Investment industry at “inflection point” with new tech, rate environment: report

The investment industry is entering a “transformational era,” a new report from the CFA Institute says, one that presents favourable conditions for active managers and firms able to adapt.

The report released Wednesday, which draws on responses from 3,000 investment professionals globally, provides an overview of trends that could shape the industry over the next five to 10 years.

Rhodri Preece, senior head of research at the CFA Institute, said the survey shows the industry at an “inflection point.”

“Forces that have defined the sector for years, if not for the last five decades, have begun to shift or even reverse, with economies under strain as we enter a new, uncertain, and transformational era,” he said in a release.

“Our analysis reveals several implications for firms, including opportunities for greater product personalization, AI-driven productivity gains, and industry conditions that are more conducive for successful active managers to demonstrate their value.”

The report revisits previous findings published by the CFA Institute in 2017, which forecast how trends including fintech disruption, purposeful capitalism and low interest rates would shape the industry over the medium term.

Those earlier trends and scenarios have shifted, the report found. 

When it comes to interest rates, the CFA Institute is now forecasting the “end of cheap money.” The report highlights challenges arising from “elusive” economic growth, heightened inflation and increased debt levels, leading to higher and more volatile nominal interest rates.

This environment has prompted new investment strategies and products aimed at mitigating the effects of inflation and satisfying client expectations, the report found. Adapting to this changing environment will be crucial for investment firms.

The report also described how deglobalization, geopolitical tensions, inequality and technological advancements are reshaping perspectives, as people retreat into echo chambers and develop distinct viewpoints. For investment management, this will lead to growth in personalized products and services, the report said.

There’s also a growing emphasis on environmental, social, and governance (ESG) factors in investment decisions, with a focus on long-term sustainable practices and climate change mitigation. More than three quarters (77%) of respondents said investment management’s impact on society in the next five to 10 years will be more positive than it is today, the CFA Institute said.

However, when it comes to net-zero ambitions, only one in three (33%) respondents said the investment industry will halve financed emissions by 2030. A slightly larger cohort (35%) believes the industry will achieve net zero in its financed emissions by 2050, the report found. 

While the 2017 report predicted fintech disruption, the CFA Institute says it hasn’t led to large-scale displacement.

“Rather than compete in a crowded and highly regulated marketplace, new entrants have partnered with established firms or targeted gaps in the marketplace where new products or tech-driven solutions could address unmet demand,” the report said.

Technological advancements, including artificial intelligence (AI), machine learning and big data, are propelling changes within the industry. Firms that effectively integrate these innovations into talent acquisition and investment teams, catering to client demands for personalized and tech-driven products, are positioned for better performance, the report found. 

Over half of respondents (56%) said their firms use AI and big data solutions in data analysis, but only 26% said the same for decision making.

Interestingly, the report found that 45% of survey respondents identified automation of repetitive tasks as the primary advantage of AI and big data, while only 22% said AI and big data adoption has led to a reduced headcount.

In terms of personalization, direct indexing, values-based investment portfolios and other innovations will continue to grow in popularity as technology creates more customized solutions for investors, the report said. 

Respondents believe the strongest growth in product demand over the next five to 10 years will be liquid alternatives (27%), followed by “solutions investments” (17%) crypto products (11%), high-income products (11%) and direct indexing (10%). 

Read the full Future State of the Investment Industry report here.