Asset Management: Initiative and Innovation - The keys to evolution GRANT THORNTON FINANCIAL SERVICES GROUP NOVEMBER 2013

Transcription

1 Asset Management: Initiative and Innovation - The keys to evolution GRANT THORNTON FINANCIAL SERVICES GROUP NOVEMBER 2013

2 The Asset Management industry in the UK is in rude health. Despite global economic pressures, the sector continues to develop where other regional markets have fallen upon more challenging times. Political, regulatory Economic and tax UK Asset Management industry Social and demographic Digital revolution 2 ASSET MANAGEMENT: INITIATIVE AND INNOVATION THE KEYS TO EVOLUTION

3 Introduction While the financial crisis had a profound effect on the asset management industry, with a decrease in asset prices affecting overall total assets under management (AuM), the UK s asset management industry has, largely, recovered. The UK is currently the second largest asset management centre in the world 1, ranking only behind America, taking a 36% share of European assets 1. The development of the industry looks set to continue with figures showing a 7.9% year-on-year AuM growth rate in the 12 months previous to December The UK s leading position within Europe is due to a variety of factors: a long established institutional market, a deep and skilled talent pool and a historically supportive regulatory regime combined with the location and proximity to global clients. The UK asset management industry remains less concentrated than its European peers, with the top 10 investment managers handling 54% of assets 1. This shows healthy competition between managers, many of whom have adopted an increasingly global outlook in order to benefit from the emergence of new wealth in Asia and Latin America. There is likely to be an acceleration in consolidation across the sector as for many traditional managers current business models have become increasingly untenable. Asset managers are facing an unprecedented degree of change from a multitude of sources, all of which will shape the future of the industry; amongst these regulation, the relationship between fees and performance, new wealth creation in the East and the impact of technology are some of the most important. Figures show a 7.9% year-on-year AuM growth rate in the 12 months leading up to December [1] Asset Management in the UK The IMA Annual Survey ASSET MANAGEMENT: INITIATIVE AND INNOVATION THE KEYS TO EVOLUTION 3

4 Economic Search for yield With fixed income investments being negatively affected by low interest rates, the search for yield has become a recurrent theme in the industry. Asset managers are constantly looking to the alternative investment market such as hedge funds, real assets (commodities, real estate, natural resources) and distressed investing. Should the popularity of alternative investment funds continue to grow, there is a distinct possibility that the alternative investment industry could threaten the revenue streams of traditional forms of investment. The latter, will therefore come under increasing pressure to deliver higher margins. Market volatility This is alongside regulatory pressure, political agendas and unpredictability arising from an increased investment focus on emerging economies. The future of successful asset management firms relies largely upon being able to adapt long term business strategies to incorporate this market uncertainty. As a result of both global and domestic macroeconomic uncertainty, regulatory pressure and the unpredictability of larger investments in emerging economies, investors are facing a prolonged period of market volatility which has a negative effect on their search for yield. Nevertheless, the future success of asset management firms relies upon being able to adapt long term business strategies to the convulse market. Overall allocation of alternative investments 2007:3% :11% [2] Asset Management in the UK The IMA Annual Survey 4 ASSET MANAGEMENT: INITIATIVE AND INNOVATION THE KEYS TO EVOLUTION

5 Growing Wealth: Asia and LATAM By 2020, the economy will focus on new revenue streams arising from emerging economies, specifically Asia and Latin America whose growth is rapidly outstripping that of the developed world. The total AuM in 2012 increased by 16% in developing markets compared to a mere 8% in Europe. Moreover, they currently possess an 8% market share of global AuM 3. An increase in those with disposable income as well as a growing middle class will provide opportunity for asset management to design new, tailored products. The industry may witness an influx of joint ventures between traditional asset managers and those that operate in the Asian and Latin American markets, to address this up and coming wealth stream. The emergence of wealth in Latin American and Asian countries, where there is a higher abundance of natural resources, and therefore alternative investment streams, provides more fund options for asset managers. Asset management firms will seek to be located nearer to those countries with increasing influence and a higher number of potential investors. Consequently, there is likely to be a shift in influence from current capital markets such as London towards these emerging economies. Emerging markets now possess an 8% market share of global AuM 3 [3] BCG Perspectives - Global Asset Management 2013: Capitalizing on the Recovery ASSET MANAGEMENT: INITIATIVE AND INNOVATION THE KEYS TO EVOLUTION 5

6 Political, regulatory and tax Regulatory arbitrage Analogously to other Financial Services sectors, the regulatory agenda abides as a key issue. In recent times, there has been an influx of new supervisory bodies and rules; many of which are subject to on-going revision. Consequently, asset managers are redeveloping their business strategies to adapt to this changing environment. AIFMD, EMIR, MiFID and Conduct Risk are just a few of the pieces of legislation affecting the industry. Withal, managers must resist the temptation to allow regulation to drive their business strategy. Contrarily, strategies must be cognizant of regulatory influences and demonstrate a newfound flexibility that will be the cornerstone upon which progressive managers will thrive. Firms are facing increasing margin pressures due to the burdensome cost of compliance. What is more, where firms were once able to exploit regulatory variances and loopholes, such opportunities are now evermore scarce. In this context, speculation surrounding the notion of regulatory arbitrage has been gathering momentum. There is an increasing credence behind this supposition. The paradoxical challenge for asset managers is whether to accept the amplifying cost of local regulation or defect to a jurisdiction with a more sympathetic regulatory regime, which similarly involves significant cost implications. Nevertheless, the prospective growth of emerging economies, allied to the more favourable regulatory landscapes, may just be enough to invoke a cogent migration. Tax competition Together with regulatory arbitrage, tax competition will likely prove a major determinant of where asset managers choose to base themselves in the future. Increased margin pressures will force firms to favour locations that couple lower tax rates with less stringent regulatory regimes. Estimated cost of regulatory compliance for the investment industry 2012: 420 million 2013: 500 million 4 [4] ComPeer Research 6 ASSET MANAGEMENT: INITIATIVE AND INNOVATION THE KEYS TO EVOLUTION

7 Social and demographic Changing demographics In comparison to the emerging economies, there is a prominent change in social demographics occurring across the western and developed world. Europe, China and Japan all have significantly aging populations, over 30% of their populations will be over 65 within the next 30 years 5. The industry s traditional target market currently rests with year olds; which, coincidentally, faces the largest decline. With a shrinking nucleus of target customers, managers will be encouraged to redevelop their business strategies to align to the much changed demographic. Subsequently, investment products will target the provision of retirement incomes and healthcare-related schemes. Buyer behaviour The development of new products and evolving buyer behaviour are cognate. The impact of the financial crisis, allied to the ever-increasing availability of informative financial information, has propagated an increasingly financially enlightened audience. Accordingly, customers will demand greater levels of transparency around products, in addition to a diversified range of investment opportunities. Despite the regulatory scrutiny surrounding transparency and advice, manifest in the Retail Distribution Review (RDR), rebuilding the trust of customers will take time and investment. Affording customers enhanced levels of control, where demanded, will be fundamental. [5] Global Age Watch Index 2013 ASSET MANAGEMENT: INITIATIVE AND INNOVATION THE KEYS TO EVOLUTION 7

8 Digital revolution Technology Technological evolution and innovation is driving change across the financial services industry, the asset management industry not excluded, as quickly as any other influencer. Innovative digital strategies must dovetail with existing channels under a unified Digital Strategy. Technical innovation presents firms with the greatest opportunity to differentiate themselves from their competitors. Furthermore, the costefficiencies associated with digital channels must be exploited to build a sustainable multi-channel business. The internet, digital media and direct-tocustomer platforms are providing customers with enhanced transparency, ease of comparison and wider choice. Smaller managers, with less extravagant discretionary spend budgets, will find technological evolution a significant challenge. Many will be unable to compete with the spending power of more dominant players, particularly as the expensive direct-to-customer platforms become a dominant feature of the evolved marketplace. Furthermore, the automation revolution is well underway and shows no signs of relenting. Cost efficiencies realised through the automation of operational processing are too significant to overlook. There is a strong contention that all operational processing will be automated by Social media Changes in buyer behaviour and social demographics have also been profoundly affected by the prominence of social media. Despite their naturally conservative nature, investment managers are increasingly aware of the importance of client interaction. Social media will prove to be a major facilitator. In spite of initial industry hesitance, the appetite and level of comfort customers demonstrated in using social media for financial interactions is also increasing. Research in the United States found that 26%of adults use social media for personal finance and investing 6 with over 90% of High Net Worth Investors participating in social media 7. This increasing usage will empower customers and gradually change investing attitudes towards guided, selfservice propositions. The use of social media also ties into big data and client analytics. More advanced client analytic technologies have the ability to improve customer segmentation and enable firms to more effectively tailor products. It is the firms that successfully utilise these tools that will be able to compete in the digital world. [6] Cogent Investor Series - Social Media s Impact on Personal Finance & Investing [7] Cogent Research - Social Media s Growing Influence Among High Net Worth Investors Over 90% of High Net Worth Investors participate in social media 7 8 ASSET MANAGEMENT: INITIATIVE AND INNOVATION THE KEYS TO EVOLUTION

9 Conclusion It is clear that the asset management industry is evolving; market uncertainty and the emerging economies are providing new challenges and opportunities. Growing wealth in Asia and Latin America is leading to the distinct possibility that there will be a shift from the traditional capital centres, such as London, to new jurisdictions. In order to survive in the changing market, asset managers will have to focus upon technological innovation and alternative asset markets. Furthermore, adapting to changes in the regulatory, fiscal and political expanses will be critical. ASSET MANAGEMENT: INITIATIVE AND INNOVATION THE KEYS TO EVOLUTION 9

10 Why Grant Thornton? This is what we do: As one of the UK s largest financial services advisory firms, we have conducted a wide range of engagements across the financial services and consulting spectrum. We have relevant experience We have deep and relevant experience across the financial services sector, particularly within investment management. We already work for many of the world s largest financial institutions, providing a wide range of consulting and advisory services. We understand this market and the challenges facing investment managers today, and will bring this experience to deliver the outcomes and assurance you require. We know how to apply the rules Financial institutions are facing increasing scrutiny, both internally and from the Regulators. We help our clients interpret the rules published by local Regulators. In the UK, we have assisted the FSA to draft regulations (the better ones). We therefore know the relevant rules and requirements better than most and, by understanding what sits behind them, are able to take a proportionate and pragmatic view of how to apply them. We have strong brand values We pride ourselves on our independence and telling it like it is. We will provide you with robust advice and opinions, backed up by strong evidence. Where appropriate, we will make practical and workable recommendations to help you strengthen and develop your business. We always seek to work together with our clients to overcome business and IT challenges, delivering value-add solutions that provide longterm benefits. We are credible We are credible and respected within the Financial Services industry, both by our clients and by the Regulators. We have highly experienced, industry-leading experts across the sector and an excellent track record. As a result, most clients return for advice and support, knowing they will receive insightful, unbiased and valued solutions. 10 ASSET MANAGEMENT: INITIATIVE AND INNOVATION THE KEYS TO EVOLUTION

11 We have the capacity to deliver. With over 35,000 employees globally and over 4,500 in the UK. We are flexible and adaptable. Our core competencies are aligned to established industry challenges. Our people are market-leading, industry experts. Our scale and reputation ensures we have access to the best talent. Our track record is proven. We count over 200 financial institutions as our clients, which is testament to our delivery capability. ASSET MANAGEMENT: INITIATIVE AND INNOVATION THE KEYS TO EVOLUTION 11

12 Irish Contacts We work closely with our GT UK colleagues in servicing our UK based Asset Management clients who have funds either domiciled or administered in Ireland. If you would like more information please contact one of our team as set out below: Niamh Meenan Partner Financial Services T +353 (0) E niamh.meenan@ie.gt.com John Glennon Partner Financial Services T +353 (0) E john.glennon@ie.gt.com Ray Kelly Director Financial Services T +353 (0) E ray.kelly@ie.gt.com City Quay, Dublin 2 Offices also in Cork, Galway, Kildare and Limerick About Grant Thornton Ireland Grant Thornton Ireland can trace its history back to Today, the firm comprises over 500 people operating from offices in Dublin, Cork, Galway, Kildare and Limerick. In addition to audit and tax, we provide tax planning, corporate finance, corporate recovery and insolvency, forensic and investigation services, business risk services, computer assurance, IT consultancy, corporate secretarial services, family business consulting and personal tax and financial planning consulting. Our clients include privately held and dynamic businesses, large corporates and financial services.. About Grant Thornton International Grant Thornton is one of the world's leading organisations of independent assurance, tax and advisory firms. These firms help dynamic organisations unlock their potential for growth by providing meaningful, actionable advice through a broad range of services. Proactive teams, led by approachable partners in these firms, use insights, experience and instinct to solve complex issues for privately owned, publicly listed and public sector clients. Over 35,000 Grant Thornton people, across 100 countries, are focused on making a difference to clients, colleagues and the communities in which we live and work.

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