At a time of great change, asset management CEOs arguably have a greater role to play than ever. A mild recovery has lifted industry profitability since the financial crisis, yet challenges abound. Undoubtedly, the global pool of assets under management will grow in the years to come, but only those firms that adapt swiftly to the changing environment will benefit.
The industry’s mild resurgence has taken place against considerable headwinds. Nervous financial markets, new regulatory frameworks, more demanding investors and fierce competition for talent are all conspiring to make profitable growth hard won. Making progress in this environment takes considerable strategic foresight.
Leveraging our experience working with clients, we’ve identified nine key challenges that CEOs are facing as they battle to grow profitability. While the industry has opportunities for profitable growth, not all firms will succeed, given the magnitude of the change taking place. The firms that do so will be those that grasp what’s happening and then engineer the transformations that they need in order to adapt.
We explain the key challenges below and at greater length in our full report Top issues facing asset managers.
Under pressure from regulators and investors, the boards of asset management (AM) companies and funds have greater oversight responsibilities than ever. Firms are responding by rethinking their governance models, increasing executives’ and directors’ responsibilities for overseeing important processes. Looking ahead, directors might want to evaluate the appropriate governance committee structures, roles, decision rights and supporting management processes to support decision-making, manage risk and improve transparency.
The financial crisis and its aftermath revealed the true extent of asset managers’ risks. High correlations between credit, market, liquidity and valuation risks underscored the need for more adaptive approaches to investment risk management. Meanwhile, growing numbers of fraud cases and more tax scrutiny showed the extent of operational risk. Managers are beginning to place more emphasis on emerging investment risks, or those that appear unlikely. Additionally, they’re taking an enterprise-wide approach to risk.
- Regulatory complexity
New regulations are creating a complex web of regulations around the globe, just as national regulators step up their scrutiny and enforcement procedures. The US Dodd-Frank Act and the EU Alternative Investment Fund Managers Directive are the two most wide-ranging pieces of new regulation, but others will follow governing practices like OTC derivatives trading. Firms will want to review the operation, resources and effectiveness of compliance programmes, especially in key risk areas.
- Operations and technology
Evolving regulatory regimes, combined with greater and more complex transaction volumes, are stretching front-, middle- and back-office systems. So asset managers are designing enhanced operations’ architectures that improve reporting and operations’ efficiency, by implementing a range of initiatives including outsourcing, workflow management and improved data management. They’re also integrating reporting systems for different asset classes that were previously separate.
- FATCA and global information reporting
New tax and regulatory requirements, investor expectations, the globalisation of AM and mounting product complexity are all increasing information reporting needs. In particular, the US Foreign Account Tax Compliance Act (FATCA), which is intended to prevent US citizens or residents from evading federal income tax on US-sourced investment income, carries significant reporting requirements for asset managers not only in the US, but globally. To meet these reporting challenges, asset managers must make sure they’re up to date with new rules and standards – especially evolving FATCA guidance – and be proactive about improving reporting.
- Trust and transparency
Asset managers are finding that greater transparency enhances trust – building confidence in reporting accuracy, governance and accountability. Yet existing information systems often can’t meet the growing information requests from investors and, increasingly, regulators. Asset managers who do give information in a timely, accurate and useful manner have a competitive advantage.
- Strategic M&A
While M&A volumes have failed to meet expectations in the past year, asset managers have good strategic reasons for making acquisitions. Organic growth is hard to find in mature markets and scale is becoming more important. Asset managers might use acquisitions to buy entry into higher growth markets and to build scale in a still fragmented industry. Market volatility is holding back deal volumes for now, but volumes will increase when financial markets stabilise.
- Organic growth
Growth is struggling against the headwinds of economic uncertainty and market volatility. Asset managers are scrutinising their businesses to find ways of strengthening their market positions and exploiting the few growth opportunities that exist. Future growth will depend largely on execution, with go-to-market strategies, branding, distribution analytics and client-facing services proving important. Additionally, innovative and customised products, as well as global and emerging market strategies, offer opportunities.
- Human capital
As signs of tentative market recovery continue, asset managers are investing in recruiting and retaining talent. Competition for the best people is as great as ever. Most asset managers already have people strategies, but they’re seeking to align these more effectively with their business strategies.
Taken together, these nine challenges present considerable risks and opportunities. Uncertainties abound, but you can be sure that the industry is in a period of transition that will take several years. As change continues, the CEOs of some firms will understand what’s happening better than others and act swiftly to benefit from them. These CEOs will guide their firms to become tomorrow’s AM leaders.