The Generative AI Tipping Point is our 2023 global wealth and asset management report with Morgan Stanley. We explore the industry outlook, strategies for gaining market share, and the impact of generative AI on wealth and asset management.

The generative artificial intelligence (AI) revolution is well underway and is already transforming the way asset and wealth managers operate and are delivering significant efficiencies. With that said, it is important to recognize that generative AI is just one piece of an integrated strategic approach that asset and wealth managers need to adopt to drive sustainable growth.

In our 2023 global wealth and asset management edition with Morgan Stanley, we discuss how the revolutionary power of generative AI can be implemented to drive better investment decisions, engage clients more effectively, and enhance productivity across the value chain. We also put this revolution in the broader context of major industry and macroeconomic trends that will force asset and wealth managers to take specific actions to capitalize on growth opportunities and reimagine their operating models to build greater resiliency in their businesses. Our report has been informed by interviews with senior executives of asset and wealth managers with approximately $21 trillion in combined assets under management (AUM). Below is an excerpt of our report, please click here for the full version of "The AI Tipping Point."  

Global asset management outlook

Despite the market rebound in 2023, the asset and wealth management industries still face a long-term shift in the macroeconomic environment. The continued shift toward protectionism, nationalism, and multipolarity has further exacerbated macroeconomic challenges, ushering in a world order characterized by more restrictive central banks, less fiscal flexibility, and greater geopolitical instability that will likely take a toll on global growth and wealth creation.

In working with leading asset and wealth managers around the globe, as well as in our interviews with senior industry executives for this report, one thing has become clear, however: Leading managers are embracing these challenges and using them to galvanize their firms’ commitment to reexamining their strategies, reimagining their operating models, and embracing new capabilities like generative AI to drive value and build resiliency in their businesses.

Given the macroeconomic backdrop, our outlook for the asset management industry is for modest growth. We forecast total externally managed assets to grow at 7% from 2022 to 2027, or a more normalized rate of 3.6% when measured from 2021, driven mainly by private markets.

We expect private markets to continue fueling global AUM growth, but at a slower rate relative to past years (the compound annual growth rate (CAGR) was 19% from 2017 to 2022, and it is projected to be 13% from 2022 to 2027) as signs of private equity fundraising struggles have emerged in 2023 and as institutional allocation slows from peak. Nevertheless, it should still outgrow other segments, ultimately accounting for 16% of global AUM by 2027 versus 12% in 2022.

The growth will not be equally shared by each market segment. Exhibit 1 shows our five-year projection of assets under management (AUM) across main product categories of hedge funds, private markets, solutions/multi-asset class, passive strategies, money market funds, and core active strategies — taking into consideration our view on expected relative flows across products and industry consensus forecasts for market returns.

We expect revenue CAGR to be slower than overall AUM growth (projected to be 5.2% CAGR in 2022-2027 versus 7% AUM CAGR), or a more normalized 4.7% revenue measuring from 2021 due to: 1. Some slowing of private markets AUM growth and slight mix shift to lower fee debt strategies; 2. persisting fee compression across most asset classes, particularly core active and passive, albeit at a moderated pace; and 3. additional mix shift impact from a rotation to lower-fee fixed income strategies.

Global wealth management outlook

For the first time in more than a decade, global household wealth shrank in 2022, but a rapid rebound is expected. Inflation, rising interest rates, heightened geopolitical tensions, and uncertainty regarding economic growth negatively affected wealth growth, leading to a decrease of approximately 4% in 2022.

After the long bull market, the wealth management industry is now encountering a more challenging market environment, with structural headwinds hitting both the revenue and cost sides. The recent decrease in revenues has been largely driven by drops in AUM and loan volumes, as well as a significant reduction in transaction volumes as clients have pulled back trading activities relative to the elevated levels during COVID-19. This revenue slowdown combined with the strong wage inflation driving costs up has intensified profitability headwinds.

Looking forward to 2027, we expect global financial wealth to grow at 6% (projected from 2022-2027) annually, with a strong rebound in 2023. We expect the Middle East and Africa, Asia-Pacific (APAC), and Latin America to lead, with growth rates of 8.2%, 7.4%, and 6%, respectively. Within APAC, Japan’s growth will remain slow relative to the rest of the region, at 2.9% (projected from 2022-2027). Furthermore, while China remains one of the main growth drivers in APAC, recent uncertainty has brought its outlook more in line with the rest of the region, at 7.6% (projected from 2022-2027). In absolute terms, North America and APAC are expected to drive more than 75% of worldwide new wealth creation until 2027.

In our next section, we discuss key actions asset and wealth managers can take to reexamine their strategies, reimagine their operating models and embrace new capabilities like generative AI to drive value and build resiliency in their business.

Three actions for asset managers to drive profitable growth and operational resiliency

The combination of persistent stress on asset manager operating models, the fading of macroeconomic tailwinds that have benefited all firms, and revolutionary changes being ushered in by generative AI has created a set of conditions that will raise the competitive bar and prompt a “big sort,” causing a large gap to emerge between leaders and laggards.

The leaders, for example, those that will end up being on the right side of the “big sort,” will be those that invest in and position their businesses to take advantage of faster-growing areas, and take specific actions to drive profitable growth and build operational resiliency. We see three main actions.

1. Fuel the active management engine to win share

The rise of passive investments at the expense of active management has been the single most disruptive trend to the asset management industry over the last 20 years.

The bright spots in core active management have been limited, and the relentless trend toward passive has been driven by many factors; chief among them is that active management has not been able to consistently demonstrate its value-add. That said, we see significant opportunity ahead for firms that can capture share despite persisting secular challenges.

Money-in-motion (reallocations within the active space) create a battlefield for active asset managers that cannot be ignored. According to our analysis, the flows between core active funds are estimated to be more than three times that of net flows into passive funds (Exhibit 2 below). In other words, for every $1.00 outflow to a passive fund from an active fund, approximately $3.00 in flows between core active funds are available to be captured by active managers.

While delivering investment outperformance (for example, performance alpha) will remain a critical driver of flows, it is not the only one: Managers that can deliver sources of “alpha” via product innovation, distribution and service, and fee structures will also be able to win share.

2. Optimize institutional pricing to capture significant revenue uplift

Fee pressure, most notably on traditional strategies, has been relentless as institutional investors continue to switch core exposures to passive while consolidating the number of managers they utilize — giving them additional leverage to negotiate larger, volume-based fee discounts.

Managers are not helping themselves, with many having large pricing dispersions across their managed accounts, leading to massive profitability skews. Asset managers are leaving money on the table. Taking the example of a generic $500 billion manager that has an unnecessarily large dispersion, and extrapolating a subset of the manager’s mandate data to cover its entire portfolio, suggests that applying a more disciplined, optimized approach could yield an approximately $50 million revenue uplift.

3. Reset your operating model to build resiliency and provide platform growth

The 2022 market downturn once again showed that asset managers continue to face tremendous downside exposure to markets on the revenue side, but with stubbornly high/growing cost bases.

Asset managers will always be beholden to market performance to some extent; however, a key question for managers is how to construct their operating model so that for any level of the market, operating margins remain as high and as resilient as possible. Therefore, it is not surprising to see many organizations announcing ambitious operational efficiency and cost programs with cost saving targets of 5–15%.

We contend that asset managers adopting more aggressive strategies can achieve cost savings of 20–40% by making difficult choices to trim their structural cost base, such as exiting underperforming markets and segments, and by embracing a “virtual” model, relying more on remote work and technology to power the business.

While a key benefit is operational efficiency, these programs will also allow asset managers to reinvest some of the savings in growth areas, like building out private market capabilities or investing in nascent technologies like generative AI that have the potential to further boost efficiency and free up capacity to drive incremental revenue.

We see four primary sets of “levers” that asset managers can pull to improve operating margins and free up resources to invest in growth: 1. de-scoping, 2. organizational effectiveness and simplification, 3. workforce management, and 4. third-party cost management.

Our report provides estimates of the potential that each of these primary sets of levers can have in optimizing the respective cost base, based on our experience working with asset managers.

Within these four sets, there are specific actions that asset managers can take to achieve targeted operational efficiencies and cost improvements. Some of these are firmwide (for example, exiting underperforming business units/products/regions), while others are targeted to specific areas of the business (for example, reducing discretionary roles, such as project portfolio management — PMO, change, and business management).

Three levers for wealth managers to drive profitable growth

The market downturn in 2022 revealed vulnerabilities in the operating models across most wealth managers. While market cycles will always drive AUM and profitability, leading managers are taking matters into their own hands by identifying attractive sources of growth. This involves a strategic focus on capturing or winning a larger share of net new money (NNM) and revenue pools to offset the adverse effects of market downturns. Concurrently, leading wealth managers are investing in capabilities to enhance advisor productivity, enabling advisors to capitalize on market upswings and effectively navigate the challenges posed by downturns. We see three initiatives that wealth managers can take to unlock net new money and drive profitable growth.

1. Win key client segments with integrated wealth management and corporate and investment banking coverage  

Wealth managers possessing a premium brand and access to robust corporate and investment banking (CIB) capabilities have substantial opportunities within the high-net-worth (HNW) and ultra-high-net worth (UHNW) client segments.

Among these segments, family offices (FO) and entrepreneurs and executives (E&Es) have historically presented great growth potential. However, these client segments have complex needs that span beyond wealth management (WM) to include corporate and investment banking (CIB) services. Family offices serve complex investment needs and require customized investment solutions, as well as access to exclusive investment opportunities. Entrepreneurs and business owners present a sizable client segment and make up half of high-net-worth individuals (HNWIs) globally. This client segment is highly diverse and has unique needs, where personal and business financial needs are often interlinked. For instance, entrepreneurs of hypergrowth companies in the tech or healthcare space have a higher demand for corporate finance services, as well as financing solutions for themselves and their companies to fuel continued growth.

The intersection of wealth management and corporate and investment banking presents a range of revenue synergies and opportunities. Our analysis shows that wealth managers that can comprehensively serve these clients can unlock net new money of more than $200 billion across traditional wealth management and sophisticated wealth management and corporate and investment banking solutions.

To enable coverage of these client segments, a product range that combines best-in-class corporate banking and investment products is crucial. Additionally, the provision of linkages/relationships to potential investors, such as financial sponsors, is important.

Over time, collaboration approaches have evolved. Leading firms have found that joint capability and coverage teams that holistically address client needs are the most effective approach. By bringing together experts from both wealth management and corporate and investment banking, joint capability and coverage teams are able to provide a more comprehensive and tailored approach to serving the needs of family office and entrepreneur and executive segments. Some leaders are rolling out the next frontier, consisting of leveraging and monetizing CIB technology and capabilities with wealth management clients as the natural evolution to address more sophisticated lending, reporting, and risk management client needs.

2. Elevate employee workplace wealth capabilities to capture profitable growth

Estimated at $35–$50 trillion in assets, the modern workplace presents a significant opportunity for wealth managers to gain “early access” to a gold mine of retail clients. Once the workplace relationship is established, wealth managers can aim at the whole client relationship through its retail wealth management arm. Advising on defined contribution (DC) assets represents a revenue opportunity of $70–$100 billion on $16 trillion assets, and also the opportunity to advise on $15–$25 trillion assets held away by participants. Stock recordkeeping can be a different avenue to the same destiny: by recordkeeping part of the $6–$8 trillion vested and unvested assets worldwide, wealth managers can also aim to advise the $15–$25 trillion assets held away of the workplace. While in its early stages, providing liquidity to private stockholders accounted for $60 billion in transaction volume in the last four years, and can be differentiating for wealth managers with investment banking capabilities targeting private firms.

3. "Moneyball" for advisor growth

Wealth managers can gain a competitive advantage and tap into a $600 billion AUM opportunity by adopting a strategic, data-driven approach to enhance their advisor recruitment efforts, which we've termed "moneyball" for advisor growth.

In the US alone, advisors switching employers represent $2–$3 trillion in assets each year. With the potential of bringing $120 billion in new assets every year, wealth managers adopting a data-driven approach to enhance their advisor recruitment efforts can build a significant edge. By focusing on three areas: 1. establishing the right ambition; 2. prioritizing the right advisor cohorts; and 3. focusing on the right markets — wealth managers can improve the effectiveness of their recruiting efforts.

The genErative AI tipping point

Generative AI has rapidly transitioned from the realm of academic tinkering to practical testing and deployment in a broad array of industries, including asset and wealth management.

We believe we are now at a “tipping point” in terms of its ability to be deployed on a widespread basis across asset and wealth managers. The "tipping point” is driven by three key developments: 1. higher degree of accuracy (than previous generations of natural language processing (NLP), 2. broader range of generative AI applications spanning across industries, business functions, and capabilities, and 3. better accessibility and user-friendly interfaces, with no technical background required to productively use the tools.

Leaders are already deploying and extracting tangible benefits for Generative AI

Firms that have already successfully implemented generative AI solutions have focused on areas where it has the greatest “fit” potential, namely where there is abundant information to interpret and synthesize, a need to generate moderately customized or creative content, and where the activities involve routine tasks. When properly deployed, generative AI can lead to significant productivity gains across the value chain. While it is still quite early in the adoption of this technology, our estimates of potential productivity gains reflect views of industry executives on the expected benefits of fully ramped-up AI tools over time. We expect these initial estimates to evolve as more asset and wealth managers adopt AI at scale and the range of the benefits become clearer. Our current views suggest the following:

• In sales and client service, generative AI can enhance sales or advisors’ ability to engage existing clients and enable better identification and conversion of prospective clients. By freeing up time spent on administrative tasks, helping prepare more customized insights about clients and tailored answers to inquiries, we estimate that generative AI can lead to potential productivity gains of 30–40% for advisors.
• In product development, generative AI can accelerate routine tasks, such as report drafting and market research, potentially enhancing productivity for asset managers by 25–35% and allowing for faster time to market with products better tailored to market demand.
• In investment and research, generative AI can empower portfolio managers in investment research and risk analysis by replacing information collection, summary, and data cleaning tasks with higher-value validation and idea generation activities, resulting in up to 30% productivity gains.
• For middle and back-office functions, generative AI can improve efficiency for legal, compliance, and operational tasks, and democratize ability to code, saving 25–50% of employee time.