Wednesday, January 15, 2020

Inaugural Asset Management Advisory Committee meeting focuses on industry transformation

By Amy Leisinger, J.D.

In the first meeting of the Asset Management Advisory Committee, panelists discussed recent developments in fund investing and the evolution of the asset management industry. Separately, panelists emphasized the importance of investor choice, particularly regarding private equity and other investments. According to Committee Chairman Edward Bernard of T. Rowe Price, informed debate leads to better ideas and solutions; even with varying perspectives, the ultimate goals of market success and proper investor protection remain the same, he explained.

"I believe the AMAC will help ensure that our regulatory approach to asset management meets the needs of retail investors and market participants at a time when the asset management industry and our markets more generally are rapidly evolving," SEC Chairman Jay Clayton said.

Industry changes. Michael Goldstein of Empirical Research Partners highlighted several aspects of transformation in asset management. The U.S. money management industry is approximately $45 trillion in size and has a substantial retail component, he said. New capital raised by private equity and venture capital has increased though some inertia remains among holdings in general. Interest rates and pricing have a lot to do with investor behaviors, Goldstein noted, but a growing preference for machines over people has changed the industry landscape, as has the trend of companies staying private for longer periods. In addition, mutual funds are getting more involved in the venture capital space, and financial professionals are moving toward describing themselves as "wealth managers" and "financial planners," as opposed to the more common "brokers." This could indicate a shift in the roles in which these professionals see themselves, he opined.

In addition, Goldstein noted that the dominance of "baby boomers" as asset holders has created some inertia and limited disruptions to a certain extent. However, at the same time, the nature of investment advice has shifted toward indexing, he said. According to Goldstein, the more the industry automates, the more decisions and returns are standardized. Technology is increasingly defining outcomes, and automated advice is becoming the norm. Ultimately, this is a reflection of what is happening in the economy and in terms of globalization, he explained.

Deloitte Consulting Principal Ben Phillips agreed that automation and data accumulation are increasing in popularity but also noted a shift from products to services; changing needs are changing consumer demand, he explained. Investors are becoming more outcome-oriented and focused on low fees, and shifts in supply and demand, particularly in connection with the decline in listed companies, are reshaping the U.S. asset management industry, according to Phillips. In addition, there is an enhanced focus on performance fees over asset-under-management fees and mass customization in efforts to align with what customers seek. Asset managers will need to increasingly rely on private markets to achieve client goals, he opined.

Private investments. In a separate panel, Stephanie Drescher of Apollo Global Management noted that credit markets are shifting private, as alternative credit and equity continue to outperform traditional asset classes. This has resulted in a substantial flow to alternative managers, with pensions even seeing increased allocations to private investments, she noted. Blackstone Group’s John Finley opined that volatility is lower in private markets and that adjustments can be made as necessary to ensure growth. We should look at democratizing access to private markets, he said.

Colby Penzone of Fidelity Investments agreed, suggesting that broadening access to private markets beyond qualified institutional buyers and accredited investors could be beneficial. Many investors already have indirect exposure to private investments through funds and other proprietary vehicles or third parties. While investor and intermediary education will be critical in the event of allowing access to private markets, the ultimate benefits could outweigh the costs.

"The SEC is in the protection business and the choice business," Finley noted. The primary focus should be on how to do both with respect to private markets, he concluded.