Top 10 Drivers Impacting Global Wealth And Asset Management by EY
Disruption. Change. Paradigm Shift. Threats – Or Opportunities.
Faced with these challenges, the global wealth and asset management industry is entering a perfect storm of client, technological, regulatory, fiscal and market evolution. Disruption is everywhere. The opportunity to take the complex landscape of FinTech disruption and regulatory reform, make sweeping strategic changes to technology and solutions, and win the confidence and trust of the market will create new industry winners. And leave many on the sidelines.Disruption that firms are facing gives rise to several key strategic drivers impacting the industry.
EY Global Wealth & Asset Management puts forward what we see as 10 disruptive drivers in global wealth and asset management now challenging the industry:
- FinTech and innovation: The future of advice is threatened by innovation and FinTech. Firms must quickly react to regulators and investors demanding more transparency, better risk management, enhanced client service and greater clarity in the connection between fees paid, services delivered and value offered.
- Cybersecurity: The spotlight on cyberthreats is as strong as ever.
- Liquidity risk: Misalignment of liquidity was a key driver of the financial crisis. Any hiccup in asset allocation in the current low-rate environment leaves investors exceptionally vulnerable to further liquidity shocks.
- Conduct risk: Conduct of firms — delivering real value for fees received — is now a key enforcement theme of global regulators.
- Long-term conviction vs. short-term action: Corporate strategy must balance the need to meet near-term earnings targets against the necessity to ensure long-term sustainability.
- Investments with purpose: Seeking growth in a highly competitive industry, firms must step up offerings of “investments with purpose” in response to changing market dynamics, such as the rise of millennials and growing affluence of women, who often demand investment opportunities that align with their values and benefit society.
- Focus on client experience: Firms need to move away from their focus on product push and toward building their business model based on customer experience.
- Simplifying the proposition: Simple, clear and transparent is the new mantra.
- Technology and strategic efficiency: Technology will continue to not only deliver further productivity gains, but also leverage big data to use client analytics and grow distribution.
- Complexity of global tax reporting: Tax reporting is no longer a periodic procedure ending at a specific point in time, but has now become a more complex, year-round process.
Faced with these challenges, the global wealth and asset management industry is entering a perfect storm of client, technological, regulatory, fiscal and market evolution. Disruption is everywhere. The opportunity to take the complex landscape of FinTech disruption and regulatory reform, make sweeping strategic changes to technology and solutions, and win the confidence and trust of the market will create new industry winners. And leave many on the sidelines.
Disruption that firms are facing gives rise to several key strategic drivers impacting the industry:
Seizing disruption as a game-changing opportunity, rather than viewing it as a threat, to gain first-mover advantage, drive productivity gains and enhance the client experience to better compete and win in the market.
Leveraging technology to drive innovation in a highly prudent, cost-effective manner with a focus on budgeting and project management so that each new strategic priority has a clear and measurable goal: better cost management, more streamlined processes, enhanced client service.
Preparing well in advance, as regulators and investors now demand, to mitigate risks of the next liquidity crisis.
Re-evaluating focus and alignment on conduct risk from the C-suite through the entire organization. Global regulators and investors have set the conduct bar high. Tone from the top is critical, but execution is critical to success. Getting in front of the market by establishing and executing world-class standards of conduct will win firms the prize of gaining trust and growing business.
Embracing the difficult trade-off between sacrificing short-term profitability to achieve long-term growth and sustainability.
Ensuring that tax compliance is supported by an integrated global infrastructure and an understanding of the unique needs of each jurisdiction. Firms must effectively align reporting, and leverage technology and service providers, in the most cost-efficient means possible – backed up by the appropriate tools for local activity and governed with centralized oversight.
2016: Embracing disruption, innovation and change
The global wealth and asset management industry continues to experience strong growth, primarily due to steadily recovering developed markets. Yet, firms also face an onslaught of changes: an often conflicting regulatory environment, a changing remuneration model in distribution and evolving investor demographics. Firms who have focused on lucrative asset classes that offered comfortable margins, such as emerging markets (EMS) and high yield, are now challenged as many investors become more risk-averse.
Perhaps the greatest opportunity. or threat, is FinTech. The ongoing paradigm shift driven by FinTech disruption should not be underestimated. The successful new telecom firms that emerged winners after the dot-com bubble usually had only a limited historical background in telecommunications and were initially rooted in such unrelated sectors as computer hardware and shipping. They were willing to sacrifice some short-term profits to achieve long-term growth and sustainability. They focused on continually enhancing client experience rather than merely pushing products. The winners knew how to seize opportunity and innovate. By comparison, many of the global entrenched network carriers who dominated the industry for decades before the dawn of the wireless and internet era were slow to react to change; as a result, they were overtaken by those more innovative and disappeared or were forced to restructure.
Today, many wealth and asset management firms are striving to gain first-mover advantage in FinTech and lead the race for market share by offering aggressive pricing, compelling messaging and “sticky” digital client interfaces. Similar to the telecommunications boom of prior decades, FinTech presents the danger, or opportunity. to rewrite the list of industry winners across the globe.
In tandem with FinTech, firms are seeing opportunities in complex regulatory change. Innovators are busy implementing world-class standards of transparency, governance and conduct-risk mitigation well in advance of any regulatory implementation deadline. Their prize will be the leadership role of “most-trusted service provider” in an industry challenged by declining client trust.
Winning client trust will deliver success through growth. For example, the vast majority of the workforce in the developed world still does not own any fund products. While in the UK and the US, most workers do have exposure to funds at least indirectly through retirement accounts, the proportion of potential clients connected to the asset management industry is far lower in the rest of the world. According to a study by the European Central Bank, the participation rate in the asset management industry is around only 6% in Italy and Spain. In Greece and Cyprus, it is only 1%. In the emerging and frontier markets of Latin America, Asia-Pacific and Eastern Europe, participation similarly hovers around the single digits.
This lack of industry penetration in much of the world is due in large part to widespread skepticism about wealth and asset managers, as well as uncertainty about what value they can deliver. Further, vast segments of the working population, such as the mass affluent, were previously considered by much of the industry as uneconomic to service. However, with the rise of the new breed of “robo-advisors,” a great proportion of these potential clients will soon become economically viable as a vast new market segment.
EY’s Global Wealth and Asset Management practice sees a wide range of current issues that will threaten the status quo, drive permanent change and above all, present great opportunities to seize for sustainable growth. We present our Top 10 for further discussion.
Top 10 drivers of change
Seize disruption as an opportunity to innovate and win in the market, rather than as a threat to the status quo.
Disruptive trends are challenging the industry. In the FinTech-driven paradigm shift now underway, robo-advisors, blockchain and robotics are some examples of key accelerators. For the most strategically nimble players, these challenges will also deliver the opportunity to innovate more quickly, more wisely and more cost-effectively than the competition – and ultimately win in the market. Many current FinTech trends are fundamentally impacting the wealth and asset management value chain (as shown in Figure 1). Across many sectors throughout the global economy, technology is disrupting traditional business models. Yet, at the same time, disruption also will create opportunities for traditional firms to partner with or even acquire new start-ups. New tech-savvy firms that lack expertise in financial services can deliver cost-saving synergies and drive innovation for traditional firms that command the vision, insight and courage to reinvent themselves – as painful as that may be.
The wave of FinTech investment in wealth and asset management first started after the global financial crisis. This period saw increased demand for vastly enhanced reporting, risk management and compliance systems. FinTech in these areas is still only in the early stages. EY expects FinTech investment to accelerate rapidly and focus primarily on client interface (specifically, the costly distribution process), increased automation and operational efficiency, and greater transparency.
The most immediate manifestation of technology-driven disruption and innovation has emerged in the form of robo-advisor platforms that can enhance, supplement or, in some cases. replace advisor-client interaction. Technology will reshape the future of investment advice by redefining what it is and how it is best delivered. All major wealth management firms must either roll out their own version of a robo-advisor platform. acquire one outright or strategically align with an existing platform – or at least offer a highly interactive digital client user interface with at least some degree of automation. Few wealth managers can afford to simply ignore the robo-advisor threat – and must embrace it as a game-changing opportunity to deliver more value, services and efficiency to customers.
Robo-advice is not just for the mass affluent caught in the “advice gap” – those with limited assets who are deemed uneconomic to service by traditional wealth management firms. The trend toward automated delivery of advice is changing expectations for a much broader investor group, regardless of wealth level. Service-level expectations for clients are not being set by any one firm, but rather by the entire financial services industry – and even more so by Uber, Netflix, Airbnb and Amazon. The entire wealth and asset management industry must change and meet those new expectations in order to survive and grow.
Human, machine or hybrid: All firms can implement some degree of digital automated client interfaces. This could be full automation with limited human intermediation, to partial automation backed up by personalized telephone support. to a traditional model that sticks with face-to-face advice but also relies heavily on digital tools to improve servicing that enable advisors to devote more efforts to advice and value-add services.
Bitcoin, or at least the technology underpinning bitcoin, is another emerging driver impacting the industry. Mutual distributed ledgers, often referred to as blockchain technology, can deliver greater functionality and cost savings to wealth and asset management firms. And they will threaten the existence of the asset servicing industry as we know it today. Asset servicers will be forced to restructure their business model and fully integrate distributed ledger technology rather than compete against it.
Blockchain technology presents an opportunity to radically transform, modernize and streamline the way asset management firms handle payments, custody, clearing and settlements for most financial transactions. Financial services firms will be able to have a globally secure and verifiable data ledger available with real-time access for essentially any legitimate party. This capability can empower financial services firms to provide trusted third-party services that are now offered exclusively by a small handful of global custodians.
Success and survival in asset servicing post-blockchain implementation will largely depend on effective industry collaboration, the creation of consortia and skillful, strategic adoption of new technology. The adaptation and implementation factor is arguably more essential than simply picking the best technology. However, significant obstacles must be negotiated before blockchain becomes a viable productivity enhancement tool across financial services. The major issue is system governance. A distributed ledger requires establishment of a clear ownership and control structure. But how can this be best accomplished without creating a natural monopoly? What role should global regulators play in administering an effective and secure distributed ledger for the asset management industry?
Robotics are also revolutionizing the entire operations value chain to aggressively manage costs, increase productivity. streamline processes and replace manual actions enterprise-wide with automation wherever possible (shown in figures 4 and 5). A virtual robotic workforce will transform how organizations move data, operate and engage customers. Robotics will enable firms to automate existing high-volume or complex data-handling actions as if the business users were doing the work.
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