Asset management faces the future, with UBS's Suni Harford

What's next for asset management? UBS Asset Management head Suni Harford, a Most Powerful Women in Finance honoree, sat down with American Banker Editor-In-Chief Chana Schoenberger in the Leaders Forum to discuss financial regulation around the world, mass personalization and her bank's merger with Credit Suisse.

Transcription:

Chana Schoenberger (00:00):
Hello, I'm here with SUNY Hartford who is the president of UBS Asset Management. Thanks for coming.

Suni Harford (00:06):
Thank you so much for having me.

Chana Schoenberger (00:08):
It's very exciting. So you all are going through a very interesting acquisition right now of Credit Suisse. How do you think this acquisition is going to affect your business?

Suni Harford (00:19):
Well, the acquisition of Credit Suisse is, it's got a lot baked into it, right? It was something, I think anybody that has worked at either firm for many, many years, decades, maybe 150 years that they've both been around, have thought about, but for a lot of different reasons was not going to happen in the environment that we were in. So the opportunity to merge these two really strong firms is a once-in-a-lifetime opportunity. I think it's unique in that a lot of the people that work at UBS used to work at Credit Suisse and vice versa, so we know each other in that sense. I think everybody's really excited about what the combination can bring for us. So a lot of work and unusual circumstances that got us started, but I think we feel pretty good about it.

Chana Schoenberger (01:03):
So what is the most exciting part of this acquisition for your business?

Suni Harford (01:07):
Well, the most exciting part for the asset management business is that they really are two complimentary businesses. Historically, Credit Suisse Asset Management had sold their traditional asset management business in Europe, and they'd also sold their traditional asset management business in the United States. So what is left are really unique opportunities for us. It is the largest CLO and loan franchise in the world, which we don't have at all. At UBS Asset Management, it's a commodities franchise, a mutual fund format in the United States, which we do not have. It's a quantitative investment strategy, which we do not have. They're number two to our number one in Swiss real estate and yet very complimentary targets of the market. So clients are different and the space in which we're operating from a quality perspective, the type of assets in real estate are different. So even there complimentary. It provides us with real scale.

(01:59):
We go from being the 20th largest asset manager to just about top 10, which it's not about size per se, but it is important. A lot of clients will look at the top 10, top 12 asset managers and invite them in for the RFP and to get to know us. So it opens a lot of doors for both firms that would not necessarily have been open otherwise. So just from that perspective, it's great and it is unique. I've done a number of mergers in my career, probably over 10 over time, and having something so complimentary makes it a lot easier on a lot of levels.

Chana Schoenberger (02:38):
That's great. Okay. So just to go broader from there, what is the state of asset management today? Where's this industry headed?

Suni Harford (02:44):
Asset management has been going through a heck of a decade, I suppose. We came out of 20 years of markets only going up, which made it very easy for a lot of folks to skate along with the broader tide that was the market. There was a lot of noise about active managers being passe. It was all about the passive investor eating the lunch of the active managers and margins shrinking, and I think we found a nice balance since that giant rally dissipated. So for example, we've been 50% passive and 50% active now since 2017, and I think that's the mix we'll keep. Clients want to see value for their money. They don't want to pay a lot of fees for beta products, but the technology has evolved such that we are much more efficient. So costs can go down with the right investment in technology and the ability to customize is a huge trend that clients are demanding more and more.

(03:40):
So that leads to the broader dynamics of the market. It is a consolidating market among the big players in asset management, not because there isn't still opportunities for growth, not because there isn't opportunities for revenue, but because you have to invest very heavily, particularly in technology, to be one of the players that lasts long-term. You have to drive those efficiencies and pass those savings onto your clients. Otherwise they'll find someone who can. So a lot of consolidation, but a lot of opportunity then as the field shrinks if you're investing in the right place to do what you want. So again, more demand, the demographics are on our side, more people retiring. Again, interest rates being what they are provides we're back into fixed income mode now. So again, a shift in the asset mix. It's not just all equities all the time. It's not just US equities all the time. We're looking again at the globality of it. The Asian markets continue to have gone through some upheaval that presents tremendous opportunities. So I feel pretty good about the asset management industry going forward.

Chana Schoenberger (04:42):
So what happens with the great wealth transfer, which is maybe underway,

Suni Harford (04:47):
So great wealth transfers in a lot of different ways. So I'm going to piece that. You've got the generational shift, which is going on with the demographics. So there's a tremendous amount of money that's being handed down to the next generation, a generation who does things differently. You're looking at the growth in philanthropy in blended finance opportunities, which is a big part of what we're building at UBS. You are looking at different ways to approach partnerships and consortiums around not just street players, but with clients as well. So there's a tremendous amount of innovation being built into that transfer of wealth that's being demanded by this new generation of investors. There's a great rotation in terms of equities versus fixed income, but what I will argue for the biggest transformation we're seeing is along this idea of customization. Everybody can be a fund of one.

(05:39):
ETFs were very popular because they were fairly custom in what they were doing and low margin products for the client. And now you can do direct indexing and tech is just this far from providing any client the ability to design their own portfolio any way they want in terms of their sustainability preferences, for example, in terms of the asset classes they want to play in, and they can get in and out of these portfolio blocks, if you will, as you build them with very low cost. So again, I think that shift will be the one that lasts us. It takes us into the next decade.

Chana Schoenberger (06:15):
Let me pick up on something you were saying there. You have ESG responsibilities, pretty big ones. How is your business thinking about investing and sustainability?

Suni Harford (06:27):
So sustainability is a trend. Again, maybe lucky, maybe heartfelt, I'm not sure. But we've been doing it for over 25 years at UBS. So it was a natural sweet spot for us. We started investing largely in the asset management division in 2016, brought over the team to start expanding on our use and collection of data, which we knew would drive things. Investing in the technology reporting transparency is key in this industry and we've adopted a different stance than I think others did, which was to be all inclusive with the competition. We share our best practices. We are working really hard, for example, with some of the data providers to create a cloud environment to share data so that we all can have the standardization we need. And I think that's given us a leg up. We've been investing in it for a very long time.

(07:17):
One of the edges we have at UBS is we've had our own net zero statement, if you will, for our own operations since 2004. So there's credibility in having done it before it was in vogue. It's also easier for us to be consistent in our approach, and that is primary to what we're doing in sustainability. We're not perfect. There's a lot of culpa in what we're doing in our own operations in some of the areas like DEI, we can always do better. We understand clients get to choose. We're not trying and pose our values on anybody, and we have a world that's going through a tremendous shift. So this is about advising our clients. It's about working through the transition with them. It's about giving them guidance and then giving them time to develop along the glide paths they set with us so that we are working with, we have that seat at the table. That engagement brings better, I think, than the exclusion approach that some are taken, but I think will be the way that has the most impact long-term for clients, for returns for shareholders at UBS as well as for the planning, which is nice.

Chana Schoenberger (08:20):
When you think about the divide between the US and the UK and European regulators, there's been a lot going on this spring, especially with the banking crisis, which is not directly related to asset management, but certainly all of Wall Street sort of saw this. Where do you see this divide going? How are companies dealing with all these different regulatory regimes at once?

Suni Harford (08:42):
So it's hard to talk about the different regulatory regimes by region, as you say, without talking about the politics behind them. Regulators really are enacting laws that are driven by legislatures. So it's a global political environment that seems to be leaning more toward territorialism and nationalization instead of that global approach. May be controversial to say, I think that horse is out of the barn. I think markets are global, and I think the regulators and the legislatures have to understand that capital is going to flow and they can control that. But at the end of the day, investors need to be able to participate in all of those opportunities. I think the regulators, again, based on a power base sitting in legislatures, are there. But I feel particularly around sustainability, there is a drive to be more consistent around the globe where it's politic to disagree with that or make some bold statement.

(09:41):
But at the end of the day, most companies, most investors are global. It's just confusing to say you have to have five different accounts instead of one when it's all the same product around the globe. So I can knock on wood and hope, and maybe it won't be in my career lifetime, but I think they're going to have to come together and they're going to have to find some common ground. Otherwise, it's just not tenable for any bank, any investor, any player in the markets at all to be able to do all that they need to do. It's very, very expensive to match 53 different regulatory regimes as we have to do at UBS.

Chana Schoenberger (10:14):
That's the perils of being a global business.

Suni Harford (10:16):

Exactly right.

Chana Schoenberger (10:17):
Well, thank you very much. I appreciate you being here today.

Suni Harford (10:19):
Thank you so much. I really appreciate your time.