There will winners and losers in 2015 as the wealth and asset management tackles regulatory change and a number of other challenges, says Ernst & Young (EY).
According to the firm’s outlook for next year, regulatory-driven change will see remuneration bite the hedge fund industry, while asset managers will need to learn to deal with unfixed product profiles as annuities change the model.
In addition, EY believes that 2015 will see a new wave of technology spend on the front office as asset managers compete to chase growth.
Gill Lofts, UK Head of Wealth and Asset Management at EY says: “The general election adds a degree of uncertainty around the tax, legal and regulatory framework for wealth and asset management. However, on thing is certain, 2015 will see much more work in the savings and pensions market. Greater innovation and investment in retirement solutions for consumers will inevitably see increasing vertical integration between manufacturing and distribution, further blurring the lines between wealth managers, asset managers and life companies. It really is all to play for, and as of yet very unclear who the winners will be.
“On a macro level, the economic growth rates in China, the US, the UK and much of continental Europe will have a distinct impact on asset managers’ performance next year. Managers will need to ensure they are flexible enough to react to where the demand is coming from – they cannot afford to drop the ball this year.”
Zeynep Meric-Smith, Director at EY, says: “Remuneration reform in 2015 will be a critical business issue for many European asset managers. Bringing remuneration into the regulatory framework will mean that hedge funds, as a subset of the asset management industry, could find themselves open to greater scrutiny and possible media criticism, and firms will need to be prepared for this external interest.
“Strong internal communications with stakeholders and employees will also be fundamental to limit any unrest, however, we believe that the risks of poaching are currently over-hyped. The higher risk-reward profile of small boutique asset managers is not new, but we don't expect that increases in disclosures and transparency requirements will lead to the exodus of employees to larger firms.
“It is important to remember that the debate around remuneration is not purely driven by regulators – it has encouraged institutional investors to push for better alignment of investor and manager rewards, and greater use of deferral and claw-backs. Their growing focus on pay particularly is reinforcing the regulation in this area, and, in the long term it wouldn’t be surprising if investors were to become more demanding than the regulators. Further, whilst many hedge funds do have 'skin in the game', the proportion and transparency as to exactly how much, for how long and in what structures, will increase.
“Firms must think long term and be strategic in their approach as the changes are not temporary, but part of a broader, permanent shift in culture. Whilst many hedge funds benefit from the application of proportionality to their disclosure requirements, the longer term strategic direction of remuneration disclosures will pull them in the same direction as the rest of the industry today. The challenge will be achieving compliance without dropping the ball on attracting and retaining talent and inflows.”
More details can be found in the attached document.
Asset managers will need to learn to deal with unfixed product profiles as annuities change the model
Ben Lucas, Director at EY, comments: “The changes to the pensions market will most likely be one of the biggest areas of focus for asset managers in the coming years. Whilst the Budget announcement has heralded a golden opportunity for the industry, it won’t come without its implementation challenges. Unlike actuaries, managers do not have a heritage in dealing with unfixed product profiles, and will have to get to grips with ways of working as their new customer base is looking for non-traditional ways of managing their money.”
This year we will see a new wave of technology spend on the front office as asset managers compete to chase growth
Dean Brown, Executive Director, Wealth and Asset Management, comments: “Asset managers have increased their technology spend year on year since the financial crisis as they have dealt tactically with the technological challenges new regulation has thrown their way, but now, in 2015 we expect to see the start of the next wave of technology spend. Legacy systems are starting to constrain managers’ growth ambitions. Managers’ creaking systems also now often represent an unacceptable level of risk. As the industry enters the next phase of the growth cycle and managers look to expand their business into new products and geographies we expect to see much more focus in strategic spend on front office platforms and operations. Making the investment division more efficient will give managers the competitive edge they will need to successfully chase the growth opportunities offered by this point in the economic cycle.”
