Reinventing asset and wealth management: How are ultra-low interest rates affecting the sector?

With many more years of ultra-low interest rates ahead, savers will be on the hunt for better returns. This could not only increase assets under management (AuM), but also attract more interest in high yield alternative investments. How can your business capitalise?

With COVID-19 infections rising and many economies going back into lockdown, economic recovery looks set to be a long and difficult haul. The need to stimulate fragile economies means that interest rates will remain low or even negative for the foreseeable future. This creates opportunities for asset and wealth managers, but could also change the dynamics within the sector.

Competing for investment

As we at PwC explore in our newly launched Securing your tomorrow, today: The future of financial services, the prospect of dwindling savings returns and even paying banks to hold depositors’ money will encourage an increasing number to switch their cash to other investment opportunities, including managed funds. However, some asset and wealth management (AWM) organisations are in a better position than others to attract these new investors and help them provide for their futures.

 The simplicity and affordability if passive funds could make them the preferred choice for many clients looking to switch from bank deposits and fixed income investments. In turn, alternatives look set to take on more of the alpha mantle as funds seek to boost yields in the difficult economic environment and diversify investment beyond crowded public markets. Many AWM organisations may therefore look to increase their alternative allocations.

 Yet alternatives are no panacea. Many investors, regulators and fund managers would prefer not to expose clients to the risks. Alongside alternatives, increased investment return would therefore have to come from within the capital markets. This would provide renewed opportunities for active managers to differentiate and grow. Investors are prepared to pay more if the performance and client experience justify it.

 The other big question is how to engage with these new clients. The severe limitations on face-to-face interaction have accelerated the digital switch within AWM. Managers with advanced digital analysis and omnichannel engagement capabilities have been able to create a compelling customer experience, from electronic onboarding to investment advice and real-time reporting on portfolio performance. Others have been scrambling to catch up.

This digital shift will continue to gather pace as digital platforms evolve to offer lifetime wellness solutions. This might be day-to-day spending analysis and money management as well as help with savings and retirement solutions. By creating this always-on relationship, managers can develop richer and more revealing insights into financial behaviour and needs, which they can turn into more precisely tailored products. This is the equivalent of a high net worth wealth offering for a mass affluent market.

Funding recovery

Further openings include bridging the lending gap. Thanks in part to the cost differential between regulated and unregulated capital, non-bank credit to the private non-financial sector already now exceeds bank lending in advanced economies. Any rise in business failures as economies continue to struggle would put increased pressure on banks’ balance sheets and ability to lend. SMEs could be especially vulnerable to any dip in the availability of bank credit. This would create an opportunity for private credit funds to fill the breach by helping finance businesses with strong growth potential, but difficulties in accessing mainstream funding.

 Giving your business the edge

So, what marks out the likely winners in this low interest rate environment?

1/ Repair and move on  

The immediate priority is tackling any deficiencies on cost-efficiency, digital connectivity and product offering. You risk missing out on new investors and losing mandates if don’t get up to speed quickly.

2/ Rethink your solution set

Investor expectations are changing. What are the fresh opportunities and gaps in the market opened up by the low interest rate environment? How can you strike the right balance between alt alpha, passive beta and an active core to deliver standout returns, while reflecting clients’ specific savings goals and risk appetites?

 3/ Reconfigure your capabilities

Delivering requires new skills and capabilities. This might be acquiring alternative managers or specialist teams. You could also look to digital platforms to get closer to clients, sharpen understanding and create a more compelling experience.

You can’t deliver everything on your own. Partnership can help you to augment your capabilities and reach into new markets. Further opportunities include forming funding alliances with banks that combine with their relationships and skill sets in areas such as credit monitoring and collection.

Market opens up

In future blogs, I’ll be looking at further drivers of change and how to meet them including the growing expectations on environmental, social and governance (ESG) issues.

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