By Gary Meltzer, PwC US Asset & Wealth Management Sector Leader –
For those of us in the asset and wealth management industry—managers, distributors, investors, servicers, or service providers—the third quarter is looking a lot like the second, which resembled the first, which mimicked the fourth … as the cycle continues.
The cycle is the industry’s collective response as its products, performance, fees, and operations continue to adapt to and navigate a changing landscape defined by fee compression, a prolonged low interest rate environment, economic and geopolitical instability, and a changing client base.
Against a backdrop of lukewarm third quarter earnings at companies across all sectors, sizes, and locations, we explore the drivers of this cyclical response—current asset and wealth management trends—in greater detail below.
Industry. Asset managers face challenges on multiple fronts, experiencing only modest relief since the financial crisis. These headwinds relate to pricing pressures, unrelenting regulatory changes (e.g., the US Department of Labor’s Fiduciary Rule), technology demands across the enterprise, flat equity markets in the US, Brexit and shrinking margins. There are, however, some bright spots: global expansion; active management globally, regionally and by sector; data and analytics to enhance distribution; and leveraging brand in these uncertain and volatile times.
Alternatives. It’s a challenging time for some hedge funds as they focus on performance, flows and fees. Some established managers enjoy size, scale, and long-term track records while smaller and emerging managers fight for shelf space and try to prove themselves in a difficult investing environment. Delivering alpha is harder than it’s ever been—and it’s not likely going to get any easier. Compounding this are fee pressures and changing performance expectations.
Traditional funds. Even though the DOL rule doesn’t take effect until April 2017—almost six months from now—financial institutions already are announcing changes to their business models, engaging in strategic M&A, and altering product prices to gain an edge in the post-rule landscape. While these tactical reactions are understood, it’s the long-term impact that’s still murky. We expect to see continued product rationalization, further consolidation, and brand reinvigoration, but there remain many scenarios that may play out as the Securities and Exchange Commission readies its own rule and the DOL rule faces several court challenges. The shift to passive and lower fees is accelerating the growth of ETFs, and we forecast that they will double by 2020 to $7T, according to PwC’s report, ETF 2020: Preparing for a New Horizon.
Real Estate. According to PwC and the Urban Land Institute’s “2017 Emerging Trends in Real Estate,” the US real estate market is viewed more favorably than its global counterparts thanks to its reputation for “big assets, big cities, big capital, and big competition.” Drivers of these factors, and key findings from the report, include: (1) a new breed of CEO has been turning a widespread economic development approach on its head, transforming some cities in the process; (2) labor availability and shortages will continue to have a significant impact on the market; (3) the growing number of female executives, affluent immigrants, younger and older workers, and retirees will have a profound influence on community building in the US over the next 10 years; and (4) the difficulty of securing construction financing is keeping the oversupply typical of a late market cycle from emerging this time around, among others. Additionally, asset managers are increasing allocations to the hard assets space which is allowing the sector to grow with equity allocation even at a time of tightening credit markets due to these demand factors.
Wealth management. In the recently released UBS/PwC Billionaires Report 2016, we estimate that more than 500 people will hand over $2.1T to their heirs in the next 20 years. Many families are preparing for the biggest wealth transfer in history, as are their family offices, managers, advisors, and service providers. One common theme is preservation and control—preserving wealth for future generations through careful planning to meet a variety of goals. To take advantage of this trend, the asset manager of the future should be aligned with customer needs and building trust with clients. Technology advances and regulatory changes have brought new transparency to the wealth management process. Today, clients want more personal, more real-time, more effortless, on-demand interactions. Advice is likely going to strike a balance between human capital, digital and robo advice and advanced analytics.
Asset servicing. The combination of asset servicer’s size, scale, and reach, along with the agility and nimbleness that defines FinTech innovation continues to leave the sector ripe for disruption. This potential for radical FinTech-driven transformation—mainly by blockchain and its implications—is underpinned by talent, culture, and performance incentives, as many firms need to attract, retain, and redeploy young talent to bring fresh thinking and new ideas to this environment. As custodian banks look to lean on millennials with tech expertise, they’ll likely face an uphill struggle to lure them away from the allure of the FinTech industry. Technology innovation will change the way asset servicers interact with their clients and solve their most complex operational and data needs.
Deals. Performance and market conditions continue to drive consolidation. Traditional managers with active strategies are continuing to lose significant assets to passive strategies, some hedge funds are challenged to outperform the broader markets, and wealth managers are facing significant resource needs to comply with the DOL rule. The numbers speak for themselves: there were 36 announced deals in Q3 compared with 30 in Q2, valued at $571M. While there were no $1B+ deals in Q3—there was one such deal in Q2—the anticipated industry consolidation began showing signs: 36 deals were announced deals in Q3, compared to 30 in Q2 as cited in PwC’s US Asset and Wealth Management Deals Insights Q3 2016 and PwC analysis.
What’s on the horizon? Looking to fourth quarter and full-year earnings, we are expecting the cycle to continue, though the impact of the November elections, the DOL rule’s ripple effects, and the impact of continued tech innovation can’t be underestimated. We also expect deal activity in the asset and wealth management space to remain strong for the rest of the year driven mainly by regulatory change—especially the DOL rule. What this means for asset and wealth management practitioners is to expect the unexpected while pivoting, adapting, and evolving as needed.