The coronavirus (COVID-19) pandemic is causing widespread concern and economic hardship for consumers, businesses and communities across the globe. To help, we prepared guidance on COVID-19: What US business leaders should know: crisis management and response, workforce, operations and supply chain, finance and liquidity, tax and trade, and strategy. Below, you’ll find guidance specific to asset and wealth management firms.
Most companies already have business continuity plans, but those may not fully address the fast-moving and unknown variables of an outbreak like COVID-19. Typical contingency plans don’t generally take into account the widespread quarantines, business and community disruptions, and added travel restrictions of a global health emergency like this one.
The crisis raises a number of unique challenges. In PwC’s COVID-19 CFO Pulse Survey, finance leaders in the United States and Mexico shared their top concerns.
Here is our take on some issues that asset and wealth management companies might face — and what actions to consider as a result.
The asset and wealth management industry could be considered a bellwether for the overall economic environment, given how closely revenues are tied to the capital markets.
Publicly traded asset managers have seen their share prices fall 20% to 30% or more since their February market highs. Significant liquidity in passive products is largely untested. Large areas of fixed income markets, such as corporate credit, are showing growing signs of stress. The potential for significant market volatility could be in play for weeks or months, and predictions of a downturn are increasing. The M&A and IPO markets may contract until markets stabilize. It’s a challenging time to be an investor.
Business continuity plans may not have envisioned a crisis that involves more than moving operations from one place to another or deploying remote server backups. Disaster recovery plans for various operations exist, but they may not be robust enough to deal with multi-pronged issues (operations, technology breaking points, third-party risk, net asset value calculation and determination, people concerns and financial reporting) that could arise from a ripple effect on suppliers and markets. Invariably, there will be some manual tasks that may have escaped even the best business continuity planning. Asset and wealth managers rely on a network of service providers, yet they may not have deep enough insight into third-party crisis management plans for administrators, custody, pricing and other services.
While cybersecurity is always a top priority, asset management firms may face additional threats and vulnerabilities with higher levels of remote access to core systems. Employees and management could be more susceptible to social engineering efforts.
People (human capital) are asset management firms’ biggest strength, serving the needs of clients, managing the portfolio, running operations and more. Many firms have developed backup plans for employees after previous crises, but those often involve moving to a secondary location. In this situation, backup locations may also become inaccessible, and social distancing may require employees to work remotely for long periods of time. Firms may not be fully prepared to implement this change at scale, even for work categories where it is achievable. Cyberthreats could also increase as a growing number of employees work remotely.
Communications about market volatility and business continuity may not provide enough transparency and information to keep employees informed and reduce their concerns about their own work situations. Stress — from increasing client demands, market volatility and potential exposure to illness — could mount, and absenteeism could make it harder to maintain business operations.
All of these factors could leave asset management firms with a workforce more prone to control breakdowns, errors and other risks that could lead to regulatory exposure.
Asset managers’ risk management, management reporting and investor services functions are already experiencing a strain. The volume of customer questions and concerns regarding asset exposure to affected regions, asset classes and sectors could continue or even increase.
Third-party service providers that drive key processes could run into issues if their personnel or operations are disrupted. Vendor exposure to business and employee illness risks could change the formula for best execution if counterparty settlement becomes impaired or problematic.
Technology infrastructure may be stressed or show weak spots as more employees work remotely for extended periods of time and demands on the systems increase. Firms may be freezing code and web changes, which could have implications for clients and security. Adding new technology components to deal with outsized volume could create new cybersecurity risks. Phishing attacks related to COVID-19 are on the rise.
Asset management firms may need to make disclosure(s) about the effects of COVID-19 on their business within financial statements or other SEC filings, based on relevant GAAP and SEC disclosure standards. These could include risk factors, impairment, debt, liquidity, and management discussion and analysis (MD&A) when discussing operating results and changes in balances. Investors in private asset management firms will likely be focused on these and other business issues, and fund investors may also extend their inquiries to cover areas of potential disruption to the advisor’s operations
Macroeconomic and industry conditions may lead to triggering events requiring impairment assessments. Forecasts, models and assumptions may all need to be reviewed and, potentially, revised, if impairment assessments are warranted. Valuation of less liquid and private investments become more challenging with increased market volatility, uncertainty and illiquidity. It’s also possible that you’ll have trouble calculating NAV (net asset value) given COVID-19-related volatility, which could create issues with NAV determination.
Asset management supplier firms also depend on their own network of suppliers to fulfill their responsibilities. Some of those suppliers may have operational footprints in territories that are affected by COVID-19, which further complicates the situation. Depending on the extent of business interruption, your suppliers and their suppliers could affect your ability to produce timely financial statements.
With potential delays in the production of financial information — coupled with the US and state and local governments granting extensions to the tax filing deadlines — production and delivery of information reporting to fund-limited partners could be impacted.
If there are significant portfolio sales to fulfill redemptions, funds could face tax ramifications — and may encounter illiquid markets and/or distressed values.
Capital markets could become less accessible. Lending standards could tighten quickly, and it could be more expensive or impractical for you to refinance or issue new (original) shares.
With some employees being mandated to work from home, payroll tax withholding, nexus/permanent establishment and apportionment of income need to be reviewed. Furthermore, asset managers will need to address geographic strategies for business continuity/disaster recovery in jurisdictions that handle their workforce.
Forecasts, models and assumptions may all need to be reviewed and, potentially, revised for business planning and analysis. A determination should be made on whether impairment assessments are warranted.
Beyond these pillars, each industry will need to address some subtleties of its own. Here are specific considerations for asset and wealth management firms, as well as guidance on ways to respond to the challenges.
Traditional wealth management portfolio models of 60%/40% equities/fixed income are not performing as expected. This has the potential to lead to pressure on consumer confidence and spending.
Passive products have recently become popular in an up market, but they could lose favor in a volatile or down market.
Alternative managers, in contrast, may be positioned to invest in special opportunities at more favorable valuations, as well as distressed companies.
The SEC, FINRA, IRS and other reporting regulatory channels are providing new guidance and relief, and they may offer more in the coming days and weeks. Regulatory changes could affect planning for people, reporting, third-party risk and other contingencies.
In a time of global uncertainty, it’s easy to lose sight of the big picture. This is particularly true when the memories of the last recession are still relatively fresh. But it’s worth recognizing just how different the current situation is from where we were a decade ago:
This is why it makes sense to go back to first principles: What is your company’s mission? We encourage our clients to start determining the few differentiating capabilities they’ll need to thrive. Even in a crisis — or especially in a crisis — you’ll want to double down on those things that make your organization unique.
Eventually, this crisis may even present some opportunities for the industry to transform and excel. As the dust settles from the outflows and valuations, for example, asset and wealth managers might find it financially attractive to outsource additional non-core functions further — beyond tax and into compliance, legal and some middle-office activities.
Some companies may also use this opportunity to shore up their core processes or consider how to better manage them — now and in the future. For some firms, the COVID-19 crisis may highlight some issues that have needed attention for a while, but can no longer wait. When your team can’t get to the office, you may discover how many manual workarounds your company has put in place for routine activities. Suddenly, finance and human resource transformation becomes more important. When your data centers are located in affected areas, or scammers try to take advantage of market noise, cloud transformation and fraud/economic crime solutions become a higher priority.
Now is a time to stay calm and make level-headed decisions. Take precautionary measures and stress-test business continuity and recovery plans. Implement crisis planning preparation if you have not already done so. Be mindful of your people and their immediate needs and concerns. And develop multiple scenarios and plans for business disruption and market volatility.
Whether you’re trying to protect business integrity, empower your people, make better or faster decisions, or transcend through technology, it helps to take a long view. Once this COVID-19 crisis passes — and it will — where do you want your business to be?
For more than a century, our purpose — to build trust in society and solve important problems — has been at the core of everything we do. We stand ready to help you.
Thomas J. Holly
Asset and Wealth Management Leader, PwC US
Partner, Asset and Wealth Management, PwC US