Products must reflect client needs, says report

Product innovation must be driven by client need, requiring tailored investment solutions, says a new report

Product innovation must be driven by client need, requiring tailored investment solutions, says a new report. The findings show that a lack of client engagement is viewed by the industry as a major factor behind failed innovation.

The report, entitled “Investment Innovations, raising the bar”, jointly released by Create-Research, Citi Global Transaction Services and Principal Global Investors, found that despite the failure of product innovation over the past few years, asset owners have retained an appetite for it, but only where specific principles are met.

Nick Lyster, chief executive of Principal Global Investors Europe, called for a direct link between innovation and client need. This means, he said, “building tailored investment solutions that are relevant and additive to clients’ business objectives, rather than creating copy-cat products or those which rely on financial engineering. We believe that the multiboutique model provides a strong platform to execute this strategy, enabling a deep knowledge of products combined with an ideas-centric, client driven approach.”


Key findings of the report include:

– Some 35 innovations saw significant adoption in the last decade. 57% of respondents said that emerging markets equities delivered most value while leverage recorded the worst performance, according to 40% of respondents;

– 50% of pension plans believe a switch from products to solutions will be a key driver of innovation over the next 3 years;

– a mismatch exists between asset managers’ and clients’ expectations: 39% of the clients think further product innovation will deliver genuine value over the next three years, versus 64% of the asset managers;

– Lack of client engagement is viewed as a major cause of failed innovation: 73% of pension funds surveyed are only rarely/occasionally engaged when asset managers innovate their financial products; and

– 88% of asset managers foresee further product innovations over the next three years, although of these, 52% believe they will be incremental, improving existing innovations, rather than creating new ones.


The report surveyed more than 500 respondents from pension plans, asset managers, consultants, administrators and distributors from 30 countries with a combined AuM of more than $29trn. The report asked which financial innovations they believe have worked and which have not. Respondents were then asked what should be the main thrust of innovations over the next three years and what specific improvements and actions they want to see related to these innovations.

The headline findings cite 2008 as a watershed for financial innovation with many of the new products, asset classes, return enhancing tools and asset allocation techniques developed in preceding decades viewed as becoming increasingly fallible, as the financial crisis developed. The report says this prompted a dangerous mismatch in expectations between asset managers, advisors and their clients. Now, client engagement is rising again and the report presents a call to action for asset managers and owners to work more closely together to add value in the innovation process, better aligning their interests and expectations for mutual benefit.

Amin Rajan, chief executive of Create, said: “The global economy is still in a state of uncertainty and strong headwinds in the shape of financial regulation, scarcity of talent and revised client expectations are buffeting the industry. Against this backdrop, there has to be a clear line of sight between innovations and client needs. Asset owners will demand creative solutions that deliver tangible value. New products developed without such fundamentals and without clear client engagement will struggle to gain traction.”

The report finds that pension plans increasingly want to see an overlay of human insight, foresight and empathy in the investment process, as quant models can only deal with historical data. This is highlighted by the failure of existing risk models during the last two vicious bear markets.

The report also highlights that product quality, better alignment and operational excellence will dictate the thrust of innovation in the near term. Asset managers intend to adopt more robust processes for promoting new ideas and stress-testing the resulting products. They also expect to rely more on their administrators in order to focus on their own core capabilities and continue an upward advance in the investment value chain. 

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