The ongoing digital overhaul in asset management, particularly the deployment of artificial intelligence ( AI ), presents new opportunities to support emerging client segments and maximize profits. However, the majority of asset managers are still approaching the technology with a high level of caution.

The asset management industry is undergoing a sweeping digital transformation, with AI being applied across the board, from hyperscale players to small-sized asset managers, according to a new report, "Rebooting the Global Asset Management Industry", prepared by Citi and CREATE-Research.

The growing exposure to AI and digitalization is driven by changing business dynamics, particularly the influx of younger investors.

Wealth successors

Asset managers are deepening their relationship with this younger breed, many of whom are set to inherit their respective family fortunes. In addition to their high demand for digital access, these tech-savvy investors seek highly curated and tailored financial advice, including predictive analytics and business risk assessment.

These next-generation clients are also keen advocates of responsible investing; they insist that their financial decisions must align with their ethical standards.

“The next-gen see themselves as the stewards of their family’s wealth and seek to preserve and grow it responsibly,” says the report. “They expect their asset manager to provide digital tools that enable better data analysis and offer predictive analytics that enable clients to do their own scenario planning and construct their own portfolios.”

This is where AI can help. As youngsters shun the one-size-fits-all model, GenAI and AI enable asset managers to customize their portfolios by providing data-based analytical insights, the report states. More than three-quarters of surveyed respondents believe that AI will be a tool for value creation in their business, with the ability to optimize efforts to meet clients' needs.

Maximizing profit

Digital deployment also serves as a key enabler to shore up cost management, which is a top priority among asset managers in the face of the rising popularity of passive funds, fee compression, and regulatory oversight.

AI is found to be a useful tool for improving alpha generation, given its ability to quantify risks that were previously difficult to measure, such as geopolitical risks. Digital technology can also help investors navigate riskier markets in search of higher returns.

With alternative assets attracting more interest due to their promise of better returns, AI provides valuable assistance in identifying risks and opportunities.

“For now, the emphasis is on combining the analytical prowess of GenAI with the contextual understanding, emotional intelligence, and strategic decision-making of human experts, in order to unlock new levels of efficiency, personalization, and client experience,” states the report.

Lukewarm response

Unfortunately, high hopes for AI have outpaced its rate of adoption. Only a trickle of surveyed respondents have launched a full-fledged implementation of the technology, whereas a third have not even made a move. It’s worse in the case of GenAI, with more than half of the respondents reporting no progress in integrating it into their operations. The lukewarm response raises doubts about its role in wealth management, at least in the short term.

Asset managers are approaching AI with caution, given the risk of hallucinations or false outputs as well as  legal and ethical risks, which could undermine their reputation. More than 60% of surveyed respondents consider themselves as cautious followers when it comes to AI adoption, 5% say they are laggards, while less than a quarter are ahead of the pack.

Aside from the massive concerns about the risks involved, the lack of upskilling of asset managers on AI knowledge also moderates its adoption in the industry.

“A significant proportion of asset managers’ current technology-based work processes remain reliant on constant human intervention, with technology used as a supportive tool, not a direct replacement of humans,” the report explains.

“Over time, agents may gain greater autonomy and cause a ‘digital flip’, in which the winners move to entirely different operating models, with GenAI doing much of the heavy lifting. Whether regulators will allow that eventuality seems highly unlikely – for now.”