Asset and Wealth Management (AWM) CEOs remain very confident about their companies’ growth prospects in 2018, but they are also aware that forces of regulation, technology and changing consumer behaviour are ushering in a period of disruption.
That’s the main conclusion from the report ‘Optimistic CEOs, buoyant growth, disruption ahead’, which is part of PwC’s 21st Global Survey and questions 126 of the AWM sector’s CEOs about the threats and opportunities facing their companies.
According to the report, 87 per cent of AWM CEOs are confident about revenue growth in 2018 – slightly lower than in 2017 when 92 per cent were this optimistic, while their three biggest concerns are over-regulation (83 per cent), geopolitical uncertainty (80 per cent) and tax changes (77 per cent).
While 70 per cent of AWM CEOs believe changes in core technologies will prove ‘disruptive or very disruptive’ over the next five years, just 38 per cent believe that robotics and AI can improve the consumer experience, and almost three quarters (73 per cent) of AWM CEOs are ‘somewhat or extremely concerned’ about cyber security threats.
Although Assets under Management (AUM) will be buoyed by rising asset prices and PwC estimates that by 2025 global AUM will have almost doubled – rising from USD84.9 trillion in 2016 to USD145.4 trillion in 2025 – major changes to fees, products, distribution, regulation, technology and people skills, mean it won’t be business as usual in the years to come.
CEOs are rightly anxious about the many threats they face. Regulation is their greatest worry, with 83 per cent stating that they’re ‘somewhat or extremely concerned’. In Europe and the US, the Markets in Financial Instruments Directive II (MiFID II) and Department of Labor Fiduciary Rule respectively are set to squeeze margins. These regulations are putting further pressure on asset management fees and demanding greater transparency.
Unsurprisingly, technology and the speed that it may change the sector is perhaps what makes AWM CEOs lose most sleep. Some 70 per cent of CEOs believe that changes in core technologies will prove ‘disruptive or very disruptive’ over the next five years. As a consequence, many CEOs are also worried about the availability of digital talent. Some 63 per cent confess to being ‘somewhat or extremely concerned’ about the lack of digital skills in senior leadership. A similar number, 67 per cent, are concerned about a lack of digital skills throughout their businesses.
At the same time, AWM CEOs are struggling to come to grips with how technology is changing consumer behaviour. Simply speaking, customers want better products and services, more quickly and at a lower cost (better, faster, cheaper). However just 38 per cent of the interviewed CEOs believe that robotics and alternative intelligence (AI) can improve the consumer experience. This seems a very low number and hard to reconcile with the possibility that AI may come to reduce or eliminate completely the use of the investment analyst.
Similarly, tax changes are a big issue, with 77 per cent stating that they’re ‘somewhat or extremely concerned’. For some managers, new tax rules are challenging historic tax structures. More generally, the Foreign Account Tax Compliance Act (FATCA) and Common Reporting Standard (CRS) rules for sharing of tax information about individuals between countries places the burden of reporting on financial institutions. Additionally, the United States recently enacted the most comprehensive tax reform in more than 30 years and the OECD, EU Commission and UK HMT have all released draft position papers on the possible future taxation of digital. All these changes have significant implications for operating models in the AWM sector.
Elizabeth Stone (pictured), UK asset and wealth management leader at PwC, says: “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.
“Artificial intelligence, robotics, big data and blockchain are all transforming the way asset and wealth managers work. Some firms are further ahead than others in exploring these, but all firms needs to ensure technology is front and centre 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. Finding and retaining the best people remains a key differentiator in a competitive market.
“London truly is a global centre for investment management and, with just over a year to go until the UK leaves the European Union, Brexit will undoubtedly be one of the top disruptors for the industry in the year ahead. Whilst the asset and wealth management industry hopes to have more clarity on transition by the end of this month, in our view, firms need to continue planning for a ‘hard Brexit’ and accelerate their focus on moving from planning to implementation. Firms should use Brexit as an opportunity to reassess their business models and strategy in light of the disruptors highlighted as a concern both in the CEO survey and our AWM 2025 report.”
More CEOs are gearing up for organic growth in the year ahead. 79 per cent of them are planning for this, compared to 76 per cent in 2017. To prepare for this, they’re planning to hire, with 57 per cent intending to increase their headcount. Yet more than a third (39 per cent) also intend to cut costs. With fees under intense pressure in the largest markets of the US and Europe especially, they seem to have little choice.
CEOs’ answers reveal there’ll be further consolidation. More than a third (43 per cent) are planning mergers and acquisitions (M&A) in 2018, while 48 per cent intend to expand capabilities through either strategic alliances or joint ventures. This follows 2017 when M&A in asset management reportedly climbed to an eight-year high. CEOs report varying motivations for M&A, including economies of scale and synergies, entering new markets and the need to offer a more diverse range of products.
Whether through M&A, joint ventures or straightforward expansion, CEOs remain eager to access markets outside their home base. As North America remains the world’s wealthiest region, it’s no surprise that 48 per cent of CEOs regard the US as the most important market outside their own. But, almost as many, 40 per cent, are looking to China.
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