How COVID-19 is affecting the asset and wealth management industry

Start adding items to your reading lists:
or
Save this item to:
This item has been saved to your reading list.

Practical steps for responding to the coronavirus crisis

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. 


What are your top 3 concerns with respect to COVID-19? (Select up to three.)

Financial impact, including effects on results of operations, future periods and liquidity and capital resources
%
Potential global recession
%
The effects on our workforce/reduction in productivity
%
Decrease in consumer confidence reducing consumption
%
Supply chain disruptions
%
Difficulties with funding
%
Not having enough information to make good decisions
%
Impacts on tax, trade, or immigration
%
Cybersecurity risks
%
Fraud risks
%
Privacy risks
%
Source: PwC COVID-19 US CFO Pulse Survey
April 22, 2020: base of 305

Considerations for the asset and wealth  management industry

Here is our take on some issues that asset and wealth management companies might face — and what actions to consider as a result.

Crisis management and response

Challenges the asset management industry faces:

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.

Steps to consider:

  • How your company responds to a stressful event can shape employee, client and public attitudes far into the future. In fact, it can be a defining moment for your corporate culture, so don’t underestimate the significant emotional component. Revisit and implement your crisis communication plan. Post it publicly to provide transparency. Communicate with key stakeholders proactively and be ready to pivot if needed.
  • Identify and maintain critical decision points to manage and contain exposure to the virus (such as the decision to restrict travel, which most have now made) based on an agreed set of data sources.
  • Asset management firms know how to handle market volatility and assess market-related risks better than non-financial firms. Use historical context to your advantage when speaking with clients, staff and the public. Consider re-evaluating your enterprise risk management framework to address the new and enhanced risks that COVID-19 is creating, such as technology (e.g., IT capacity, stability and connectivity as well as cybersecurity), operational (e.g., workforce planning, changes to internal controls), and reputational risks (e.g., communication to key stakeholders). 
  • Immediately assess and bolster continuity plans to build up capabilities — both now and in anticipation of recovery. Communicate those plans and all contingencies clearly to key internal and external stakeholders to promote trust and transparency and help mitigate additional damage.
  • Create clear and flexible plans to deal with significantly larger transaction volumes from shareholders and customers, as well as the trades that portfolio managers are making. For instance, at least one firm is using people from other business units to staff phones and is adding servers and routers to deal with demand for trades and balance inquiries. Consider which service providers will be strained — such as transfer agents supporting smaller fund companies — and plan accordingly.
  • Consider reinforcing your cyber protections. You may want to:
    • Remind employees about being suspicious of emails from unfamiliar sources to counteract attempts at phishing and compromising business email. 
    • Conduct a phishing exercise now to reveal gaps in your defenses.
    • Strengthen your perimeter using security tools to identify and deflect threats before bad actors can intrude.
    • Strengthen your remote access management policy and procedures. Make sure working from home doesn’t mean working without security. It’s now possible to transition to rapid, secure, remote work models more quickly than before.
    • Fortify your endpoint protection, and make sure devices and software are hardened and patched.

Workforce

Challenges the asset management industry faces:

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.

Steps to consider:

  • Begin stress-testing remote work conditions immediately. Some large and midsize firms have already begun this work. Join them.
  • Determine whether key personnel have appropriate equipment and, if not, outfit them with necessary equipment, networking capabilities and bandwidth.
  • Implement training for department heads on best practices to lead remote teams: not only the mechanics, but also dimensions of collaboration and inclusive behaviors.
  • Adjust HR policies to align with local regulations (e.g., entitlement to continued pay during quarantine, covering costs of medical tests). Consider expanded backup child care services for employees. Consult with risk management and legal teams about liability for newly remote employees.
  • Consider establishing a help desk for remote-access questions and support.
  • Refine performance expectations. Account for a learning curve as you adapt to a change in work locations and processes, and anticipate a dip in productivity. Refine goals and incentives (e.g., sales quotas) for employees as needed.
  • Depending on your compensation planning cycle, consider delaying decision-making until the acute crisis has passed.
  • Set up risk mitigation programs for employees who still need to work on site.
  • Create clear and concise communications about steps you are taking to reduce employee stress while you plan.
  • Build flexible work arrangements where applicable, particularly in already-affected areas.
  • When normal processes need to be modified, double down on cross-checks and accuracy reviews.
  • Assess what new data types will be accessed through remote connections, and make sure risk management is involved to discuss any potential implications.
  • In the event that your videoconferencing or other technologies cannot handle the load, explore technology solutions that can.

Operations and supply chain

Challenges the asset management industry faces:

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.

Steps to consider:

  • Review service level agreements (SLAs) in place with key service providers, suppliers and sub-suppliers. Pay close attention to what could potentially go wrong. Consider which SLAs can be flexible and know what triggers exist if SLAs are not met.
  • Look closely at your firm’s supplier network (information technology, payroll, stock compensation, fund accounting, custodians, third-party distributors) to determine whether they have operations concentrated in areas affected by COVID-19.
  • Make sure that whoever is responsible for third-party and vendor oversight understands how to assess potential impacts and compensating controls should issues arise.
  • Perform an operational risk assessment internally and with key suppliers and partners, discussing the impact of disruption on critical business functions.
  • Create strategies for strategic sourcing, including alternative vendors and lead-time impacts.
  • Set and maintain policies for authorized extraordinary spending to secure supply.
  • Engage immediately with governance bodies such as fund trustees.
  • Keep your audit and tax teams informed. If you expect any delays resulting from third-party issues, notify your auditors and tax advisors as soon as possible.
  • Assess how long change code freezes will last and model how this will impact security patch updates and controls. Assess and quickly manage any potential vulnerabilities.
  • Redistribute remote work guidelines and protocols.
  • Update scenario plans and agree upon actions to cover a 3-6 month impact and a 12-18 month impact, as well as a process to maintain these plans weekly.

Finance and liquidity

Challenges the asset management industry faces:

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.

Steps to consider:

  • Begin planning for revaluation now and get ahead of additional risk reporting. Begin assessing for triggering events and potential changes to valuation models and assumptions.
  • Consider which disclosures may be required outside of the financial statements and notes. These could include disclosures about the business, risk factors, and management’s discussion and analysis of results, liquidity and capital resources (including consideration of trends and uncertainties). Prepare and plan now for these disclosures.
  • Given the reduced price discovery and liquidity and increased valuation risk, it may be appropriate to reassess your valuation process, policies and controls. You may also want to consider introducing new compensating controls, in case issues with staff or availability of third-party valuation is limited.
  • Ensure that clients, investors and other stakeholders know when your NAV-related processes and procedures diverge from the norm. Confer with counsel, compliance, investor relations and others about the impact of potential divergence from standard policies as a result of market disruption.
  • Map any potential regulatory obligations that are triggered during unusual or emergency situations.

Tax and trade

Challenges the asset management industry faces:

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.

Steps to consider:

  • Develop action plans to address significant redemption requests. If needed, prepare plans and processes for gates, ‘side pockets’ or other efforts to freeze redemptions. Include investor communication prominently in any of these plans. And plan now for how to reflect such issues as part of Management Discussion & Analysis and reporting for external stakeholders.
  • Discuss with tax teams how extraordinary expenses (direct material costs separate from operating and capital expenses) should be handled.
  • Track and analyze imbalances of revenue and costs as supply shifts.
  • Use staff movement tracking to determine if workers’ primary tax locations have been affected.
  • Continue to track all tax jurisdictions for any tax incentives or stimuli that could benefit the underlying company.

Strategy and brand

Challenges the asset management industry faces:

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.

Steps to consider:

  • Additional discussions around impacts, forecasts and impairments will be necessary on an ongoing basis. Consider a weekly cadence with the core team.

Other considerations

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.

Business model

Issues that the asset management sector might face:

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.

Steps to consider:

  • This could be an opportunity for active managers to prove  their value.
  • Communicate frequently with your clients to update them on your approach and suggest how they should think about risks and changes in various products.
  • Model what-if future business model scenarios now.

Regulatory reporting

Issues that the asset management sector might face:

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.

Steps to consider:

  • Exercise extreme diligence in staying up to date on guidance, and plan for pivots to any of your preparations based on new guidance.

The way forward

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:

  • Today’s financial system is far more resilient. Many of the structural reforms put in place have led to increased oversight and more reserves. These are designed to strengthen our ability to withstand systemic shocks and, by all accounts, they seem to be working.
  • Many consumers are better prepared. While consumer debt is at an all-time high, it’s far lower relative to GDP than it was a decade ago.
  • The damage is likely to be more contained. Certainly, some industries are reeling from a precipitous drop in demand, and health care faces some unique pressures. But, at least in theory, the danger could start to recede in months rather than years.

Core principles

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. 

What’s next

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.

  • In a cost-oriented environment, if volatility is extended and decision-making is in a state of flux, asset management firms might need to consider how to reduce costs through new efficiencies. From a tax perspective, having all tax needs outsourced with enhanced technology could become necessary to mitigate  business disruption and minimize risk.
  • Interim triggering events may require new asset valuations incorporating the latest forecasts and assumptions.

The picture now

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.

Contact us

Thomas J. Holly

Asset and Wealth Management Leader, PwC US

David Foss

Partner, Asset and Wealth Management, PwC US

Follow us

Required fields are marked with an asterisk(*)

By submitting your email address, you acknowledge that you have read the Privacy Statement and that you consent to our processing data in accordance with the Privacy Statement (including international transfers). If you change your mind at any time about wishing to receive the information from us, you can send us an email message using the Contact Us page.

Hide