The top 10 drivers
impacting global
wealth and asset
management
Executive
summary
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:
• 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.
• 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 worldclass 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.
• Preparing well in advance, as regulators and investors now
demand, to mitigate risks of the next liquidity crisis.
1
| The top 10 disruptive threats and opportunities in global wealth and asset management
EY Global Wealth & Asset Management puts forward what we see as 10 disruptive drivers in global wealth and asset
management now challenging the industry.
1
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.
6
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.
2
3
Cybersecurity: The spotlight on cyberthreats is as
strong as ever.
7
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.
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.
8
9
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.
10
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.
4
Conduct risk: Conduct of firms — delivering real
value for fees received — is now a key enforcement
theme of global regulators.
5
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.
The top 10 disruptive threats and opportunities in global wealth and asset management |
2
The top 10 drivers impacting global wealth
and asset management
Introduction
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.
3
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.
| The top 10 disruptive threats and opportunities in global wealth and asset management
Top 10 drivers of change
1
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.
In the FinTech-driven paradigm
shift now underway, robo-advisors,
blockchain and robotics are some
examples of key accelerators.
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 advisorclient 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.
The top 10 disruptive threats and opportunities in global wealth and asset management |
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The top 10 drivers impacting global wealth
and asset management
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
Figure 1: Disruptive digital trends impacting the wealth and asset management value chain
o
• Improve customer experience by
reducing lead times and errors
Big data
• Reduce risk costs through
granular risk evaluation
5
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| The top 10 disruptive threats and opportunities in global wealth and asset management
• Build customer loyalty with
value-added services
• Increase revenue through digitalenabled products
• Increase customer loyalty and
sales conversion
• Migrate customers to low-cost
channels
• Drive sales through mobility tools
(e.g., sales apps on tablets)
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?
processes and replace manual actions enterprise-wide with
automation wherever possible. A virtual robotic workforce will
transform how organizations move data, operate and engage
customers. Robotics will enable firms to automate existing highvolume or complex data-handling actions as if the business users
were doing the work.
Robotics are also revolutionizing the entire operations value chain
to aggressively manage costs, increase productivity, streamline
Figure 2: Potential ways to put robotics to work in enhancing productivity
Data handling
Digital enablement
Data movement
• Back-office operations
• Client onboarding and profile enrichment
• Moving client data from acquired firms
• Account setup and settlement
instructions
• Client and risk reporting
• Importing customer portfolios
• Capturing and conveying intraday
settlement status
• Migrating data from legacy system
• Margin/collateral processing
• Corporate actions
• Aggregating daily NAV reporting
• Liquidity compliance reporting; monthly
liquidity management reporting
• Streamlining the addition of new
investment products
• Consolidating and customizing research
and markets daily notes
• Tax compliance reporting
The top 10 disruptive threats and opportunities in global wealth and asset management |
6
2
Intensify cybersecurity preparedness to
best safeguard the trust of clients and
regulators alike.
Perhaps the greatest asset of any firm is client trust. Firms must
invest aggressively and strategically to protect that trust and
prevent (prepare for) cyberattacks. Not surprisingly, for most global
regulators as well as the market at large, cybersecurity has become
a C-suite concern (as shown in Figure 3). Global regulators and major
institutional investors are holding informal industry roundtables
to discuss the threat. For several years, requests for information
from most major institutions have required details about proactive
measures taken by their asset managers to understand how they
are securing their technology ecosystem — for both their own
organization as well as service providers.
Firms must invest aggressively
and strategically in order to
protect that trust and prevent
cyberattacks.
High-profile instances involving cybercrime have shaken several
financial institutions. These have resulted from the expansion of
web-accessible digital client interfaces and the increasing use of
online platforms for product distribution, transactions and data
storage. Effective cybersecurity can combat money laundering and
misappropriation of client financial data.
One way of thoroughly testing cybersecurity preparedness is to
conduct so-called Red Team exercises, simulated all-out attempts
executed by an external IT vendor specialist who plays the part of
a highly skilled and determined hacker. These real-life exercises
conducted periodically can identify gaps in cybersecurity and social
defenses — and lead to not only identifying security weaknesses, but
also to determine plans of actions to address when attacks may occur.
Another way to increase cybersecurity preparedness is to scrutinize
coverageof cybersecurity insurance that would transfer some of
the financial costs of a security breach to the insurer. Cybersecurity
insurance is available to cover many direct short-term measurable
costs related to a cyberbreach. However, there are many
idiosyncrasies in terms of when events actually trigger the policy’s
coverage, and even the most extensive policies won’t likely cover the
unquantifiable cost of reputational damage. In addition, because the
cybersecurity insurance market is still nascent, there is wide room for
interpretation in the wording and exact coverage of policies, and costs
can be prohibitive.
Figure 3: Cybersecurity market forces
1
The technological pace is increasing
CEOs at Fortune 500® companies reveal their
top two greatest threats and challenges1
2
3
Accelerating cyberthreats
88% of respondents do not believe their information
security fully meets the organization’s needs1
1. The pace of technological change 2. Cybersecurity
26.3
billion more
44zb
It is estimated that there
will be 26.3 billion more
devices than the number
of humans projected
by 20202
By the year 2020, 44
zetabytes of data will be
created by 7 billion people
and 30 billion devices
connected to the internet3
Creating greater cost and resource drain
USD $400b
Cyberattacks cost businesses
US$400 billion every year1
88%
12%
There will be an estimated shortfall
of 1.5 million professionals in the
global information security workforce within five years2
Four out of five companies employing more than
2,500 people were targets of cyberattacks in 20142
1.5
ml
ess
By 2018, 70% of mobile
professionals will conduct
all of their work on personal
smart devices4
7
70%
| The top 10 disruptive threats and opportunities in global wealth and asset management
2016
2017
2018
2019
2020
3
Prepare well in advance to effectively
manage the next liquidity event.
The extended near-zero-rate environment has driven a widespread
“reach for yield” among investors. Liquidity risk made headlines
in December 2015, when several high-yield funds ceased trading
because of volatile market conditions. The slightest hiccup in market
expectations about monetary policy can cause investors to rush to
the door, creating another liquidity event, particularly in thinly traded
asset classes where redemption provisions are more frequent. The
low-rate environment is changing risk appetite and how portfolios
are allocated. Firms can certainly grow their business by catering to
the risk-seeking segment of the fixed-income market. But they must
ensure a solid system of liquidity risk controls and well-established
oversight to gain the confidence of both investors and regulators.
Many global regulators are proposing new requirements to monitor
portfolio liquidity risk. Specifically, in a public comment letter issued
in September 2015 (comment period ended January 2016), the U.S.
Securities and Exchange Commission (SEC) sought industry views on
mitigating liquidity risk. Key proposals included classifying liquidity of
portfolio assets based on the amount of time they can be converted
to cash without market impact, and assessing and periodically
analyzing the risk. The SEC also sought views on the application of
swing pricing. Many asset managers in the European Union (EU) are
already using this optional mechanism. Regulators in the EU and UK
have also commented on suggested actions needed to ensure tighter
control around liquidity risk oversight. These proposals do not come
without challenge from asset managers, or even from the boards
overseeing funds. Efficient implementation of appropriate vendor
risk management systems and processes, with particular attention to
scenario stress testing, model validation and quality of independent
valuation data, will give clarity and confidence to both investors and
regulators.
Firms can certainly grow their
business by catering to the riskseeking segment of the fixedincome market. But they must
ensure a solid system of liquidity
risk controls and well-established
oversight to gain the confidence of
both investors and regulators.
The top 10 disruptive threats and opportunities in global wealth and asset management |
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The top 10 drivers impacting global wealth
and asset management
4
Focus on execution of proper conduct
enterprise-wide — not merely setting the
tone from the top.
How firms conduct business with their clients, particularly in the
complex distribution environment, is high on the agenda for most
global regulators. In addition, the worlds of politics and media are
paying significant attention to whether clients are receiving value for
their money and whether financial institutions are practicing good
conduct. Conduct risk is also gaining equal, if not greater, priority in
the C-suite with liquidity and market risk — two topics that governed
enterprise-wide risk management attention for much of the last
decade. The tide of conduct-targeted regulatory change sweeping
the globe will mandate that firms review their entire top-down risk
governance culture.
As Mark Carney, Chair of the Financial Stability Board and Governor of
the Bank of England, commented, “The succession of scandals means
it is simply untenable now to argue that the problem is one of a few
bad apples. The issue is with the barrels in which they are stored.”
For those firms that clearly
display to the market the highest
standards of conduct toward
advising clients, the prize will be
winning the status of most
trusted advisor.
9
The concept of “ensuring good conduct” may seem simple. But
related to it are great complexities: understanding the current
legislation, keeping up with how it is developing during the legislative
process and implementing an effective global compliance system.
For firms marketing and distributing in the EU, practices will be
restructured in order to operate in the regulatory environment after
the European Commission’s revisions to the Markets in Financial
Instruments Directive (MiFID-II). This Directive will force firms
to implement numerous investor protection measures, enhance
reporting transparency and, most notably, ban sales inducements.
Fully implementing the highly complex package of conduct-focused
MiFID-ll provisions will be costly and confusing, and it will force radical
change in business development and distribution.
Likewise in the US, both the Department of Labor (DOL) and the SEC
are now proposing new fiduciary rules that would govern advisor
conduct and communication in large parts of the fund distribution
process. These new rules will be a highly debated topic in the wealth
and asset management industry — just as the Retail Distribution
Review (RDR) in the UK created fierce debate during the drafting
and implementation process. The objective of the new proposals is
to mitigate conflicts of interest and ensure that the distribution and
advice process adheres to the client’s best interest.
Industry participants widely agree that the client’s best interest
should be above that of an advisor or firm. However, it is a
challenging undertaking to understand how any fiduciary rule will take
shape, limit and define product selection, and determine compliant
vs. noncompliant behavior. Many believe the DOL’s proposal, similar
to other global conduct risk mitigation initiatives, is too far-reaching
and ambiguous in several respects, including the definitions of “best
interest,” “recommendations” and “reasonable compensation.”
| The top 10 disruptive threats and opportunities in global wealth and asset management
5
Retain commitment to long-term
sustainable growth, perhaps at some cost
to short-term results, to ensure future
industry leadership.
Corporate strategy is always challenged in balancing the need to meet
or exceed near-term goals with the desire for long-term growth. In
challenging market conditions, such as early 2016, this conflict was
acute. Whether it’s staying the course on upgrading costly technology
platforms, integrating global operating platforms or investing in new
products, markets or disruptive business changes, the demands
to deliver near-term profitability often overshadow aspirations for
growth. Firms must safeguard their commitment and resolve to invest
in and ensure long-term sustainable growth that will enhance value
for all stakeholders.
Firms must safeguard their
commitment and resolve to invest
in and ensure long-term sustainable
growth that will enhance value for
all stakeholders.
For example, emerging technologies (such as robo platforms and
blockchain) have yet to tangibly demonstrate how effectively they
will streamline operations and enhance margins — at least in the near
term. As we note later, investor demographics are evolving with a
greater focus on “investments with purpose.” That is, investments
focused on sustainable and socially responsible activities (e.g.,
infrastructure, solar farms, and renewable energy) and leaving a
legacy for future generations. Here, too, there is a need to forgo
short-term results and provide conviction to commit to longer-term
benefits. Wealth and asset managers must demonstrate the resolve to
recognize what’s on the horizon and invest, where possible, ahead of
the curve to achieve long-term sustainability for all stakeholders.
Firms also must decide whether they should continue to maintain
a substantial presence in emerging markets (EMs). Following a
volatile year in equity markets in China, Russia and many developing
economies, allocation of resources to EMs has been restrained and,
in many cases, aggressively curtailed or eliminated. Other than
Singapore, Malaysia and Turkey, which many no longer consider as
emerging, it is highly unlikely that firms will see any near-term growth
or expansion in many EMs for some time.
While some bullish analysts say that short-term volatility is typical
in EMs, and product origination and distribution opportunities may
still exist, the headline-grabbing corrections in Chinese equity prices
are not the core issue. These global economies are facing not a mere
cyclical economic slowdown but, since 2012, the reversal of a 20-year
cycle during which net capital inflows into EMs steadily grew — and the
debt bubble inflated to massive proportions. (EM equity fund flows
from 2012 to 2015 are shown in Figure 4; bond fund flows are shown
in Figure 5.)
Yet, global firms cannot afford to be absent from EMs; specifically,
they must keep China in their long-term strategic plans. Over the next
decade, the new tier of emerging nations, driven by their own nascent
middle classes, will draw new global capital inflows. Capital markets
will become increasingly connected and interlinked through trade in
goods and services and convergence of financial systems. The largest
global firms will aggressively leverage their economies of scale. In
short, EMs may be down for the short term, but certainly not out for
the long term — and firms must invest accordingly.
The top 10 disruptive threats and opportunities in global wealth and asset management |
10
Figure 4: Emerging market equity fund flows
Figure 5: Emerging market bond fund flows
81.2%
46.9%
30.9%
23.9%
27.4%
11.4%
0.0%
2.2%
9.3%
4.7%
-1.2%
-5.4%
-4.2%
-23.1%
-19.7%
2012
2013
2014
2015
2012
International emerging market equity find flows — for US domiciled
funds* (USD bn)
Emerging market equity fund flows — for non-US domiciled
funds^ (USD bn)
Note: Both categories refer to diversified emerging market products and exclude singleregion products.
*International emerging market equity funds invest primarily in equity securities whose
main trading markets are non-industrialized or emerging market countries.
^The term non-US refers to regions in Asia, Europe, Latin America and Japan.
Sources: Strategic Insight and Simfund
-10.5%
2013
2014
2015
International emerging market equity find flows — for US domiciled
funds* (USD bn)
Emerging market equity fund flows — for non-US domiciled
funds^ (USD bn)
Note: Both categories refer to diversified emerging market products and exclude singleregion products.
*International emerging market bond funds invest primarily in corporate and government
fixed-income securities originating in non-industrialized or emerging markets.
^The term non-US refers to regions in Asia, Europe, Latin America and Japan.
Sources: Strategic Insight and Simfund
Focus on the long term
Despite recent capital outflows from several emerging markets,
Asia-Pacific regulators are actively pushing ahead with
implementing cross-border fund passporting schemes. Currently,
these schemes may not deliver the volume of registrations seen
under the UCITS (Undertakings for Collective Investment in
Transferable Securities) regulatory program in the European Union.
But, in the not-so-distant future, Pan-Asian fund passporting will
be seen as both vital for economic development in the region and
essential to the long-term growth strategy for global firms.
• Association of Southeast Asian Nations (ASEAN) collective
investment schemes (CIS): Singapore, Thailand and Malaysia
currently participating; became operational in August 2014
• Mainland China-Hong Kong Mutual Recognition of Funds scheme
(MRF): Became operational in July 2015 and allows eligible
Hong Kong-domiciled funds to be sold directly to investors in
mainland China, and vice versa
11
• Asia Region Funds Passport (ARFP): Will facilitate the crossborder distribution of funds across the Asia region. So far, six
countries have agreed to take part — Australia, Japan, South
Korea, New Zealand, the Philippines and Thailand.
• Shanghai-Hong Kong Stock Connect (SHKSC): Established to
provide HK and mainland China mutual stock market access; was
launched on 17 November 2014
• Chinese Offshore Investment Passporting — Qualified Foreign
Institutional Investor (QFII), Renminbi Qualified Foreign
Institutional Investor (RQFII), Qualified Domestic Individual
Investor (QDII), Qualified Domestic Limited Partnership (QDLP):
All are regulatory schemes aimed at facilitating onshore and
offshore investment for China and streamlining the entire
process of cross-border fund flows. QFII and RQFII are channels
through which international investors can invest in the Chinese
capital markets. The QDII and QDLP schemes are used to expand
capital outflow through RMB internationalization and usage of
funds from investors in China to make overseas investments.
| The top 10 disruptive threats and opportunities in global wealth and asset management
6
Recognize growing interest in factors
beyond risk-return in the product
suite and meet growing demand for
“investments with purpose.”
When deciding how to allocate their assets, more investors are
focusing on opportunities that deliver a purpose above and beyond
merely outperforming the market. Such investments carry many
descriptions — socially responsible, sustainable, ethical, and affinitydriven are just a few. This broadly defined product class has been one
of the fastest-growth industry segments in recent years, particularly
in the US and UK — and will likely expand even faster (see Figure 6).
To fully leverage this rapid growth, firms must enhance their product
suite targeted to this complex, growing market segment.
demand. Clearly, investments with purpose are not just a marketing
message, but a key to any successful, sustainable growth strategy.
When deciding how to allocate their
assets, more investors are focusing
on opportunities that deliver a
purpose above and beyond merely
outperforming the market.
Service providers across the product manufacturing and distribution
value chain are seeking growth in a highly competitive industry where
commodification is rapid. They will need to enhance their offering
of investments with purpose in response to ever-increasing market
Figure 6: Investments with purpose represent one of the industry’s fastest growing product classes
70
1,400
60
1,200
50
1,000
40
800
30
59
45
20
32
10
0
6.5
April
2006
10
April
2007
18
13
April
2008
April
2009
21
April
2010
400
34
24
April
2011
600
Number of signatures
Assets under management (US$ trillion)
Responsible investment across the globe
200
April
2012
Assets under management (US$ trillion)
April
2013
April
2014
April
2015
0
Number of signatures*
*Signatories to the UN Principles for Responsible Investment (https://www.unpri.org/about).
Source: Global Sustainable Investment Alliance
The top 10 disruptive threats and opportunities in global wealth and asset management |
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The top 10 drivers impacting global wealth
and asset management
7
Adapt the core business model to deliver
outstanding client experiences — not just
push products.
Wealth and asset management firms must shift from a focus on
simply promoting products to building and leveraging a core business
model based primarily on enhancing the customer experience.
Essentially, for firms to win new business, their clients must feel
that a trusted lifetime financial coach is advising them to reach their
long-term personal goals — much like a trusted family physician
advises them on heath matters. Moving toward experiences, and the
relationships underpinning those experiences, is in stark contrast to
the hard-sell approach, which leaves clients feeling that they are just
being sold hot new products and leads to subsequent mis-selling risk.
Rapid implementation of digital distribution in many sectors of the
global economy has clearly demonstrated an inevitable trend toward
commoditizing products and services. Commodity providers compete
primarily on price and are often severely challenged to create a
distinct brand identity and enhance margins. Yet, the most innovative
firms in wealth and asset management, although operating in an
intensely competitive sector, can find ways to add value by improving
the personalized client experience. Ultimately, value creation for
Wealth and asset management
firms must shift from a focus on
simply promoting products to
building and leveraging a core
business model based primarily
on enhancing the customer
experience.
13
stakeholders will not emanate merely from simply assets — which
had been the traditional valuation parameter for most firms. Instead,
value will depend heavily on the customer experience, as well as the
firm’s ability to seamlessly fit into customers’ digitized, connected
lives and address their personal core values and preferences.
For firms, value creation begins well before an account is even
opened, as the result of developing a brand identity in the market,
enhancing the firm’s reputation and clearly communicating a
compelling purpose. While moving toward a customer experiencefocused business model seems simple — as most firms proclaim to
be customer-focused — the shift will be revolutionary. Customer
experience-based firms have no immediate prioritization of product
sales targets, nor any clear distinction between revenue centers
and cost centers. In a rapidly homogenized industry with little real
differentiation between one product suite and another, improving
client experience will emerge as the only true source of competitive
advantage.
More often than not, leaders of the technology industry have
historically expressed limited interest in short-term profitability,
meeting or beating analysts’ earnings-per-share expectations, or
share price. Instead, the industry titans of technology have usually
focused with evangelical zeal on radically transforming their entire
sector — whether social media, retail, music distribution or desktop
software. Such mission-oriented vision is rare in wealth and asset
management. Nonetheless, to ensure sustainability and long-term
value creation in a transparent, commoditized and competitive
market threatened by disruption, firms will need to reinvent
themselves and adopt a customer experience-based business model
— as difficult as that may be. Focusing on the client experience — as
part of the overarching goal to deliver financial well-being — will entail
shifting from product push to outcome-based solutions.
The old messaging strategy of “Product X will outperform the index
because of skilled management and great ideas” will likely fall on
deaf ears, as investors have become increasingly sophisticated and
skeptical in the past decade. Instead, the product development and
messaging strategy will sound more like: “Product X, a multi-asset
class solution, is an investment that fits into your overall wealth
management plan and is well-suited to align with your unique longterm financial goals.”
| The top 10 disruptive threats and opportunities in global wealth and asset management
8
Simplify the proposition — and reduce
unnecessary complexity.
Historically, asset management firms have strived to develop complex
products that, more often than not, were less than transparent in
risks and fee structure. Complexity was seen as a merit and a strong
selling point on its own. The more complex the product, the more it
would intrigue investors. And in many cases, in the end, these lessthan-transparent products often led to clients who were unsatisfied
with the services they received for the fees they paid.
For all constituents within the
product life cycle — manufacturer,
distributor, investor and regulator —
the drive will clearly be toward
simplicity.
Today, the opposite is true. Simple, clear and transparent is the
new mantra. For all constituents within the product life cycle —
manufacturer, distributor, investor and regulator — the drive will
clearly be toward simplicity. Not surprisingly, growth of the huge ETF
product class and robo-advisor platforms has been driven by a market
seeking products and services they can understand. Simplicity has
been the key to their success. In the UK, following the implementation
of RDR, for instance, the fastest growing product classes have been
simple, super-clean share classes and ETFs. It is expected that after
MiFID-II takes effect in the EU in 2018, simple products will dominate
the market, leaving firms that offer primarily complex instruments
facing significant challenges in growing their businesses.
The top 10 disruptive threats and opportunities in global wealth and asset management |
14
The top 10 drivers impacting global wealth
and asset management
9
Leverage smart technology (and data) not
just for strategic efficiency — but
also growth.
Global firms will find that data is their greatest opportunity and
their greatest challenge. Volume, velocity, variety — all leading to
actionable analysis and insight to drive the business — will be the
parameters to optimize. Firms must no longer confine technology
to the back office merely for cost-saving purposes; by aggressively
leveraging technology in the front office as well, winning firms can
grow distribution through big data techniques using client analytics.
For decades, firms primarily leveraged technology to cut costs
through automation and headcount reduction. The ongoing drive
for productivity and efficiency, resulting from massive investment
in technology, has undoubtedly delivered results. Implementation
of robotics in many client operations will result in even greater
productivity gains and more scope for investment in distribution.
However, technology and strategic efficiency will also deliver better
results in the front office, as firms leverage big data and client
analytics, target messages and services, and proactively adjust their
product suite to more aggressively grow distribution. Today, leading
firms already leverage systems to meticulously analyze the source of
website traffic, the “stickiness” of certain webpages and comments
on social media to gauge the pulse of client demand.
A key challenge has always been how to filter and channel the “noise”
contained within huge data sets, particularly “unstructured data”
such as video, and derive actionable insights. In the near term,
advances in technology, such as the increasing power of the Hadoop
software package to permit distributed processing of large data sets
across clusters of computers, can potentially drive more targeted and
sophisticated distribution efforts.
adjustment. Hadoop-driven analysis could also help identify clients
and market segments that have the most revenue potential. Macro
hedge funds with computer-driven investment processes have been
using analytics for several years to ascertain market-moving company
information from social media and news feeds.
Asset managers will adopt similar sophisticated data-mining
techniques to continually improve not just the investment process,
but also distribution and business development. Harnessing big data
appropriately can provide managers with a powerful tool to be more
insightful and proactive rather than reactive
Firms will become far more thoughtful in how they leverage
technology, and how it fits into future long-term strategic goals.
Data has become an asset — and skillfully leveraging that data will
drive growth.
Firms must no longer confine
technology to the back office
merely for cost-saving purposes; by
aggressively leveraging technology
in the front office as well, winning
firms can grow distribution through
big data techniques using client
analytics.
For example, asset managers could refine their distribution strategies
by using Hadoop to process all available client data, generate more
detailed client profiles, and learn more about their investment
behaviors and interaction preferences. Firms will be able to adjust
their product suite well before customers realize the need for
15
| The top 10 disruptive threats and opportunities in global wealth and asset management
Figure 7: Big data and client analytics will deliver more
results — and not just file forms
• Deepening “know your client” (KYC) and “know your
distributor” (KYD) insight
• Implementing aggressive fraud detection and shoring up
cybersecurity defenses
• Identifying clients and market segments that present the most
revenue potential
• Monitoring product-specific metrics (sales, profitability)
regressed against market environment for guidance on
product suite adjustment and tweaking marketing strategies
accordingly
• Identifying potential client and market demand for new
products in advance of competition
• Identifying clients at risk of defecting to competitor firms
• Determining effectiveness and ROI of marketing campaigns on
a granular market-by-market and product-by-product basis to
best allocate future advertising spend
The top 10 disruptive threats and opportunities in global wealth and asset management |
16
The top 10 drivers impacting global wealth
and asset management
10
Manage global tax complexity as a
52-week nonstop, enterprise-wide
compliance challenge.
Rapidly evolving global tax regulations are driving fundamental
change and creating significant challenges in how firms can meet
compliance in a controllable and sustainable way (see Figure 9). Tax
reporting is no longer simply a periodic procedure of filing required
documents that ends at a specific point in time. Instead, compliance
has become a highly complex year-round process of data collection,
validation, documentation, classification, and report generation and
submission.
Tax reporting is no longer simply
a periodic procedure of filing
required documents that ends at
a specific point in time. Instead,
compliance has become a highly
complex year-round process
of data collection, validation,
documentation, classification, and
report generation and submission.
Tax compliance has emerged, alongside operational risk management
and distribution, as a core focus for wealth and asset management
firms striving to efficiently manage operations and strategically
direct resources toward key areas such as FinTech and business
development. If firms succeed at their operational strategy of cost
17
efficiency and automation of operations, then they can ultimately
invest more in distribution and growth to compete in an increasingly
price-sensitive global marketplace.
For over a decade, the Paris-based Organisation for Economic
Co-operation and Development (OECD) has been proposing
recommended guidelines for global financial information exchange.
In 2014, the OECD issued a recommended Standard for Automatic
Exchange of Financial Information in Tax Matters. The Standard
is similar in nature to the US Foreign Account Tax Compliance Act
(FATCA), which presented a substantial compliance burden for the
industry when first implemented. Like FATCA, the OECD Standard
is an automatic information exchange regime aimed at preventing
offshore tax evasion and maintaining the integrity of tax systems. In
fact, new global tax compliance reporting programs initiated by firms
will need to consider what systems and procedures can be reused and
recycled from FATCA implementation, and where new developments
will be needed.
Included in the OECD recommendations is the Common Reporting
Standard (CRS), whose first implementation deadline is rapidly
approaching. This is considerably more complex than FATCA (as
shown in Figure 9). So far, more than 90 countries have agreed to
implement the CRS. Of these 90, about 50 are committed to mandate
the first exchange of information starting in 2017.
In a recent EY survey of compliance executives in the industry,
27% of respondents said they lack sufficient skilled resources and
are challenged to meet future tax reporting demands. For 40%,
monitoring and adapting to changing reporting requirements
represented their top compliance issue. Over half of the respondents
(55%) have yet to initiate a CRS program.
Multi-country, multi-entity financial services groups, including most
global wealth and asset management firms, now face substantial tax
compliance challenges. There will be a number of reporting standards
and processes to follow that will differ from each other at a low level
of detail. This will necessitate a consistent, compliant and efficient
globalized reporting process, supported with the appropriate tools for
local activity and backed by centralized oversight.
| The top 10 disruptive threats and opportunities in global wealth and asset management
Figure 9: CRS will be much broader and more complex than FATCA
High
Divers of complexity
• Geographic footprint and number of reporting entities
Global impact and complexity
• Differences in local law: who, what, when, how
• Volumes of reportable customers and transactions
CRS
By 2018, 90+
countries will have
agreed to OECD’s
recommendations
FATCA
CRS
FATCA and
CDOT
Low
2015
2016
2017
2018 and on
• FATCA reporting begins
• FATCA reporting expands
• FATCA reporting
continues
• Ongoing annual FATCA
reporting
• CDOT begins
• CDOT ceases
• Jurisdictions releasing
local CRS laws and
guidance
• Documentation
requirements in effect
• Reporting begins
for early adopter
jurisdictions
• Reporting expands to
additional jurisdictions
The top 10 disruptive threats and opportunities in global wealth and asset management |
18
Conclusion
The threat of disruption is clear throughout the entire value
chain of the global wealth and asset management industry.
The client-facing advisor is under threat from the robo-advisor,
or at least facing far more competition and benchmarking
from this new platform. Asset servicers are threatened by
blockchain technology, which may introduce decentralization,
new nontraditional players and peer-to-peer processing into
a highly concentrated business environment traditionally
characterized by centralization, oligopolistic pricing power
and huge barriers to entry (enormous economies of scale
and global reach). Traditional fund distributors are under
threat: in many markets, such as the EU, these distributors’
remuneration models will be restructured amid sweeping
conduct-focused regulatory reform.
While these potential disruptions may be new for wealth and
asset management, disruption has been nothing new for most
other sectors of the global economy. Rapid paradigm shifts
driven by technology and regulatory overhaul have already
occurred and abruptly altered the landscape for many other
sectors, including retail, airlines, telecommunications and
consumer electronics.
What is unique for wealth and asset management is that the
widespread fallacy of uniqueness is now finally headed toward
extinction. Technological revolution, price transparency,
increased sophistication of clients and their growing demand
19
for better service, and regulators keenly attuned and proactive
in fighting for consumer protection are all underlying
megatrends that have already been disrupting most other
sectors. Many wealth and asset management firms have,
compared with other sectors, been comfortably insulated in
the past to many of these megatrends and disruptive threats.
The most innovative firms in the wealth and asset
management industry will observe other firms in related
sectors to learn how to successfully adapt. Over the past
decade, the consumer banking sector has addressed similar
disruptive threats and increased competition by implementing
more cost-saving technology, focusing more on the client
experience, and adding more value and personalization to their
service offerings wherever possible.
Thoughtful planning, coordination with all stakeholders and
long-term strategic insight will prove to be essential elements
for wealth and asset management. The firms that adroitly
and opportunistically seize disruption as a chance to identify
new ways to increase productivity, innovate to enhance client
experience and creatively deliver more value in their service
offerings will ultimately grow their business and emerge as
winners in the changing market.
| The top 10 disruptive threats and opportunities in global wealth and asset management
The top 10 disruptive threats and opportunities in global wealth and asset management |
20
Contact
Michael Lee
EY Global Wealth & Asset
Management Leader
[email protected]
+1 212 773 8940
21
| The top 10 disruptive threats and opportunities in global wealth and asset management
Our global and regional leadership
Global
EMEIA
Michael Lee
Global Wealth & Asset Management Leader
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22
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How EY’s Global Wealth & Asset Management Sector can help
your business
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