Achieving

Disruption digital
in European
alpha
in
consumer
asset management
finance:
Lessons from Sweden

Global Banking April 2018 2018

November

Authored by:
Pooneh Baghai
Raj Bector
Kevin Cho
Romain Dequesne
Onur Erzanby:
Authored
Nikhil
AlbionSudan
Murati
Karim
Oskar Thomas
Skau
Allen
ZubinWeinberg
Taraporevala
Achieving digital alpha in
asset management
Even as financial institutions globally have Increasing complexity—of financial markets,
begun the shift to competing in the digital investment techniques, products and distribution,
economy, asset managers generally have and regulation—has led to the expansion of
remained digital laggards. Despite sustained support systems in many directions.
asset growth, revenue pressures driven by
increased competition, the shift to lower-fee Many firms have tried to manage complexity by
passive investments, and the need to comply expanding and patching their legacy platforms,
with new regulations have forced asset leaving them with processes, governance, and
managers to focus on cost management. Only a skills that bear higher long-term costs and are
handful of firms are creating value (what we call not optimized for growth in a digital era. The
digital alpha) through greater investments in result is outsized growth in operations and
digitizing their operations and technology technology spending. While overall costs for
functions. These asset managers are North American asset managers have declined
streamlining systems to reduce long-term costs, by 1 basis point since 2007, the share of
but are also realizing incremental revenues and operations and technology spending has
improving investment performance, according to increased from 15 percentage points of the total
McKinsey’s annual Performance Lens Global to 20, placing it on a par with the costs of sales
Asset Management Survey for 2017. The and marketing and general firm overhead.
correlation between digital leadership and
improved overall performance is no accident: What leaders generating digital alpha have in
McKinsey’s view is that to succeed, asset common
managers must be digital leaders. McKinsey’s Performance Lens Global Asset
Management Survey for 2017 includes an
Of the 300 firms in our global survey, roughly 20 exhaustive study of operations and technology
belong to this select group of asset managers benchmarks, supplemented by interviews with
creating digital alpha (see sidebar on more than 30 heads of operations, technology,
methodology). They share three characteristics: and data at asset managers around the world.
First, they have erased the traditional boundaries The research indicates that firms generating
between their operations and technology groups, digital alpha share three sets of operations and
combining their budgets and development technology characteristics. The first is a close
strategies. Second, they have focused both on partnership between the operations and
reducing costs in legacy areas while simultaneously technology functions, eliminating a traditional and
investing new data, digital capabilities, and talent. increasingly artificial boundary. Digitally advanced
Third, they have made their operations and asset managers combine their operations and
technology capabilities central to their competitive technology budgets and talent, and develop and
strategies, describing their digital strategies as execute joint strategies—such as client
creating, and not only enabling, value. journeys—that span the two functions. The
combined teams also sponsor major new
Operations and technology costs initiatives, such as natural language processing
In North America, operations and technology costs to automate investment mandate governance.
for asset managers have grown twice as fast as
total expenses in the last ten years, roughly Second, digital leaders are establishing two-
doubling in amount (Exhibit 1, page 4). speed technology strategies. On the one hand,
they are aggressively attacking cost and

Achieving digital alpha in asset management

11
 Exhibit 1

O&T costs for traditional North American asset managers are growing
twice as fast as overall industry costs.
Estimated total North America industry costs1 by function 2007-17
$ billion CAGR
%

100% = $89 billion 4

16 6

100% = $59 billion

35 3
Sales and marketing 9

Investment management 26 8
17
Ops and tech 3
8 1 9
Legal, compliance, risk

Management, 14 17 2
administration, other
2007 2017

Cost/AUM 26 25
Bps

Source: McKinsey

technical debt by streamlining their legacy bring expertise in operations and technology;
architecture, eliminating duplicative applications, creating new digital and data roles; and investing
and sunsetting outdated systems. In parallel, in talent development to more effectively leverage
however, they are also investing in next- digital capabilities.
generation technical capabilities (e.g., private
cloud, data lakes, bots and automation) and While digital leaders are spending less on
operating models (e.g., agile application operations and technology overall, they are out-
development and maintenance). investing competitors in data and analytics—30
percent of technology expenses versus 21
Third, digitally advanced asset managers have percent for the survey average. Moreover, they
placed their operations and technology devote a greater share of their overall
capabilities at the heart of their strategic discretionary investment spending to data-related
differentiation. In practice, this means: appointing projects—35 percent more than the sample
COOs/CTOs to the management executive average (Exhibit 2).
committee; seeking new board members who

2 Achieving digital alpha in asset management

 Exhibit 2

Digital leaders in asset management are characterized by heavy

investments in data.
Higher spend on data than the industry … … including more discretionary spend
Breakdown of technology expenses, bps overall and Dollars invested in discretionary data projects, adjusted
percentage to $1 for the industry average

Applications Data 1.35

Market data Infrastructure

3.40
1.00
19% -24%
2.60

25% 18%

19%
21%
30%

35%
33%

Industry average Digital leaders Industry average Digital leaders

Source: McKinsey

Transforming the client experience are transforming their client onboarding processes,
How does an advanced digital approach leading to far more rapid cycle times and
translate to greater client experience? One dramatically lower costs (Exhibit 3).
answer is by reimagining and automating core
business processes to emphasize sales and Redesigning the onboarding journey does more
service, while reducing the cost of non-client- than lower costs: funding new accounts more
facing operations. quickly engages clients and can enhance
managers’ revenues by accelerating the
Onboarding of new institutional clients is recognition of fees.
traditionally cumbersome and highly manual for
both clients and managers, leading to high costs. Institutional asset managers are using new
An executive at one asset manager described how analytics tools to transform the client experience
a lack of accountability resulted in an onboarding and improve AUM retention. Portfolio managers
process involving almost 300 employees being are making faster and better-informed investment
copied on e-mails. All digital leaders in the survey decisions through position, performance, and

Achieving digital alpha in asset management 3

 Exhibit 3

Digital leaders in asset management are transforming the

client-onboarding journey.
Fast institutional client on-boarding… ...at lower cost through automation
Average time to on-board a new institutional Operating costs for client on-boarding, adjusted to
client, days industry average

~23 100

-62%

-75%

~9

25

Industry average Digital leaders Industry average Digital leaders

Source: McKinsey

attribution reporting integrated with clients’ risk guidelines and allowing portfolio managers to
management and accounting systems. establish positions more quickly. Firms also have
invested in analytics that assess portfolio managers’
Retail-oriented firms have built propensity models actions in advance of trades, and help to counteract
to help their wholesalers provide financial behavioral bias in investment decisions. The payoff
advisors with analytic tools such as “next product on the latter investment has been substantial,
to sell” predictors, which can improve wholesaler adding 100 to 200 basis points to portfolio returns.
productivity, while maintaining or even lowering
the costs of distribution. Additionally, every firm in our digital leadership
group maintains an investment book of record,
Improving investment insights which compiles security positions across
Digital leaders also realize benefits in the investment portfolios to provide a timely and accurate view
process. Some have automated their investment of market exposure, eliminating the need for
management agreements with natural language manual reconciliations and speeding up the
processing, ensuring rapid compliance with client investment process.

4 Achieving digital alpha in asset management

 Exhibit 4

Digital leaders in asset management are outperforming peers.

O&T costs AUM growth Profit margin

over revenue % %
%

16 6 51

30
9
3

Industry Digital Industry Digital Industry Digital

average leaders average leaders average leaders

Source: McKinsey

Digital leaders in asset management are of revenues versus 16 percent, and they realized
rethinking their footprint and sourcing strategies growth in AUM of 6 percent, double the 3
for the middle and back offices; rationalizing percent average. Moreover, profit margins were
commoditized and low-value activities; while far higher, at 51 percent, versus 30 percent for
keeping talent focused on the highest-value the full survey group (Exhibit 4).
strategic differentiators. For some, this has
meant opening low-cost locations as well as The survey results show a strong association
outsourcing. between firms’ digital strategies and growth,
efficiency, and profitability. This correlation may
Delivering superior financial performance not be causation: asset management is a
The 20 or so asset management firms that we complex business, and markets and investment
identified as digital leaders also reported stronger decisions can have a stronger impact on
financial performance than the full sample. In performance than how firms organize their
2017, their operations and technology costs operations and technology.
were far below the group average, at 9 percent

Achieving digital alpha in asset management 5

 Methodology
To identify asset managers generating digital alpha, we looked for firms that were in the top decile
in each of the following three dimensions:

Architecture: Firms with a streamlined application landscape (e.g., focused set of vendors across
the value chain), high infrastructure and application stability, and strong cybersecurity protocols

Analytics: Firms with an integrated data strategy, actively using algorithms and advanced
analytics (e.g., machine learning) to improve investment performance, strengthen product
distribution and client relationship management, optimize operations, or manage talent

Activities: Firms that have been focused on reducing cost and improving efficiency through
automation, user experience, and client/associate journey redesign

These digital leaders are diverse in terms of geography, client channels, asset-class focus, and
size, but are linked by three crucial financial outcomes: superior growth in assets under
management (AUM), lower overall operations and technology costs, and higher profitability—
earning margins of 51 percent as a group, versus 30 percent for the survey average.

However, operations and technology are a talked about how both the CEO and the CIO
meaningful component of costs, and a had prioritized these initiatives within the
streamlined operating model provides a organization. Securing the support of the CIO
foundation for higher profitability. Moreover, in a is crucial to ensuring that the digital strategy
business so dependent on markets, and an receives the sustained investments needed to
environment where investment alpha has become be successful. None of the leaders believed
unpredictable and difficult to achieve, every basis that a grassroots approach would have
point of profitability matters. delivered the same outcomes, even if given a
longer runway.
Becoming a digital leader in asset management
The journey to digital leadership in asset ■ Make the first “at bat” count: Take a
management can take years, depending on a journey approach. To convince skeptics in
firm’s starting point. While none of the COOs the organization (often, portfolio managers
interviewed during our research felt they had and relationship managers), many leaders
completed their digital transformation, they spoke about the importance of having a
observed that they were already reaping the signature initiative that would engage many
benefits of the journey. Aspiring firms need to parts of the organization and illustrate a
keep the following imperatives foremost in mind: significant change between the old and new

■ Tone from the top: Co-opt the CEO and

worlds. For instance, while trade operations
can often involve significant costs and
CIO. Each of the digital leaders we spoke to inefficiencies, several leaders pointed out that

6 Achieving digital alpha in asset management

 these were often “invisible” to portfolio functions. A single product owner was
managers. To win support, they picked end- assigned—often from investments or
to-end journeys that were very visible (e.g., distribution—to avoid the historic challenge of
institutional client on-boarding or client sponsorship abandonment.
reporting) to begin with. Rethinking the entire
client (or associate) journey means involving The chief operating officer of a $1 trillion asset
virtually every part of the organization, and manager told us: “For my 40 years in the
demonstrating a tangible difference in the business, my job has been operational delivery.
experience as a result. Now it has become business transformation and
value creation for my firm, and I’ve never been
■ Keep scale in mind throughout: Build more energized by the task ahead.”

■ ■ ■
agile, cross-functional teams with
dedicated product owners from the
business side.The digital leaders in our While asset managers generally remain further
research focus on building flexible and re- back on the S curve of digital disruption relative
usable technology that enables them to scale to other financial services firms, some institutions
capabilities quickly. While the term agile is are already building new digital capabilities and
overused, all the leaders spoke about two harvesting the rewards. They are outperforming
themes in their approach: first, a deliberate the industry in asset growth, operating efficiency,
effort to build capabilities within their teams and profitability. Yet, as asset managers know
(e.g., introduction of agile academies and only too well, sources of alpha rapidly erode
coaches to bring concepts to life); and without continued innovation. The question for
second, the creation of cross-functional executives therefore is not whether to invest in
teams with active participation from new digital capabilities, but how to do so in the
investments, distribution, and the support most effective way possible

Pooneh Baghai is a senior partner in the Toronto office, where Karim Thomas is an associate
partner, and Raj Bector is a partner in the Washington DC office. Kevin Cho and Nikhil Sudan
are associate partners in New York, where Onur Erzan and Allen Weinberg are senior partners.
Romain Dequesne is an associate partner in Paris.

Achieving digital alpha in asset management 7

Global Banking Practice
November 2018
Copyright © McKinsey & Company
www.mckinsey.com/clientservice/financial_services