INVESTMENT FIRM OF THE FUTURE ALTERNATIVE BUSINESS MODELS AND STRATEGIES FOR A MORE FORWARD-THINKING INDUSTRY

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Netherlands VBA 31 May 2018 Roger Urwin, Strategic Director,

1 INVESTMENT FIRM OF THE FUTURE ALTERNATIVE BUSINESS S AND STRATEGIES FOR A MORE FORWARD-THINKING INDUSTRY CFA Netherlands VBA 31 May 2018 Roger Urwin, Strategic Director, Future of Finance Global Head of Investment Content, Willis Towers Watson

2 THE ORIGINS OF THIS RESEARCH CFA (and Willis Towers Watson) have a commitment to work towards a trustworthy, forwarding thinking investment industry 55% of CFA members say they personally have a strong sense of purpose and want to do meaningful work. 28% say this is true of their firm overall Future State foundational research with a central plank of four Scenarios Fintech Disruption Parallel Worlds Lower for Longer Progressive Capitalism Investment Firm of the Future builds out unfolding Narratives We define the Shifts that investment firms need to make to survive and thrive in the next five to ten years We work on both descriptive and normative versions of the future 2

INVESTMENT ECOSYSTEM Source: CFA Institute System purpose comes from how diverse participants function issues of the alignment, efficiency, cost of the investment industry Motivations

3 INVESTMENT ECOSYSTEM Source: CFA Institute System purpose comes from how diverse participants function issues of the alignment, efficiency, cost of the investment industry Motivations purpose and value materiality and intentionality Spillovers unintended second and higher order consequences public goods/bads regulators/governments exponential growth in complexity 3

4 INDUSTRY DISRUPTION BUSINESS 72%. 54% 23% 18% CFA Survey* considering next 5-10 years expect the pace of industry consolidation to speed up #1 challenge to investment firm financial performance Fee pressures, and shifts to lower fee products Lower returns Cost pressures in service and compliance OPERATING PEOPLE 72% Say technology will grow significantly 39% Expect a decline in the number of investment professionals INVESTMENT 80% Say investment solution mandates will grow DISTRIBUTION 60% Expect DC participants will be more engaged * Survey sample is c2500 CFA members. Survey taken in February and March

SCENARIOS AND NARRATIVES OVER 5-10 YEARS SCENARIOS Fintech Disruption New technologies promote new business models; disruption and creative destruction are endemic; challengers do better than

services participation with wider dispersion of product preferences Lower for Longer New normal low interest rates and returns become embedded for the foreseeable future (five-ten years)

more professional, ethical and client-centric organizations acting in aligned-to-purpose ways Source: CFA Institute 2017 and 2018 NARRATIVES BUSINESS OPERATING PEOPLE INVESTMENT DISTRIBUTION

outcomes and values Build diversity and inclusion within investment firms Investment firm cultures support behaviours that blend business and client outcomes Investment mandates rebalanced to

5 SCENARIOS AND NARRATIVES OVER 5-10 YEARS SCENARIOS Fintech Disruption New technologies promote new business models; disruption and creative destruction are endemic; challengers do better than incumbents; major disruptions to the world of work Parallel Worlds Different segments by geography, generation and social group engage in society differently; a higher baseline for financial services participation with wider dispersion of product preferences Lower for Longer New normal low interest rates and returns become embedded for the foreseeable future (five-ten years) accentuated by lower levels of global growth and higher levels of political instability Purposeful Capitalism Capitalism s way of working evolves; the investment industry raises its game with more professional, ethical and client-centric organizations acting in aligned-to-purpose ways Source: CFA Institute 2017 and 2018 NARRATIVES BUSINESS OPERATING PEOPLE INVESTMENT DISTRIBUTION Investment firm results increasingly challenged Culture and leadership increasingly resonant DC platforms offer efficiencies and wider access to solutions Customisation algorithms synched to outcomes and values Build diversity and inclusion within investment firms Investment firm cultures support behaviours that blend business and client outcomes Investment mandates rebalanced to produce client-centred outcomes Sustainable investment methodologies become core Technology enhancement of customer relationship models Increased trust is monetised, with cybersecurity critical 5

6 THE GAP ANALYSIS AN EXAMPLE BUSINESS THE KEY NARRATIVES An example set for illustration Culture and leadership increasingly resonant Investment firm results increasingly challenged FROM Where we are now Culture is not that strong Business results are subject to headwinds TO Where we want to be Culture stronger and business supportive Business results addressed THE GAP What it would take to get there Difficult Very difficult OPERATING Investment platforms offer efficiencies and wider access to solutions Customisation algorithms synched to outcomes and values etc, etc PEOPLE Build diversity and inclusion within investment firms Firm cultures support behaviours that blend business and client outcomes INVESTMENT Investment mandates rebalanced to produce client-centred outcomes Sustainable investment methodologies become core DISTRIBUTION Technology enhancement of customer relationship models Increased trust is monetised, with cybersecurity critical 6

7 EXAMPLES OF NARRATIVES - #15 DIVERSITY DIVERSITY AND INCLUSION WITHIN INVESTMENT FIRMS Investment firms have notably weak gender diversity in their workforce composition and poor inclusion practice in their behaviors. They are gradually realizing the business case for diversity and more inclusive cultures but must acknowledge the size of the challenge involved. The key points Human ecosystems survive and thrive best where there is robust diversity. The reason is diversity is demonstrated to lead to greater adaptability and creativity Firms interested in the positive benefits of diversity employ people along multiple dimensions, including gender, ethnicity, national origin and educational institution. Diversity and inclusion, when practiced in good cultures, treats all employees fairly and on their merits Making the business case requires firms to look for teams marked out with a range of perspectives, knowledge, experience, and ways of thinking. 7

THE FULL LIST OF NARRATIVES BUSINESS OPERATING PEOPLE INVESTMENT DISTRIBUTION Industry realities and possibilities Higher returns from professionalism

assets Sustainability embedded Streamlining segments Technology and trust 1 Investment firm challenges grow 2 Regulation and standards get tighter 3

leadership resonate 7 Different IT models on a spectrum moving forward over time 8 Stronger data and analytics strategies emerge 9 Further innovation

Collective intelligence through improved cognitive diversity 14 De-biasing decision processes 15 Diversity and inclusion within investment firms 16

Opportunities in people-centred cultures 19 Investment mandates rebalanced between components and solutions 20 Systematic investment methodologies as

Investment impacts are integrated and/or targeted 25 Technology enhancement of customer models 26 Client technology needs infrastructure and shape 27

8 THE FULL LIST OF NARRATIVES BUSINESS OPERATING PEOPLE INVESTMENT DISTRIBUTION Industry realities and possibilities Higher returns from professionalism People plus automation Hyper-customisation Collective intelligence and diversity Firm culture characteristics Growth in solutions, systematic, private assets Sustainability embedded Streamlining segments Technology and trust 1 Investment firm challenges grow 2 Regulation and standards get tighter 3 Success influenced by business model differences 4 Professionalism increasingly recognised 5 Brand and reputation increasingly valuable 6 Culture and leadership resonate 7 Different IT models on a spectrum moving forward over time 8 Stronger data and analytics strategies emerge 9 Further innovation in technology 10 Platforms offer efficiencies and wider access to solutions 11 Customisation synched to outcomes 12 Customisation synched to values 13 Collective intelligence through improved cognitive diversity 14 De-biasing decision processes 15 Diversity and inclusion within investment firms 16 Investment firm culture generally centred on business results 17 Client- centred culture vies for success in intellectual capital business 18 Opportunities in people-centred cultures 19 Investment mandates rebalanced between components and solutions 20 Systematic investment methodologies as core 21 Private investing as satellite 22 Different sustainability models exist across a spectrum and evolve 23 Stewardship becomes mainstream 24 Investment impacts are integrated and/or targeted 25 Technology enhancement of customer models 26 Client technology needs infrastructure and shape 27 Messaging is key to servicing 28 Increased trust is monetised, with guardrails 29 Blockchain use in transaction assurance 30 Cybersecurity critical to confidence and outcomes 8

9 THE INVESTMENT FIRM SHIFTS (1) Operating model differentiation Insourcing and buy or build decisions are critical to the value chain and use of technology Decisions on strategic partnerships and choice of technology and the quality of their execution will increasingly differentiate operating models People and technology better together Collective intelligence built around diverse skills that harnesses technology is critical Investment professionals need deeper situational fluency and emotional intelligence to complement technology Diversity is a big contributor to better decisions. 9

10 THE INVESTMENT FIRM SHIFTS (2) Streamlined Investment models The control and delivery of client outcomes is a critical new focus Hence the growing emphasis on investment solutions which are by design aligned to outcomes and so have natural advantages. Outcome-engaged clients Better engagement using technology in a way that speaks the customer language New data provided by clients, customers, and end investors add opportunities to customize New levels of engagement with new forms of trust 10

11 CONCLUSIONS Investment firms face a future in which change is accelerating. This is unleashing considerable disruption and stress on individual investment firms and the industry as a whole. Investment firms need to recognize these changes and adapt to them by: Exploiting technology Building greater collective intelligence through teams with deep knowledge and wide perspective Doing far more joined-up investment thinking and practice Engaging more by identifying client needs and managing to their desired outcomes. An investment firm s futures should come from conscious choices based on reflection and coherent analysis (where the Gap Analysis comes in). The future should not be an outcome from inertia and compelled response. 11

12 CAN YOU IMAGINE A WORLD IN WHICH.. Our industry: Holds itself up to clearer, higher standards Is proactive and purposeful Adds value well beyond the rewards it enjoys itself Makes positive contributions to society s deeper-rooted issues. If we continue to develop along these lines, we will build an industry that clients and regulators value in the broadest possible sense -- one that is appreciated for its contribution to society and one that engenders trust. Paul Smith CFA Institute Annual Conference Hong Kong May

13 THE WHAT IFS CAN YOU IMAGINE A WORLD IN WHICH.. BUSINESS OPERATING PEOPLE INVESTMENT DISTRIBUTION your firm s business plan is shaped and narrated through soft data, scenarios and strategic goals not hard data, forecasts, budgets? the default DC option is the hyper-customized product that map to a person s unique characteristics and preferences, not their age? diversity is something that your firm used to worry about but no longer does because it is both measured and managed? asset owners all report on the impacts from their portfolios on the SDGs Sustainable Development Goals? client measures on trust, satisfaction, expectation and outcome are systematically tracked through feedback loops 13

CONTACT DETAILS Roger Urwin FIA FSIP Global Head of Investment Content Willis Towers Watson Roger assumed the new post of Global Head of Investment Content at Towers Watson in July 2008 after acting

14 CONTACT DETAILS Roger Urwin FIA FSIP Global Head of Investment Content Willis Towers Watson Roger assumed the new post of Global Head of Investment Content at Towers Watson in July 2008 after acting as the Global Head of the investment practice from 1995 to Roger joined Watson Wyatt in 1989 to start the firm's investment consulting practice and under his leadership the practice grew to a global team of over 600. His prior career involved heading the Mercer investment practice and leading the business development and quantitative investment functions at Gartmore Investment Management. Roger s current role includes work for some of the firm's major investment clients both in the UK and internationally. He leads the firm s work on transformational change and has conducted major strategic reviews at a number of global leading funds. He is also involved with the Towers Watson thought leadership group (Thinking Ahead Group) and co-founder of the Thinking Ahead Institute. His investment innovations include three global firsts: the creation of the first target date and lifestyle DC funds (in 1988), the risk budget framework (in 1999) and the governance budget framework for assessing asset owner organisational effectiveness (in 2007). He is also the author of a number of papers on asset allocation policy, manager selection and governance and sustainability. Roger has a degree in Mathematics from Oxford University and a Masters in Applied Statistics also from Oxford. He qualified as a Fellow of the Institute of Actuaries in He became a Fellow of the UK CFA Society in Also Strategic Director CFA Institute Future of Finance Also MSCI Advisory Director Roger is the Strategic Director for the CFA Institute Future of Finance initiative. Roger was instrumental to the establishment of the Future of Finance initiative in 2012 with its mission of securing a trustworthy, forward-thinking and sustainable industry. He has led its direction part time since January 2016 and chairs its advisory councils. Roger was formerly a CFA Institute Board of Governors Member from 2008 to 2014 Roger is part-time Advisory Director at MSCI Inc Roger.urwin@willistowerswatson.com

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