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Portfolio > Asset Managers

Asset and Wealth Managers Poised for Growth, Bracing for Disruption

By Michael S. Fischer

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Asset and wealth management chief executives are very confident about their firms’ growth prospects this year, but are also aware that a period of disruption lies ahead, PwC reported Tuesday.

The report was based on questions put to 126 asset and wealth management chief executives about the opportunities and threats facing their operations as part of PwC’s 21st Global CEO Survey.

Eighty-seven percent of survey respondents expressed confidence about revenue growth in 2018, five percentage points lower than in last year’s survey.

PwC estimated that by 2025, global assets under management, buoyed by rising asset prices, will have nearly doubled, rising from $84.9 trillion in 2016 to $145.4 trillion.

However, major changes to fees, products, distribution, regulation, technology and people skills mean it will not be business as usual in the years to come.

Heads of asset and wealth management firms are rightly anxious about the many threats they face — and rightly so, according to PwC.

Regulation is their greatest worry, with 83% saying that they were “somewhat or extremely concerned.” In the U.S., the Labor Department’s fiduciary rule is set to squeeze margins, as is the Markets in Financial Instruments Directive II in Europe.

These regulations are exerting more pressure on asset management fees and demanding greater transparency, the report said.

But technology and the speed at which it may change the sector is perhaps the main culprit causing chief executives in the survey to lose sleep. Seven in 10 believed that changes in core technologies would prove disruptive or very disruptive over the next five years.

As a consequence, 63% expressed some or great concern about the lack of digital skills in senior leadership, and 67% worried about a lack of digital skills throughout their businesses.

At the same time, the leaders of wealth and asset management firms are struggling to come to grips with how technology is changing consumer behavior. “Simply speaking, customers want better products and services, more quickly and at a lower cost (better, faster, cheaper),” the report said.

However, only 38% of survey respondents believed that robotics and artificial intelligence could improve the consumer experience. PwC noted that this appeared to be a very low number, especially given that AI may come to reduce or eliminate completely the use of the investment analyst.

Another big issue for chief executives in the survey was tax changes, with 77% indicating at least some concern. New tax rules are challenging historic tax structures for some managers, according to the report.

More generally, the Foreign Account Tax Compliance Act and Common Reporting Standard rules for sharing of tax information about individuals between countries places the burden of reporting on financial institutions.

In addition, the U.S. recently enacted comprehensive tax reform, and the OECD, the EU Commission and Her Majesty’s Treasury in the U.K. have all released draft position papers on the possible future taxation of digital assets.

All these changes have significant implications for operating models in the asset and wealth management sector, PwC said.

“Although optimism is a strong characteristic of asset and wealth management CEOs, they are definitely beginning to appreciate both the magnitude of potential disruption in its various guises and the challenge of  finding new ways to gain scale and differentiate their product offerings in order to maintain and grow market share,” Elizabeth Stone, PwC’s U.K. wealth and asset management leader, said in a statement.

“Artificial intelligence, robotics, big data and blockchain are all transforming the way asset and wealth managers work.”

Stone noted that some firms were out front in exploring these matters, but all firms needed to ensure technology was at the center of their business models, especially as barriers to global business are likely to continue to rise.

“It’s also important not to forget the uniquely important role of human talent in this industry,” she said. “Finding and retaining the best people remains a key differentiator in a competitive market.”

Organic Growth, Further Consolidation

The survey found that 79% of chief executives were gearing up for organic growth in the year ahead, compared with 76% in 2017.

Fifty-seven percent said they would increase their headcount, but 39% also planned to cut costs. With fees under intense pressure, especially in the U.S. and Europe, they appear to have little choice, PwC said.

Further consolidation is also in the offing. Forty-three percent of respondents said they were planning mergers and acquisitions in 2018, their motivations including economies of scale and synergies, entering new markets and the need to offer a more diverse range of products.

Forty-eight percent said they intended to expand capabilities through either strategic alliances or joint ventures.

Whether through M&A, joint ventures or straightforward expansion, chief executives in the survey remained eager to access markets outside their home base, particularly North America, the world’s wealthiest region.

Forty-eight percent of respondents regarded the U.S. as the most important market outside their own. But almost as many, 40%, were looking to China.

— Check out How to Win the Man vs. Machine Advice Game on ThinkAdvisor.

Michael S. Fischer

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