The financial services industry is undergoing significant changes with the impact of emerging technologies, the continued struggle for capital, and the growing necessity for sound financial reporting, modeling, and projections. The current market is challenging leaders to reevaluate approaches and develop innovative strategies to meet evolving customer expectations and regulatory scrutiny. Environmental, social, and governance (ESG) issues, capital constraints, technology, and alternative data are key factors affecting the success and longevity of financial services firms and are critical to stay ahead in a rapidly changing market.

Incorporating ESG into investment strategies

Parallel to technological advancements, ESG criteria has become a pivotal factor in investment decisions. There is growing acknowledgment that non-financial factors now strongly influence the overall performance of a firm and often guide investors in their decisions. Asset managers are tasked with integrating ESG policies into their investment strategies to attract and retain capital. This shift is not merely about compliance but also about recognizing the long-term value and risk mitigation that ESG-focused investments offer. Asset managers must continuously monitor, adjust, and adopt best practices to align with ESG standards, enhancing their appeal to existing and potential investors concerned with sustainable and responsible investments.

Combating the struggle for capital

Amidst shifts in economic performance, investment opportunities, and consumer confidence, asset managers face the challenge of raising capital over the next 18 months, especially in an environment where the decline in public markets creates a ripple effect, impacting the availability and flow of capital. This necessitates innovative strategies for asset managers to secure funding. As the competition for capital intensifies, the ability to demonstrate a robust operational and technological prowess becomes crucial for asset managers seeking to differentiate themselves and attract investment.

Additionally, new regulatory requirements set forth in the new Securities and Exchange Commission (SEC) Private Fund Adviser rules will impact capital allocation, investments in technology, and market expansion. This may have larger implications on the rising cost of capital as well for the end users. Leaders in the industry must remain agile and responsive to stay ahead during current volatility.

Investing in technology

Though financial services firms are challenged with increased market pressures and the ongoing struggle to find capital, it is critical to make strategic decisions related to technology investments that will support and enhance client expectations. In a highly competitive market, a client-centered experience is key to the success of any firm. The intersection of advanced artificial intelligence (AI) techniques, cloud computing, and data licensing — while continuing to provide a personal touch to clients — will be key drivers of growth for the industry over the next several years.

In the competitive financial services space, investing in comprehensive digital solutions now, like Microsoft, Salesforce, NetSuite, and Vena, can profoundly impact the transparency and decision-making insights leadership have access to.

Leveraging alternative data for a competitive advantage

Asset managers aiming to improve processes, meet client demands, and develop new investment strategies have made significant investments in utilizing alternative data. Alternative data is used in financial analysis but is obtained by non-traditional methods including social media posts, satellite images, geolocation data, and communications metadata.

By harnessing these sophisticated data-gathering techniques, firms can model key performance indicators (KPIs), identify emerging trends, and offer previously inaccessible insights to decision makers. While the integration of alternative data and advanced technologies introduces heightened cybersecurity risks, it also aids in identifying unique investment opportunities. Asset managers must, therefore, invest in robust cybersecurity measures to protect sensitive information and maintain investor trust.

Navigate 2024 with Citrin Cooperman

The financial services industry continues to face economic volatility, increased regulatory pressures, and the constant need to innovate to stay ahead of the curve. Firms can address these challenges head-on by incorporating ESG into investment strategies, investing in technology, and leveraging alternative data.

Citrin Cooperman’s Financial Services Industry Practice helps firms develop multifaceted approaches that enable them to remain successful in an increasingly competitive landscape. If you have any questions or would like more information about how our team can assist your organization, please contact us at info@citrincooperman.com.