Asset & Wealth Management Revolution: Embracing Exponential Change Key messages and questions for relationship teams to put to clients/prospective clients www.pwc.com/assetmanagement
Why read this briefing? Change in the Asset and Wealth Management industry is accelerating at an exponential pace. Although the industry looks set for rapid growth, asset and wealth managers must become business revolutionaries, even disruptors, if they re to increase profits and prosper. Now is the time for action This briefing outlines the report s key messages, which are presented as a series of predictions for transforming trends, supported by data and in-house analysis. It includes questions for further discussion with clients and prospective clients about their strategy, digital approach, people and processes. 2 PwC Revolution: Embracing Exponential Change
About the report The first section of the report sets out how the operating landscape for asset and wealth managers will grow in AUM. In the second section, the report explains four key trends that will incessantly revolutionise the industry and explains how firms can adapt to the changes ahead. Our overarching message is that there is significant potential for growth in AUM (almost doubling to US$145trn by 2025 in the best case scenario) but that managers must act now. Waiting is no longer an option in an industry where some haven t developed as much as in other industries. Four trends will revolutionise the industry: 1. Buyers market. Fees are being pushed down by investors and regulators. Increased regulation, competition and new entrants are disrupting value chains and revolutionising wealth managers raison d être. As low-cost products gain market share, and larger players benefit from scale economies, there will be further consolidation and new forms of collaboration. Asset and wealth managers must be fit for growth or they may either fail or be acquired. They must act now. 2. Digital technologies: do or die. The industry is a digital technology laggard. How well firms embrace technology will help to determine which prosper in the years ahead. Technology giants will enter the sector, flexing their data analytics and distribution muscles. The race is on... 3. Funding the future. Asset and wealth managers have been filling the financing gaps resulting from the financial crisis. To generate alpha, their involvement in niches such as trade finance, peer-to-peer lending and infrastructure will dramatically increase. Helping individuals to save for old age, as governments step back, will also support growth. Action is needed to capitalise on the gaps. 4. Outcomes matter. Investors have spoken loudly. They want solutions for specific needs not products that fit style boxes. Active, passive and alternative strategies have become building blocks for multi-asset, outcomedriven solutions (which will increasingly include environmental, social and governance outcomes). Firms must either have the scale to create multi-asset solutions or be content as suppliers of building blocks. Revolution: Embracing Exponential Change PwC 3
These four trends will transform the industry s nature and structure. Scale, price, diverse people and technology capabilities will characterise the largest firms. Smaller, specialist firms will prosper if they offer excellent investment performance and service. The industry must act in three areas: Strategy Firms should reorganise the business structure to support the differentiating capabilities and cut costs elsewhere. Technology Every firm must embrace technology as it impacts all functions. People Different skills are needed, backed by new employment models. Firms must find and develop people with new skills and adapt their employment models to nurture and retain them. The context: These transforming trends have evolved from the six game changers we identified in our Asset Management 2020 paper, published in 2014: 1. Asset management moves centre stage 2. Distribution is redrawn regional and global platforms dominate 3. Fee models are transformed 4. Alternatives become more mainstream, passives are core and ETFs proliferate 5. New breed of global managers 6. Asset management enters the 21st Century. Looking forward to 2020, the paper successfully forecast the rapid growth in industry assets under management. It also predicted the shift from active management to passive, the rise of ETFs and continued expansion in alternative asset management. Notably, it also anticipated that regulations such as the Retail Distribution Regime (RDR) introduced in the UK in 2012 would be mirrored by regulators in other geographies, with a significant impact on asset management and wealth management revenue models. Since 2014, these changes have accelerated and evolved. They re in the process of revolutionising the sector. Set for growth in assets: If interest rates remain relatively low globally and economic growth is sustained, our projections foresee assets under management (AuM) growing from US$84.9 trillion in 2016 to US$111.2 trillion by 2020, and then again to US$145.4 trillion by 2025 (see figure 1). Retail (mutual) funds (including ETFs) will almost double assets by 2025 and institutional mandates will expand similarly. What s more, we think alternative asset classes in particular real assets, private equity and private debt will more than double in size, as investors diversify to reduce volatility and achieve specific outcomes. 1 Personal wealth is accumulating fast, mainly in developing countries, and individual retirement and pension funds are expanding. The industry is set to manage a greater share of this wealth. We believe the industry s penetration rate (managed assets, as a proportion of total assets) will expand from 39.6% in 2016 to 42.1% by 2025. 1 But growth has challenges. Geopolitics, normalisation of interest rates, Brexit, China s transition to a consumer-driven economy and the potential changes in US policies on regulation, tax and trade all create uncertainty. Our most conservative scenario still projects growth although substantially slower, resulting in AuM of US$93.4 trillion by 2020 and US$107.8 trillion by 2025. 1 1 PwC Global Market Research Centre. For methodology see full paper. 4 PwC Revolution: Embracing Exponential Change
Figure 1: Total client assets in USD trillion Clients 2004 2007 2012 2016 2020e 2025e CAGR 2016-2025e Pension funds 21.3 29.4 33.9 38.3 53.1 64.6 6.0% Insurance companies 17.7 21.2 24.1 29.4 38.4 44.7 4.8% Sovereign wealth funds (SWF) 1.9 3.3 5.2 7.4 10.0 13.6 7.0% HNW1 37.9 50.1 52.4 72.3 93.4 119.9 5.8% Mass affluent 42.1 55.8 59.5 67.2 84.4 102.2 4.8% Total client assets 120.9 159.7 175.1 214.6 279.3 345.0 5.4% Global AuM 37.3 59.4 63.9 84.9 111.2 145.4 6.2% Penetration rate 30.9% 37.2% 36.5% 39.6% 39.8% 42.1% 0.7% Sources: PwC Market Research Centre analysis. Past data based on Lipper, ICI, Preqin, Hedge Fund Research, EFAMA, City UK, Insurance Europe, Financial Stability Board, Credit Suisse, Towers Watson, OECD and World Bank. Highest growth rates in Asia, Latin America Growth will be uneven; on a percentage basis it s slowest in developed markets and fastest in developing markets (see figure 2). Even so, we anticipate assets growing at 5.7% a year in North America from 2016 to 2020, slowing to 4.0% from 2020 to 2025, lifting assets from US$46.9 trillion to US$71.2 trillion over the nine years. Similarly, Europe is projected to grow at 8.4% and 3.4% respectively over the two periods, with assets rising from US$21.9 trillion to US$35.7 trillion. 2 Developing Asia-Pacific s dynamism is set to spur growth of 8.7% a year from 2016 to 2020, accelerating to 11.8% from 2020 to 2025. This will lift regional assets from US$12.1 trillion to US$29.6 trillion. Latin America is likely to grow at similarly rapid rates of 7.5% in the former period, accelerating to 10.4% in the latter. From a low base of US$3.3 trillion the region s assets are projected to increase to US$7.3 trillion. 2 Figure 2: Global AuM by region in USD trillion Base scenario 5.5% 160 145.4 140 7.0% 120 100 80 60 40 20 0 37.3 19.9 0.6 12.9 3.9 16.8% 59.4 30.1 0.6 1.4 21.0 6.4 1.5% 63.9 33.2 0.6 2.6 19.7 7.7 7.4% 2004 2007 2012 2016 2020e 2025e 84.9 46.9 0.7 3.3 21.9 12.1 5.7% 10.6% 7.5% 8.4% 8.7% 111.2 58.6 1.0 4.4 30.2 16.9 4.0% 9.5% 10.4% 3.4% 11.8% 71.2 1.6 7.3 35.7 29.6 n Asia-Pacific n Europe n Latin America n Middle East and Africa n North America CAGR Sources: PwC Market Research Centre analysis. Past data based on Lipper, ICI, EFAMA, City UK, Hedge Fund Research and Preqin 2 PwC Global Market Research Centre. Revolution: Embracing Exponential Change PwC 5
Questions for clients With change accelerating, all firms must decide how they will compete in tomorrow s world. Will they be scale or niche players? How will they become more productive? In our view, asset and wealth managers must address three questions: 1. Have you got the right strategy? All firms must have a view of the landscape of tomorrow, a clear strategy and know their differentiating capabilities. They should reorganise the business structure to support the differentiating capabilities and cut costs elsewhere. 3 As befits a time of great change, they must have a long term view, take radical steps and invest in building their businesses strategically. 2. Are you prepared to make digital technology a key part of your business? Every firm must embrace technology as it impacts all functions. Artificial intelligence, robotics, big data and blockchain are transforming the industry. Technology will determine which firms are the winners in a fast-changing landscape. 3. Are you changing your approach to hiring and nurturing people? New skills are needed and new employment models must be embraced. Hiring and retaining the best will depend more than ever on diversity and inclusion, and meeting the needs of the whole person. Talent is a global challenge and excellent people with leadership skills will be vital as firms reinvent themselves moving into new countries, new technologies, different distribution channels and leading-edge products. 3 https://www.strategyand.pwc.com/fitforgrowth. 6 PwC Revolution: Embracing Exponential Change
Contacts Olwyn Alexander Global Leader PwC Ireland olwyn.m.alexander@ie.pwc.com +353 (0) 1 792 8719 Barry Benjamin barry.p.benjamin@us.pwc.com +1 (410) 659 3400 Thomas Holly US Leader thomas.j.holly@us.pwc.com +1 (410) 215 0627 Steven Libby Global Advisory Leader PwC Luxembourg steven.libby@lu.pwc.com +352 49 48 48 2116 Robert Mellor PwC UK robert.mellor@uk.pwc.com +44 (0) 20 7804 1385 Andrew O Callaghan EMEA Leader PwC Ireland andy.ocallaghan@ie.pwc.com +353 1 792 6247 Justin Ong Asia-Pacific Leader PwC Singapore justin.ong@sg.pwc.com +65 6236 3708 William Taggart Global Financial Services Tax Leader william.taggart@us.pwc.com +1 (646) 471 2780 John Siciliano Managing Director john.c.siciliano@us.pwc.com +1 (646) 471 5170 Dariush Yazdani Market Research Centre Leader PwC Luxembourg dariush.yazdani@lu.pwc.com +352 49 48 48 2191 Subject Matter Experts Fit for Growth/Business Model Alignment Hector Nelson hector.nelson@strategyand.us.pwc.com +1 (212) 551 6405 Digital & Technology Debasis Sahu debasis.sahu@us.pwc.com +1 (646) 471 2878 People/Talent Paula Smith paula.e.smith@us.pwc.com +1 (617) 530 7906 Revolution: Embracing Exponential Change PwC 7
pwc.com/assetmanagement At PwC, our purpose is to build trust in society and solve important problems. We re a network of firms in 157 countries with more than 208,000 people who are committed to delivering quality in assurance, advisory and tax services. Find out more and tell us what matters to you by visiting us at www.pwc.com. This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, PwC does not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it. For more information about the global asset & wealth management marketing programme, please contact Maya Bhatti on +44 (0) 20 7213 2302 or maya.bhatti@uk.pwc.com. 2017 PwC. All rights reserved. PwC refers to the PwC network and/or one or more of its member firms, each of which is a separate legal entity. Please see www.pwc.com/structure for further details.