions, and adjust their business models accordingly, while working to improve communication.
Meanwhile, young people now have less disposable income, which they must save over a longer period of time. At the same time, increasing and costly regulations have led providers to shift their focus away from this demographic. Business models must change to provide important services to the people who need them; otherwise the savings gap, predicted to reach £25tn by 2050 in the UK alone, may widen instead of narrowing. If future governments cannot support their citizens in retirement, these people will have to work until death.
Will customers be able to understand investment returns and fees?
Investment management is puzzling to many. Customers need more clarity about fees charged, business costs and the performance of their investments, or they will find it too difficult to engage with saving and investing just when they need it most. The industry must commit to providing clarity and boosting customer confidence in the following key areas:
Despite initiatives to improve transparency around the fees that support the investment process, criticisms remain. In the future, investment managers will have to prove the quality of their investments, not their quantity, to charge performance fees. Technology may help simplify the investment process and reduce the fees that can be levied.
The industry must also be more candid about the remuneration of investment managers. Customers do not understand what motivations (such as bonuses and incentives) drive investment managers and, ultimately, the direction of their savings. Just as bankers’ bonuses have come under scrutiny, that of investment managers may follow suit.
Investment managers argue that they are transparent and allow individuals control over their portfolio because they provide a high volume of information in statements and disclosures. However, this information is not presented in a user-friendly fashion. Investors need to be educated about the aspects that are most important to them, not overwhelmed with irrelevant data.
The advance of passive investment:
An accelerating trend towards passive investment is squeezing active investment managers’ margins and may enforce a fee overhaul. If the trend continues, the industry will have to react; this can already be seen with various funds changing to a single pricing model for buying and selling units in its funds. However, clarity over costs is still lacking, even in the relatively simple world of tracker funds. In 2017, some investment managers offered tracker funds costing up to 10 times more than comparable products from rivals. This disparity inevitably leads to confusion over what one can get for one’s money.
Until investment managers are clear about fees, costs and performance, the perception of unfairness will exist and people will remain disengaged from the industry. A customer should be able to understand and distinguish between good-value investment products. By empowering customers to take more responsibility, the industry can help combat a lack of financial understanding.
Will technology democratise investment management?
Due to the high cost of individualised services, digital platforms, robo-advice and artificial intelligence can make investment more accessible. To remain competitive and bring their services to more people, the industry must invest in technology, and seize the opportunity to do so before consumer brands such as Google, Apple, Facebook or Amazon do.
So far the industry has been slow to undertake technological change, but doing so will make it more approachable and accessible. It will help firms grow and help customers save the money they need. Technology will enable investment managers to provide easier and cheaper access to products and services, and facilitate interaction with individual customers.
Artificial intelligence, for example, will allow investment managers to greatly increase the range of passive investment products. Providers will be able to tailor products to fit an individuals’ risk profile, while ‘robo-advisers’ can help make services cheaper and more accessible, with lower minimum investments and simpler fees. The software, which is increasingly being used, can automatically make investment and portfolio decisions for customers.
Adopting new technology will also help active managers become more efficient and reduce costs. Large amounts of data can be analysed quickly to aid stock picking and portfolio weighting, for example, and robo-advice can be blended with hands-on human experience. These strategies will make investment management far simpler to follow and understand, and will hopefully produce enhanced returns. Moreover, new technology will allow customers to self-invest and drive their own investments.
Meanwhile, blockchain has the potential to revolutionise investment management. The technology is perfect for records management, minimises risk and can greatly enhance the customer experience. Some investment managers are assessing blockchain’s capability to cut costs and provide more timely and accurate data, while increasing safety and transparency. However, incorporating blockchain into the daily operations of an investment manager will be challenging.
Adopting new technologies and making better use of data will help companies personalise their approach, and alleviate customers’ feelings of alienation and confusion when dealing with pensions and long-term savings providers. Reducing the problem of complicated and extensive fees will also mitigate perceptions of the industry as exclusive and expensive.
Technology can help empower those currently not saving and investing as they need to be to secure their future, and enhance the experience of those who are. Investment management firms must invest in IT, test new ideas and balance innovation with practicality. Making long-term savings products and investment services available and attractive to more people will benefit the industry and new customers alike.
For a more detailed analysis of the issues facing the investment management industry, including real-world examples demonstrating the potential impact of these recommendations, read the full report produced by the Financial Services Faculty, and join the conversation.
Financial Services Faculty
This audit insights report was written by the Financial Services Faculty which draws together professionals from across the financial services sector and ICAEW members specialising in the sector. The Faculty produces thought leadership reports. If you would like to get involved or share your opinions please contact email@example.com.