Five trends to watch in asset and wealth management in 2018

by AM admin on March 9, 2018

Tom Holly, PwC US Asset and Wealth Management Leader –

If you talk to any fund manager about their biggest takeaway from 2017, the first words out of their mouth will probably be “fee compression.” Investors want more for less. It’s not new, but fee compression hit asset management in a big way in 2017. The industry is moving away from actively managed funds to cheaper, passively managed funds driven by artificial intelligence (AI).

In December, we released our Top financial services issues of 2018 report, which looks at 2017’s big takeaways—and then shows what we expect for this year, and what you can do about it. For now, let’s look at how five of those issues could change the asset and wealth management industry.

Tax reform

The Tax Cuts and Jobs Act (TCJA) was signed into law on December 22, 2017. And while most of the changes went into effect for the period starting January 1, 2018, many are thinking about implications of the law that go far beyond tax planning. This is a complex piece of legislation, and I can’t begin to cover all the details in a paragraph. However, I encourage you to check out a blog post by my colleague, Brian Rebhun, who looks at some of the major effects on our sector. We’ll pay a lot of attention to this in the coming year.

Global trends

The makeup of the ultra high net worth (UHNW) class is changing. Our PwC/UBS Billionaires Report reveals that there are now more billionaires in Asia than in the US. For now, US billionaires still hold more wealth, but this may change, too. Rising home prices—certainly a passive investment—are a big reason for this. But, are those prices sustainable? Only time will tell.

Cost containment

As a way of adjusting to fee compression, asset managers are looking inward to see what they can do to reduce expenses. To do so, they’re exploring several options.

First, they’re using traditional outsourcing for back-office functions. But there’s a limit to how much money can be saved, and most easy cuts have already been made.

Second, they’re looking to automate whatever they can. This allows their workers to focus on higher-value tasks, letting the machines do the repetitive work. At first glance, technology investments are often seen as a silver bullet, but returns can be tricky to find. We’ve seen several firms invest in projects that haven’t paid off as hoped, either with customers or the back office. Winners in this space have made good choices about which processes to automate first. Usually, that’s because they started with a clear picture of a process, had an understanding of change management, and didn’t just throw technology at the problem.

Artificial intelligence and digital labor

A few leading asset and wealth managers have made deep commitments to AI. These firms have been able to leverage thinking machines to manage a suite of funds and enhance their operations. Whether it’s sorting contracts, analyzing financial instruments, or sifting through social media data, AI platforms are becoming more and more advanced.

But for every leader, there are many more fund complexes that are stuck with processes that are years out of date. The more fee pressure we see in the future, the harder it will be to keep doing things the old way.

People strategy

Asset management executives are also thinking about their people. The shift to automation will not change regulation, trust, and risk management, but these will all look very different in a world with thinking machines. Managers will remain responsible for making appropriate decisions for their investors, and that will mean understanding the AI programs that help make many of those decisions. But will managers be able to explain the mechanics of how AI actually works to their clients, or to regulators? It’s time for firms to pay more attention to the “explainable AI” movement to make sure that the right people understand what the algorithms are really doing. This is the first step into a bigger future, and managers should make sure their staff is prepared.

We’re also seeing the cultural impact of automation at wealth management firms, and it’s changing at a pace that I’ve never experienced before. How people will react is still an open question. Some may decide they still want to be a part of the industry going forward, while others may decide not to be. I think that’s unfortunate. When people can work alongside technology to examine data, discover patterns, and explore trends, they’re likely to make better decisions and be more creative. Firm executives should focus on finding and keeping people who share this mindset.

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I think it’s a fascinating time to be in the business world, particularly in asset and wealth management. There are a lot of interesting challenges ahead. I recommend you take a look at the full report for more detailed discussions around each of our top issues. You can also access a webcast we hosted in early January. Click here to subscribe to our publications and keep track of our insights on financial services during the months ahead.

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