2024 investment management outlook | Deloitte Insights

Getting reliable results with technology and processes

Firms will likely have to find a way to invest in technology improvement even amid weak performance and margin pressures. Without the right technologies and matching processes and controls, investment managers could fall short of client expectations and internal efficiency goals. The state of technological development supports how and how well the vision and strategies are executed.

Meeting client expectations

Clients are delighted, or not, through their experiences. In investment management, investment performance is important, but it’s not the only factor in developing customer experience (CX). When performance wanes, the other elements of the CX can make the difference.

Investment vehicles and portfolios

Investing in client-centricity is predicated on knowing the target investor, the types of investments they want, and how the client prefers to interact with their investments and their investment manager.

Several product development trends are gathering steam—across areas such as packaging, pricing, investment strategy, theme, and operational approach to investment offerings—indicating what could be in store for 2024. Here’s a closer look at some of them.

Even though the first ETF was launched in 1990, ETFs remain one of the main drivers of innovation in the investment management industry. Pricing and liquidity characteristics have led to increased ETF usage, while placing competitive pressure across the industry.

Actively managed ETFs are one of the latest developments, and while the concept of active management in an ETF is not new, 2023 saw rapid growth. The AUM for active ETFs rose 10.6% year over year in 2022.⁴⁶ Globally, actively managed ETFs accounted for 14.3% of net ETF fund flows in 2022, off a smaller base of only 5.3% of ETF AUM.⁴⁷ Increased tax efficiency and enhanced transparency are likely driving this trend.⁴⁸ There were 1,878 actively managed ETFs globally offered by investment management firms, comprising about US$488 billion of the US$9.3 trillion in AUM held in ETF at the end of 2022.⁴⁹ A healthy slate of mutual fund to ETF conversions contributed to the significant growth of active ETFs in 2023. With the now broad menu of active ETFs available, a majority of surveyed advisors and investors indicate that active ETFs will likely become part of their future investment portfolios.⁵⁰

Another innovation in investment management packaging is direct indexing, a technology-enabled tactic that is challenging both traditional mutual fund and ETF packaging approaches. Direct indexing is a twist on separately managed accounts (SMAs) because they offer the ability to deviate from an index, or fixed basket of securities, owned individually by the investor, for tax efficiency and client preferences. Retail investors often access this personalization through technology via a registered investment advisor relationship. However, retail brokerage and advisory providers are also offering these products to retail investors through an investment advisory intermediary. The investment minimums and pricing for direct indexing are both trending down, making these products more accessible for many retail investors, including those that use investment advisors.⁵¹ Some investment managers are trying to stand out by offering a diverse breadth of investment options, while others are trying to differentiate based on their investment minimums and trading frequency. Investment management firms face a new competition from direct indexing because the investment manager can be largely replaced with a customized basket of individual securities, supported by a technology platform operated by a wealth manager or registered investment advisor. According to a forecast, assets in direct indexing products are expected to reach US$825 billion, growing at a CAGR of 12.3% through 2026.⁵² If this approach proves to be an offering that helps firms gather AUM, then both active and passive managers would have fresh competition for AUM, one with a level of customization that can’t be built into either ETFs or traditional mutual funds. Investment managers do not want to miss out on this trend and so, over the last couple of years, many investment managers, including Morgan Stanley, BlackRock, Vanguard, Franklin Templeton, and JPMorgan Chase, have added direct indexing capabilities.⁵³

As investment management firms strive to become more customer focused, they should consider investment vehicles used to house and distribute the investment intellectual property. Efforts to challenge assumptions and ask strategic investment vehicle questions could pay off:

• Why did the investor choose this investment strategy in this vehicle?
• Is there a lower cost way to provide investment intellectual property to the investor?
• Does the investment strategy provide tax efficiencies for the investor in the current vehicle?
• Are the fees associated with operating the investment vehicle commensurate with the value they offer to the investors in that vehicle?
• Does the vehicle provide liquidity that is appropriate for executing the investment strategy and for the investors?

As investment managers evaluate such strategic questions, the pace of change among investment management products will likely accelerate. Enabling technologies tend to be undergoing change faster than investment product development.

Inside the investment vehicle

Theme-driven portfolio construction is emerging as another vector for product development. The age-old classification of investment strategies into scales of growth versus value, large cap versus small cap, and by industry sector are not likely going away. That said, investor-centricity is helping to drive development of new classification schemes. ESG and its myriad varieties are investment themes that resonate with many investors. Emerging technologies is another theme that might interest a segment of investors. These themes address the client’s holistic desires by answering their noninvestment-oriented question: What is the nature of companies you want to invest in? Some investors will likely respond with “companies that have the highest growth potential,” or “investments that provide strong and steady dividends.” However, increasingly, investors want to invest in companies with values that aren’t typically found on the balance sheet or the income statement—for example, those that positively impact the environment, society, or equity.

A subjective values approach, when applied to ESG investing, places the judgment of positive impact into the hands of investment managers. It represents a meaningful departure from the way corporate behavior has been evaluated throughout history. The competitive marketplace for products and services historically judged firms through Adam Smith’s invisible hand, supported by distribution of information by capable, objective journalism.⁵⁴ Corporations that maintained a clean reputation developed brand value and subsequently had healthier financial results.⁵⁵ Investment managers were absolved from evaluating the ESG characteristics of companies under this approach, with the financial results presumably telling the whole story.⁵⁶

ESG product development is adapting to regulatory refinement. Globally, while several new ESG or sustainable funds have been launched, many others have either changed their names, dropped their classification, or closed altogether due to regulatory changes.⁵⁷ Product development is proving difficult for both investment management firms and the companies they are evaluating for potential investment because what is “good” is often a matter of perspective or personal preference. This problem will likely be difficult for the investment management industry to solve. In the meantime, ESG investment portfolios will likely indicate that the firm is evaluating ESG characteristics in the portfolio according to a set of guidelines and priorities established by that investment manager.

Firms that excel at investing for both financial and more esoteric ESG returns will likely use advanced technologies and alternative data to capture information on corporate behavior, evaluate it in a disciplined way, and connect corporate behavior to stock price performance. The technology for this approach is most likely active at only those firms further down the digital maturity path. For example, Candriam uses a proprietary database to coordinate and monitor engagement with investee companies.⁵⁸ The database supports collaboration, a tangible building block in the virtuous cycle, between the ESG and investment teams, with easily accessible granular detail.⁵⁹

Another thematic investment approach focuses on emerging scientific advancements. The themes are similar to ESG in that they deliver on the investor’s desires for these companies in their portfolios. Examples of investment themes include space exploration, health care, and the farming value chain. The difference between these themes and ESG is that participation in the ecosystem or the value chain of the theme qualify the investments into an index for evaluation. Then, based on financial results or potential, the portfolio companies are chosen to be part of a thematic portfolio. As of July 2023, thematic ETFs numbered 1,234 and had a total AUM of US$280 billion, accounting for just over 2.6% of the global ETF industry’s total AUM.⁶⁰ The number of thematic ETFs globally increased by 10% from 1,119 at the end of December 2022 to 1,234 in July 2023.⁶¹ The investment management industry is adapting its products and services to meet client preferences.

Excellence in execution for investment solutions

For active managers, providing alpha or risk-adjusted performance that is superior to a lower-cost index approach can be a strategic pillar for their firms. Investment management firms routinely face the question: Why should your firm be selected to manage this investment portfolio?

Winning answers often describe an operating model that is designed specifically to create investment portfolios with unique value propositions. There are many, widely divergent successful investment management operating models. The latest trend is to seek alpha through robust evaluation of more data related to company and market performance and to incorporate more advanced analytical approaches. These approaches could include AI, for example, to correlate massive amounts of data and investment performance, creating an information advantage over the market.

This is easier said than done. The concept of getting more data and better analysis is no surprise to investment management firm leaders, but executing this strategy includes many complications. First, both new and traditional data can have low signal-to-noise ratios, which may produce more static than song. Another possible complication is the dramatic change in the process of finding data sources with potential investment signal. There are literally hundreds of small firms, and many large ones, that offer data products with potential for alpha for various strategies and markets. In addition, the process for finding the investment insight in a dataset may require the close collaboration of a data scientist and an equity analyst, people with extensive—but very different—vocabularies. Having the right people in the right role is one of three top challenges that organizations face during the operational digital transformation journey, according to this year’s survey respondents.⁶² This is where talent models, by fostering collaboration, cross-training, and shared success, can develop people to overcome the difficult and wide-ranging issues that arise when working to generate investment signals from new data sources. Leadership can also contribute to this success by reinforcing the firm’s purpose, which tends to help foster strong collaboration. Our survey found that firms with stronger senses of purpose were significantly more likely to have much stronger collaboration capabilities (26%) compared to firms that don’t (18%).⁶³

Achieving excellence in customer experience

Excellent investment performance generally has a halo effect on customer satisfaction, but customers typically expect more than that from their investment vehicles. Beyond investment performance, expectations often include personalization and timeliness of interactions, and technology plays an important role in staying aware of customer needs.⁶⁴ It’s important to note that customer expectations do not necessarily originate within the investment management industry; often the expectations are established outside the industry by firms that provide leading edge customer service.

Investment management firms with significantly better revenue prospects are more likely to become industry leaders in CX.⁶⁵ Understanding the customer (likely multiple personas) is one of the first steps to becoming a leader in CX.⁶⁶

Investment managers with a high quality, differentiated CX, often start with a strong foundation by effectively managing the daily aspects of the client-manager relationship, seeming to follow a “walk before you run” approach.⁶⁷ Edward Jones, for example, is investing in increasing personalization, enhancing tax management capabilities, and expanding the list of eligible investments to increase CX.⁶⁸ Many investment management firms have created senior positions responsible for improving CX.⁶⁹ The drivers for positive CX, apart from investment performance, are: ⁷⁰

• Clear and transparent fund performance and disclosure reporting
• Timeliness and clarity in customer communication
• Frictionless onboarding and customer grievance resolution
• A long-term relationship approach as opposed to short-term customer acquisition strategies and upselling
• Genuine consideration and application of client preferences and feedback

CX is one of the areas that generative AI will likely transform over the next few years. Generative AI—coupled with customer segmentation, past interactions, and access to portfolio information—could conceivably supply speed, accuracy, and personalization to the CX, directly addressing the first two of the five components of nonperformance-linked CX.

One of the early iterations of generative AI was actually developed before generative AI became a household word; it was called natural language generation (NLG). Interestingly, NLG appeared before there were observations of hallucinations in AI, which likely result from the new large language model (LLM) approach. NLG was able to, in a structured and limited way, fully create performance attribution reports from structured investment performance data.⁷¹ Adding to this approach, LLMs enhanced efficiency and control, and provided new levels of sophistication and customization to the portfolio reporting process.⁷² Additional training on the performance reporting parameters coupled with proprietary performance data can partially mitigate the risks of hallucinations.

Generative AI can help transform the timeliness and clarity of customer interactions. Imagine a customer asking the names of top drivers of alpha in their portfolios’ funds over each of the prior four quarters, showing how each performed compared to their industry sector peers. A fully developed, generative AI capability could perhaps answer that question in a matter of seconds, which might be hours faster than pre-generative AI processes could generate. However, like many transformational changes, this one would likely require close collaboration across the organization—including, front, back and middle office, finance, information technology, and risk management—to become operational. One such example is T. Rowe Price, which is undertaking investments in AI pilots across business operations—including distribution channels and technology units—to try to capitalize on the benefits of machine learning.⁷³ With many investment firms investing in this, generative AI-enabled CX capability is expected to advance rapidly in 2024. 

Solving the larger, more difficult modernization challenges likely requires collaborative, cross-functional teams to develop effective solutions, coupled with leadership’s communication of the vision and talent, which places the right people in the right positions and reinforces the right behaviors.

Meeting management expectations

Efficiency and control

Delighting customers is a goal of almost every firm, but doing so inefficiently without control can be a recipe for disaster. Competitive pricing and profitability typically demand efficiency, and the highly regulated investment management industry does not tolerate lack of governance and controls. In a fast-paced and highly competitive industry, balancing these often-competing priorities is difficult under normal conditions, but when new disruptive technologies enter the picture, the complications grow. In 2024, some investment management firms will likely develop two such game-changing technologies, generative AI and quantum computing, into their digital transformation journeys. The industry is making progress, with 50% of survey respondents reporting that they have fully or almost fully realized the potential benefits of digital transformation, a rise from 44% last year.⁷⁴ The standard for comparison is moving, and firms without generative AI or post-quantum encryption capabilities in 2025, will likely be much less optimistic about their digital transformation progress.