Global Asset and Wealth Management (AWM) CEOs remain very confident about their companies’ growth prospects in 2018, but they are also acutely aware of looming forces of disruption such as regulation, technology, changing consumer behaviour and Brexit.
This is the inescapable conclusion of the report ‘Optimistic CEOs, buoyant growth, disruption ahead’. This report is based on key findings from PwC’s 21st Global Survey which drew responses from 126 of the AWM sector’s CEOs, many of whom have operations in Ireland. The findings shed light on the opportunities and threats facing AWM companies.
Key findings include:
Although Assets under Management (AuM) will be buoyed by rising asset prices, PwC estimates that by 2025 global AuM will have almost doubled – rising from US$84.9 trillion in 2016 to US$145.4 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.
Over three-quarters (79%) of CEOs are gearing up for organic growth in the year ahead. To prepare for this over half (57%) are planning to recruit. But with fees under intense pressure, over a third (39%) also intend to cut costs.
CEOs reveal that there will be further consolidation. More than a third (43%) are planning mergers and acquisitions (M&A) in 2018, while 48% intend to expand capabilities through either strategic alliances or joint ventures. CEOs report varying motivations for M&As, including economies of scale and synergies, entering new markets and the need to offer a more diverse range of products.
CEOs have well-founded anxieties around the numerous impending threats to the AWM sector. Regulation is their greatest worry, with 83% stating that they’re ‘somewhat or extremely concerned’. In Europe, the Markets in Financial Instruments Directive II (MiFID II) is set to squeeze margins. With increasing asset management fees and demands for greater transparency, this regulation will place further strain on AWM companies.
Tax changes are another chief concern. 77% of CEOs say they are ‘somewhat or extremely concerned’ which is less than surprising given the changing global tax landscape. The threat of EU tax harmonization and an EU digital tax loom large, while comprehensive US tax reform is also likely to have significant implications for AWM operating models.
More generally, the Foreign Account Tax Compliance Act (FATCA) and Common Reporting Standard (CRS) rules for the sharing of individuals’ tax information between countries also places the burden of reporting on financial institutions.
Olwyn Alexander, PwC’s Global Asset and Wealth Management Leader, said: “For the sector’s CEOs, this is a time of contrasts: optimism, growth and looming disruption which of course can bring opportunities. Although optimism among CEOs is a strong characteristic of the Asset and Wealth Management sector, CEOs do realise that fast-emerging disruptions mean the sector must urgently learn new ways to differentiate their offerings, reach the market and gain scale. And with barriers to global businesses likely to rise, digital technology is an important part of the answer.”
Many CEOs are worried about the availability of digital talent. Nearly two-thirds (63%) confess to being ‘somewhat or extremely concerned’ about the lack of digital skills in senior leadership. A similar number, 67%, are concerned about a lack of digital skills throughout their businesses.
At the same time, AWM CEOs are struggling to get to grips with how technology is changing consumer behaviour. Simply speaking, customers want better products and services, more quickly and at a lower cost. However, less than four out of ten (38%) CEOs believe that robotics and alternative intelligence (AI) can improve the consumer experience. This low figure is hard to reconcile with the possibility that AI may come to reduce or completely eliminate the role of the investment analyst.
"Although optimism among CEOs is a strong characteristic of the Asset and Wealth Management sector, CEOs do realise that fast-emerging disruptions mean the sector must urgently learn new ways to differentiate their offerings, reach the market and gain scale."
Olwyn Alexander commented further: “To take advantage of the industry's growth opportunities, firms need a clear strategy that highlights their differentiating capabilities and allocates budgets accordingly. Technology will play a key role, as artificial intelligence, robotics, big data and blockchain are all transforming the way asset and wealth managers work. The human factor cannot be underestimated though, as new employment models to hire and retain the best will be crucial for success.”
Andrew O’Callaghan, PwC EMEA Leader for Asset and Wealth Management, said: “We also know from our conversations with leading fund managers in Europe that Brexit is a major uncertainty for the industry. For example, it was highlighted recently at the 7th Funds Congress in London attended by over 2,000 leading fund managers, that most asset managers based in London have advanced Brexit plans in place. These organisations are considering relocating certain aspects of their financial and accounting functions out of London to other EU capitals including Dublin, Luxembourg and Frankfurt.
“It was noted at the conference that Ireland and Luxembourg appear to be the preferred destinations for any such relocation of asset management operations in a post Brexit world. The reasons highlighted for Ireland’s popularity included common law jurisdiction, protection of contracts, English speaking and a relatively easy destination to access. While companies are preparing for Brexit with many having made plans, they cannot hold off indefinitely to implement these plans. And while a transition period may be on the cards to December 2020, to avoid unnecessary disruption, it is critical that clarity on Brexit is achieved as soon as possible.”
Trish Johnston, PwC Ireland Asset and Wealth Management Leader, said: “In Ireland, we estimate that Assets under Management have the potential to grow to US$8.2 trillion by 2025. With an economy that continues to grow at above EU average GDP levels, we remain very confident about the future growth capacity for Ireland’s funds industry. The strengthening of global economic expansion and robust global investment will further fuel growth in Ireland.
“However, with the uncertainties caused by Brexit and other geopolitical challenges, we cannot be complacent. Technology, and particularly the rise of AI and robotics, provides great opportunities to further manage the cost base and deliver even better products to consumers. The Irish Asset and Wealth Management industry, like its global counterparts, also needs to fully leverage technology to enable it to forge ahead."
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