Erich Gerth (pictured), CEO of RBC BlueBay
The current pressures facing asset managers have created a tipping point in the financial services industry.
From the ever-increasing regulatory compliance – with Consumer Duty, Sustainability Disclosure Requirements (SDR) and Overseas Funds Regime (OFR) being the latest, and largest, pieces of financial regulation introduced over the last 12 months – to rising business costs and competition, asset managers have had to rethink what their future looks like in the sector.
Indeed, a study from PwC last year forecast that as many as one in six asset management groups are likely to disappear from the industry over the next two to three years as a result of lower fees and higher turnover, mostly driven by a push towards consolidation to relieve some of the burdens currently weighing on firms' shoulders.
This could result in the top ten asset managers controlling around half of all fund assets globally by 2027, the study argued.
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But it's not just about complying with regulation and catching up with competitive fees, notes Erich Gerth, CEO of RBC BlueBay, as he argues that scale will be a make-it-or-break-it factor in the survival of asset managers in the near future.
"The changes that have occurred are creating a tipping point in our industry," he says.
Gerth lists Brexit as one of the "defining moments" for financial services and asset management due to the increased costs it brought for keeping or setting up operations in continental Europe and in the UK.
Bigger is better
But Brexit is just one of the challenges the industry has had to face – or is gearing up to face in the not-so-distant future – Gerth notes. The ever-increasing amount of regulation and compliance, alongside technological advances and ESG, are slowly but surely becoming determining factors for a firm's success in the long run.
In order to succeed however, scale will be "critical", he says, as firms who cannot tap into the benefits and relief that scale provides will find themselves "marginalised, because the resources will have to come from somewhere".
Noting PwC's study, Gerth argues consolidation will be inevitable, especially for those firms that cannot cough up the resources on their own.
He exemplifies RBC BlueBay's own path, as BlueBay was acquired by RBC in 2010. "We were growing successful year in and year out, but we were running faster and faster to stand still."
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The CEO also notes the stark differences between the US and European sectors, considering the large gulf between firm sizes and amount of fragmentation between the two regions.
In the US, to be one of the big firms "you need to have ‘trillion' at the end of your assets under management", whereas in Europe, a firm could be "anything over €50bn or €100bn" to be considered one of the leading asset managers, he says.
And that is why if you don't have scale, the future will be "challenging", Gerth states.
Not just in terms of size, but all else that comes with it, especially the fee pressure firms have been facing over the last decade or so.
"I think it's a very different environment […] and this is going to be a dynamic in the industry that's going to be very different than what it was 10-15 years ago, where everybody just wanted to do their own thing," he adds.
Boutiques will likely be the most at risk as a result, Gerth argues, because even though he is a fan of "specialisation", he notes that boutiques' lack of size will likely lead to an inability to "withstand the cost pressure".
This is because financial regulators are not cherry-picking what aspects of regulations smaller firms can abide by, as he highlights that compliance is "not negotiable", and efficiency will be key in ensuring a company's survival.
Higher bar to success
"The bar is being raised when it comes to how large a firm needs to be to be successful," he says. Specialist firms will need to abide by a higher bar as well as cope with more limits on what they can do, while larger firms will continue to gain market share at their expense.
But scale alone won't be the sole solution, Gerth argues, noting the "considerable differentiation" potential that "non-performance alpha" can add for a firm and its success.
"We can no longer run little cottage industries; we have got to figure out how to be efficient," he adds, arguing that asset managers should focus as much about scale as they should about internal culture.
Without the right flexibility, range of alpha sources and operating platform, "you're at a disadvantage", the RBC BlueBay CEO says, and if combined with a culture where "everyone is running in silos", firms won't capitalise on whatever advantage they may have on their competitors.
Black-box thinking
Where most firms "go wrong", he notes, is they still have "lots of hierarchy" without much transparency within the organisation itself. "If no one tells you what's going on, you're afraid to make decisions," because professionals are not being made aware of the wider picture within the firm.
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Then he calls for the implementation of what he calls "black-box thinking": a metaphor around the inner workings of planes, where the black box gets picked apart anytime something goes wrong.
"They look at it without vilifying it, because mistakes happen all the time," the CEO says. They learn from it by doing a "postmortem" to understand any improvements needed.
"When you start creating that type of culture, those that are often marginalised get a sense that they have the information [to make an informed decision] but if it doesn't work out, that will not be an excuse to either shove someone to the side or further marginalise [them]'," Gerth continues.
Additionally, such a push is not only coming from within firms; even consultants are increasingly turning their attention to culture, the way a firm deals with clients, and its level of engagement, Gerth says, speaking from experience of interacting with several of them over recent years.
"I can see it just in the durability of assets," he continues. "The higher the level of engagement with clients, the higher the switching costs, and the lower the probability they will leave as you go through the natural ups and downs of performance.
"But if you don't have the durability of assets, you don't have scale," he adds, emphasising that will take away the ability to offset regulatory compliance and rising costs with "top line growth", making asset managers' survival challenging in the years ahead.
