From Brexit to the Financial Conduct Authority’s (FCA) asset management review, wealth and fund firms have been presented with a host of challenges in 2016.
As the year draws to the close, the industry will have plenty to mull over during the festive season with 2017 promising to be equally testing.
EY head of wealth and asset management Gill Lofts sums up the mood.
‘ has been a mixed year for the asset management industry, but on the whole, managers have weathered the ups and downs in the market and major geopolitical change well,’ Lofts said.
‘Aside from passive and exchange traded fund (ETF) managers, those who will have also weathered the year most confidently are the managers with truly diversified offerings or specific alpha strategies.’
In a report on the industry, EY highlights eight key areas of focus next year.
High regulatory investment
Loft points out investment in regulation remained high throughout 2016. She does not see this changing as we enter the New Year, with the FCA expected to keep the pressure on.
‘In 2017, the senior management regime will have a significant impact on the industry, particularly with respect to governance, risk management frameworks and individual liability,’ Loft noted.
‘In addition, the Competition Review will further challenge operational efficiency and transparency, putting greater demands on asset managers’ data and reporting capabilities, and their bottom line.’
Lofts sees 2017 as a year ‘shrouded in mystery’ as the uncertainties of Brexit remain at large. From the start of the year she expects firms to either continue, or start Brexit programs in earnest, well before Article 50 is invoked.
‘The workload that comes with assessing the delegated authorities throughout managers’ global businesses will prove to be a significant task, as they look to determine appropriate business models for a post-Brexit world,’ Lofts said.
‘The question of passporting and substance also still hangs in the air. Whilst some managers will be looking tactically to increase their presence in Dublin or Luxembourg, others are taking a longer term strategic view and looking at other viable EU jurisdictions.
She added: ‘These alternatives may prove strategically more beneficial in the medium to longer term. However, we don’t predict any sort of mass exodus, and London is set to maintain its status as a global hub for asset management.’
Nation of spenders
The provision of solutions and services to better meet the varying investment needs of UK investors will be another prominent theme throughout 2017, according to Lofts.
‘Further clarity around the regulation of advice and guidance, coupled with the increasing adoption of digitalised and disruptive technologies will push this agenda forward,’ she said.
‘We are likely to see an increase in the number and type of new services and solutions being offered. That said, as a nation of spenders, rather than savers, there is still a long way to go in educating and incentivising UK consumers to save more. Nudging and gamification approaches will increase their impact in 2017, but it'll be a long journey.’
Robotics and data analytics
Lofts highlights that efficiency across the value chain is still being held to question. This year we have seen more focus on global operating model re-design, smart sourcing and outsourcing, she commented.
Lofts expects managers to take a fresh look at what they will continue to run in-house and what they will outsource. She also thinks the best way to apply robotic process automation and advanced data analytics should see new operating models start to emerge in 2017.
‘Despite the various uncertainties that 2016 has thrown up, if the sector can remain nimble and react quickly to changing environments, 2017 could be another year of broadly steady performance,’ Lofts explained.
‘The sustainability of the sector will be protected and will flourish by long term thinking, as this is not a time for short termism.'
Fall-out from FCA market study
EY wealth and asset management practice partner Simon Turner points out the FCA market study on asset management brought the active versus passive debate into sharp focus, along with the related issue of fee levels and transparency.
‘The direction of travel is positive, as it heads towards a more transparent “all in” fee for funds, and for many the focus on so-called “closet trackers” will be welcome given the continued debate of funds that potentially do little more than hug an index,’ Turner asserted.
‘What is critical now is that the regulator’s focus is firmly on client outcomes rather than simply costs.'
He added: 'If higher fees are levied for genuine outperformance or lack of correlation to a benchmark then they can be justified; if higher fees fail to deliver good results then, in most cases, “the market will decide” and those funds would come under pressure due to outflows.’
Active versus passive debate
Following on from this, Turner believes the pro-passive/anti-active trend will have far stronger tailwinds in a rising market.
‘The FTSE and the S&P have both risen sharply during 2016, and if 2017 sees poor economic data from the UK and US, we are likely to hear less fanfare around funds tracking a falling index, especially if stockpickers and hedge funds begin to outperform their passive counterparts,’ Turner said.
‘To a degree, the level of support for a lower-fee environment may depend on macro-economic and market forces as much as industry and regulatory arguments.’
Shoots of positivity for hedge funds
EY co-lead for UK hedge fund, Zeynep Meric-Smith describes 2016 as a ‘challenging’ year for hedge funds due to a lack of net asset inflows and poor performance. She does not expect these issues to lessen in 2017, but rather compound by the dramatic changes in the UK and US political landscapes.
However, Meric-Smith sees ‘shoots of positivity’ on the expectation the new US government will be supportive of the industry and continue to foster the benefits generated by it for savings and pensions.
‘Given the nimble nature and ongoing investor demand for hedge fund strategies, we expect the rate of growth for start-ups to continue over the next year,’ she said.
‘It will remain a battle of quality over sheer quantity, especially in an environment where traditional asset managers’ are looking to up-skill their in-house capabilities and expand their alternative asset management footprint as they look to the sector for uncorrelated, diversifying returns.’
Big data transformation
Meric-Smith concludes that technology will continue to play a big role in the success of hedge fund managers, by bringing costs, and with them, fees down.
‘The most savvy managers will embrace developments in big data to improve the analytics of their front office, and invest in new ways of creating operational efficiencies in their middle and back office through automating processes and in a few instances, starting to transform business models,’ she said.
‘Innovative developments in technology are lowering the barriers to entry for new launches and start-ups too, which in turn will increase the efficiencies in the market place for all investors and funds, regardless of size.’