Predictions on the Asset Management Industry for 2024
By Todd Moyer, President and Chief Operating Officer, Confluence
Driven by the SEC’s busy agenda and economic headwinds such as bank failures, 2023 is proving to be another turbulent year. The new Tailored Shareholder Report rule, Form PF changes, changes to the SEC’s private fund rules and the SEC’s climate disclosure proposal are all underway, set to have major impact.
Simultaneously, AI is transforming how asset management firms operate and comply with regulations, new and old.
Disruptions such as rapid consolidations, especially among mid-tier active managers, are adding to market dynamics. And with assets under management declining at the fastest rate in 15 years, investment firms are recognizing the benefit of partnering with fewer and larger vendors. Technology providers with complementary capabilities are consolidating, leading to heightened cost pressure as M&A activity becomes a one-stop-shop for solutions and services.
All that said, heading into 2024, here are the three trends we predict will have the most impact on our industry.
Prediction 1: As rising regulation clashes with unstructured data, AI may be the sole solution
Regulatory authorities embrace digital solutions. Several recent examples, such as TSR and iXBRL, reveal that investor and regulatory documents are becoming one and the same, ramping up the pressure on firms to have the right data and systems to deliver greater transparency.
At the same time, new technology, particularly in AI and large language models, is making it easier than ever to automate the gathering, analyzing and submitting of regulatory reports. Several institutions are known to use AI and machine learning in various capacities; as just one example, State Street is developing investment models and strategies using AI and applying it in ESG investing.
Here’s the caveat. While AI has led to productivity and efficiency gains, most applications have been powered by structured data. That’s a severe constraint. But pairing generative AI with LLM (Large Language Models) has unlocked AI to work with unstructured data, a sea change.
So while we’ll see many applications of GenAI/LLMs across all industries and domains, Investor communications and regulatory reporting have a particularly high level of unstructured data. This creates an above-average opportunity for GenAI/LLM pairing to improve efficiency and client experience. Watch for it.
Prediction 2: Firms with alternative and/or proprietary data will reap the benefits
Demands for greater data access and transparency will only intensify. Regulators may even open consultations into data access and rights. Efficiently handling large volumes of granular data is no longer optional; it is necessary for identifiers such as CUSIPs that enable data integrity within financial systems.
ESG ratings are a prime example of the effects of data regulation. With increased emphasis on ESG data to assess companies’ sustainability and ethical practices, we expect to see more firms invest in robust data systems to meet new analysis and reporting standards.
Exchanges will continue to play a crucial role in providing financial data, including market prices and trading volume. But given exchanges’ significant control over access to and pricing of this data, asset managers will be seeking alternative data sources.
Net net? Firms that have proprietary and unique data sets, and are able to leverage them, will have a significant advantage over those that don’t. In 2024, we will see more asset managers use and reuse data across the business.
Prediction 3: Heightened scrutiny will force private assets to manage risk like public funds
Recent regulatory reforms signal the increased importance the SEC places on risk management. Investors are continuing to demand better risk assessments of their private investments. That, in turn, puts pressure on managers of private assets to provide the heightened level of transparency appropriate for inclusion in an overall risk management program.
Appropriate asset allocation strategies, monitoring, and thorough due diligence to address diverse types of risks will continue to remain top of mind for asset managers. The SEC recently adopted its much anticipated updates to the private fund rules in late August. These reforms include a new quarterly reporting requirement covering performance, fees and expenses of private funds increasing the transparency of these products to end investors.
While less earth-shattering than expected, this increased scrutiny from the SEC portends similar changes to other alternative regimes. We anticipate even further regulatory reforms, possibly involving revisions to regulations such as UCITS/AIFMD, further money market fund reform, and liquidity/risk reporting.
In conclusion
To address the challenges inherent in rising regulation meeting unstructured data, the asset management industry will be embracing AI-driven technologies in 2024. Firms with proprietary and unique data will have a significant advantage over those that don’t. In addition, risk management will emerge as a central focus in private asset management.
