Asset management went through some significant market shifts during the past few years. Robo advisors, ESG investing, and alternative investments hold a prominent place out of them.
When it comes to 2025, you can see some significant strategies emerging among asset managers out there. They are trying to use these strategies to meet client demand while maximizing revenue. Read on and let’s explore few such strategies in detail.
Embracing Robo-Advisory Services
Robo-advisors have become mainstream in asset management, providing algorithm-driven investment management and financial planning services at very low costs. Established firms like Vanguard, Charles Schwab, and Fidelity have already integrated robo-advisory services to complement human financial advisors. The automation and low fees appeal to younger investors and those with simpler investment needs.
A report from the WSJ indicated that the robo-advisor market was projected to grow at an average annual rate of 30.5% from 2024 to 2030, according to Grand View Research. Leading asset managers recognize robo-advisory platforms help acquire new clients, serve existing clients more efficiently, and invest in technology to stay competitive. Integrating human insight with automated algorithms will be a winning strategy for years to come.
Focusing on ESG Factors
Environmental, social, and governance (ESG) investing has transitioned from a niche strategy to a major priority for asset managers. A PwC report found that 77% of asset managers surveyed say they have increased their focus on the development of ESG-related investment products. Asset managers implementing ESG methodologies can attract and retain AUM while investing in assets aligned with sustainable long-term growth.
Managers screen investments based on environmental criteria like carbon emissions, social factors such as employee policies, and governance metrics like board diversity. Many also engage directly with company management to advocate for improved ESG practices. Investing sustainably while delivering healthy returns is critical to serve evolving client values.
Offering Alternative Investment Options
Institutional and retail investors alike are increasing allocations to alternative investments to diversify from conventional stocks and bonds. The 2022 Capital Projections report from Convergence predicts global alternative AUM will grow at 9.07% annually, from $13.3 trillion in 2022 to over $23 trillion by 2026. Asset managers that only offer stocks and bonds risk losing out.
Effective managers provide access to assets like private equity, hedge funds, managed futures, real estate, infrastructure and more. Not only does this benefit clients by expanding investment opportunities, but managers can also earn higher fee revenue from alternatives. The flexibility and differentiation alternative assets provide make this a go-to strategy for 2025.
Customizing Portfolios with Direct Indexing
Direct indexing is gaining popularity with investors for its ability to track benchmarks while customizing portfolios. As opposed to buying index mutual funds or ETFs, direct indexing constructs a portfolio matching a chosen index but with added flexibility like tax management, ESG screens, and factor exposures. This personalized approach along with competitive pricing is appealing.
Charles Schwab predicts direct indexing could capture 15% to 30% of the $7.5 trillion in assets currently invested in index mutual funds and ETFs. Asset managers can retain and grow client assets if they enable direct indexing programs. The customization and potential tax benefits deliver results not possible with passive funds alone.
Using Big Data and AI Capabilities
Harnessing big data and artificial intelligence is no longer just for tech companies. Asset managers are increasingly tapping into alternative datasets and leveraging machine learning to enhance investment decision-making. Unstructured data from sources like online shopping trends, shipping data, or satellite images provides unique insights for stock selection and portfolio construction.
AI tools can also optimize trade execution, assess risks, and improve client services. As computing power and digital information continue growing, managers with data analytics and AI expertise could have performance advantages. Investing in these technical capabilities aligns with the digitization transforming finance.
Outsourcing Investment Functions
Seeking outsourced partners for specific capabilities has become more popular to maximize efficiency. Asset managers may choose to outsource trading desks, risk management, data management, compliance, cybersecurity, and other non-core functions. This allows them to focus resources on functions delivering the most value like investment decisions and client relationships.
According to a study by SEI, outsourcing among asset managers increased from 18% to 32% between 2008 and 2018. The global pandemic environment likely accelerated reliance on service partners further. Asset managers recognizing where outsourcing adds efficiency while retaining control over critical components will stay nimble.
Offering Impact Investing Strategies
Impact investing aims to drive social or environmental change while earning financial returns, responding to rising demand particularly among millennials. 75% of individual investors now show interest in impact investing strategies. Managers marketing specifically around measurable impact in areas like renewable energy, affordable housing, or diversity can attract motivated clients.
Standout asset managers build portfolios around impact themes then provide detailed reporting on quantitative impacts achieved. For values-driven clients across generations, concrete evidence that investments further their priorities is tremendously compelling. Purpose beyond profits could dominate strategies going forward.
Prioritizing Tax Management
Tax-efficient investing has become increasingly important, especially for high-net-worth investors concerned about taxes eroding returns. Proactive tax management using strategies like tax-loss harvesting, asset location across taxable and non-taxable accounts, analyzing capital gains exposure, and more can maximize after-tax returns.
One recent survey showed 94% of affluent investors want help managing taxes on investments. Leading asset managers now provide comprehensive tax management as a core part of the client value proposition. Modeling, tracking, reporting and optimizing to minimize unnecessary taxes across portfolios ensures clients keep more of what their assets earn. For the high New Worth segment focused on wealth preservation, savvy tax planning could be the differentiator by 2025.
Final Words
The competitive asset management environment calls for forward-thinking strategies to succeed in 2025. Trends like lower-cost robo-advisors, ESG integration, alternative investments, direct indexing, data analytics, outsourcing, and impact investing differentiate thriving managers. As client expectations evolve and disruptive innovation continues, managers must embrace what’s working now to sustain growth. The firms proactively developing these capabilities will lead asset management in the years ahead.
