By Peter Finnerty, PwC US Mutual Funds Leader –
PwC recently hosted our new, premier asset and wealth management event for clients called Assets & Wealth 2016. The event opened with a series of panel discussions on disruption in the mutual funds and exchange-traded funds industry.
We began the day looking at how recent trends in asset flows, performance, macro-economics, and regulations continue to put pressure on management fees and margins for asset managers. Panelists outlined how these trends might shape investment products, distribution, technology, and regulations, with representatives from leading asset managers, industry researchers, and law firms joining us in spirited discussions. With the asset management industry undergoing significant transformation, opportunities exist for firms to innovate and capitalize on these changes.
Here are a few highlights:
•Product innovation. Low interest rates, a changing investor base and investment preferences, and increased competition are driving more than just fee cuts—these developments are forcing fund firms to innovate. As the lines between active and passive funds continue to blur, we expect to see more than just product suites change. The panelists agreed, for example, that the number of products customized for specific investors to help them achieve their expected outcomes is likely to grow.
•Technology innovation. For mutual funds, technology represents a holistic approach to changing the ecosystem within which these funds operate, including how current and prospective clients are engaged and how their needs are anticipated. Whether it’s buying, building, or renting automated advisor capabilities; initially exploring and eventually adopting blockchain; leveraging robotics to streamline costs by using big data and analytics to assess investor demand, risk appetite, and price sensitivities, the choice is clear: mutual funds will need to continue to invest in and update their operating models from the front to the back office to meet an always connected technology ecosystem while balancing cutting costs to improve margins. There were a number of audience questions on what the technology for asset management might look like in 20 years, including how blockchain will likely impact the current and future operating environment.
•Unprecedented regulation. The regulatory panel took on the significant number of rules passed by the Securities Exchange Commission (SEC) during 2016 and the long-awaited Department of Labor (DOL) fiduciary rule. While some of these rules have slowed growth and innovation in the asset management industry, such as SEC’s money market reform and liquidity rules, the DOL fiduciary rule has the potential to shift more flows going forward to passively managed products, including exchange-traded funds. Panelists also discussed the challenges to manage compliance, including increased costs to hire more compliance personnel to operate in this new regulatory environment. The November elections may have brought plenty of uncertainty, but panelists and the audience both appeared to be generally positive about the regulatory environment for the asset management industry.
•Distribution disruption. The rapid transformation of distribution, particularly with respect to fees and operating models, sparked an especially lively discussion. The rise of automated advice has opened the larger asset and wealth management industry to an entirely new client base, while regulations such as the DOL fiduciary rule designed to aid these investors may be directing these investors toward more automated advice. We anticipate that automated advice will be offered primarily via an app or mobile device, and transparency, accessibility, and mobility will become the hallmarks of distribution in the relatively near future. Panelists also talked about emerging trends such as bundling of services (e.g., financial advice, long-term care, college and retirement savings) and providing advice for fees to create an annuity-like revenue stream driven by a digital enterprise underpinned by big data and analytics.
The morning session wrapped up with a presentation by PwC Mergers and Acquisitions Asset Management leader Sam Yildirim on M&A activity trends in our industry. While asset management deals have been relatively steady the last couple of years, she expects deal activity to increase significantly over the next few years if active managers continue to have poor investment performance and significant net outflows, combined with higher technology and regulatory costs putting pressure on margins.
Overall, we had a series of enlightening discussions on the current and future state of the asset management industry. You can look forward in the year ahead to thought leadership about many of these trends.