More On Legal & Compliancefrom The Advisor's Professional Library
- Do’s and Don’ts of Advisory Contracts In preparation for a compliance exam, securities regulators typically will ask to see copies of an RIAs advisory agreements. An RIA must be able to produce requested contracts and the contracts must comply with applicable SEC or state rules.
- Client Commission Practices and Soft Dollars RIAs should always evaluate whether the products and services they receive from broker-dealers are appropriate. The SEC suggested that an RIAs failure to stay within the scope of the Section 28(e) safe harbor may violate the advisors fiduciary duty to clients, so RIAs must evaluate their soft dollar relationships on a regular basis to ensure they are disclosed properly and that they do not negatively impact the best execution of clients transactions.
The second half of 2012 is shaping up as a turning point for many asset management firms, forcing them to take “transformational steps” to boost their competitiveness, according to a report PricewaterhouseCoopers released last week.
True, the asset management sector is enjoying a mild resurgence, PwC said. But difficult markets, regulatory initiatives, competition for clients and talent, and new expectations from investors and other stakeholders are posing big challenges.
“Successful firms will adapt to industry changes and take advantage of the opportunities opening up in the global marketplace with products that meet investor needs, improve client service and enhance operations to address new regulations and stakeholder expectations,” Barry Benjamin, PwC’s U.S. and global leader of asset management, said in a statement.
The report, Top Issues Facing Asset Managers, lists nine major challenges PwC says the asset management industry currently faces, and describes how leading managers are responding:
Regulatory and stakeholder pressures are compelling asset managers to rethink governance, with greater involvement by executives and directors, especially audit committees, according to the report. The SEC, in particular, is focused on how asset management fund boards are carrying out their duties, and the extent to which boards are responsible for problems that arise.
Asset managers are refining their risk management strategies and controls to place greater emphasis on emerging risks. Industry standards are developing, including steps to mitigate common risks and processes to identify, assess and report on enterprise risks.
Rules issued under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 and other regulatory efforts will change many aspects of the asset management business, liek the advice firms provide, the way they trade securities, how they market themselves, the disclosures they provide and their employees' personal trading.
The report says asset managers should take a hard look at the effectiveness of their compliance programs.
Many asset managers are investing in technology—replacing aging systems, integrating legacy systems, moving some operations offshore and making use of evolving cloud computing technology.
5. Improving Trust and Transparency
Stakeholder scrutiny, together with new regulation, is driving demand for transparency. In adapting to these expectations, the report notes, investment managers are finding that enhanced transparency can build trust with investors and consultants. And as they shift some processes and technology functions to third parties and offshore, managers are seeking to improve security measures to protect confidential client information.
Mergers and acquisitions have dropped significantly, with interested buyers, including U.S. and international asset managers and private equity firms, largely sidelined. However, external factors could cause M&A activity to rise, the report says. These include the requirement for some European banks to sell their money management arms and the need for private equity funds to deploy capital.
7. Pursuing Growth Through Technology
Asset managers are creating growth opportunities by developing branding and adopting mobile technologies and social media. Using sophisticated analytics to understand customer preferences, firms are emphasizing client service and product development. One outcome is the creation of actively managed ETFs awaiting SEC approval.
Investment managers are preparing to meet a January 2013 deadline for the Foreign Account Tax Compliance Act and to comply with other mandates, such as the Report of Foreign Bank and Financial Accounts. The PwC report points out that besides the business and tax risks, complying with FATCA and other cross-border regulations will require extensive, potentially costly modification of internal customer information and reporting systems.
9. Growing and Leveraging Human Capital
Investment firms are competing hard for top-level talent. But the industry’s chief human resource need, the report says, is to develop compensation plans that reward long-term performance rather than immediate gains. Institutional investors are pushing managers to align their interests with those of their customers.
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