CFA Institute’s Firm of the Future

The CFA Institute’s new publication, Investment Firm of the Future, launched at the organisation’s annual conference in Hong Kong, sets out the shifts investment firms need to make to survive and thrive in the next 5-10 years.

It looks at alternative business models and strategies investment firms need to embrace across operations, people, investment and distribution models.

Launching the paper, Willis Towers Watson head of global content Roger Urwin, the strategic director of the CFA’s future of finance initiative, said investment firms face a future where change is accelerating.

“Change is a very [anxiety-inducing] word,” Urwin said. “We tend to over-estimate it in the short term, but severely underestimate the change needed over 5-10 years. This is an extraordinarily fast-moving industry with many moving parts.”

The paper is designed to help firms face reality, manage risks and craft alternative pathways for the future. It follows on from the work the CFA did on the future state of the investment profession and constructs various narratives using five models.

“It’s important to look at all of these narratives together,” Urwin said.

In the paper, the CFA uses scenarios and the narratives to suggest shifts that individual investment firms, and the industry as a whole, can make to prepare for future challenges.

The paper sets out 30 building blocks for the investment firm of the future, including themes such as technology, culture, product design and business models.

Urwin said investment firms could not rely on the growth they had in the past.

“The shift from active to passive, and smaller flows, mean revenues are moving sideways,” he said. “This suggests different behaviours are needed.”

Urwin said technology would play a big role in the investment firm of the future, and that the industry needed to face that fact; for example, the “people model” needs to adapt and recognise that a different set of skills will be needed to harness technology.

“Are we behaving like we understand that?” he asked.

The paper’s emerging trends for the next 5-10 years are based on changing client expectations. In particular, the demand for solutions mandates will grow, alongside an increased demand for products that incorporate personal values.

“There has been so much focus on the alpha part of investments,” Urwin said. “The future will be more focused on solutions.”

At the moment, about 92 per cent of global revenues from investment firms is in alpha-related products, and only 8 per cent is in outcome-oriented products such as target date funds and liability-driven investments.

“The industry is not aligned with the purpose here,” Urwin said.

About half of the finance industry works for asset management firms, while only 5 per cent works for asset owners. How investment firms organise themselves and face change will have an impact on how they can service their clients, and indeed survive the future.

The paper can be accessed here.