EY ITEM Club
Outlook for financial services
Wealth & Asset Management forecast
“Wealth & Asset Management is on course for a rockier ride than we forecasted six months ago. The prospect of interest rate rises and investors regaining their appetite for risk has been replaced with a likely prolonged period of low interest rates, volatility in financial markets, and more sluggish growth in household wealth following the Brexit vote. But there are opportunities for wealth and asset managers to mitigate the bumps along the road, and demonstrate their value to clients.”
Partner, UK Wealth & Asset Management Leader
Read Gillian’s full Wealth and Asset Management viewpoint
Navigating a bumpy road for investors
UK Wealth & Asset
Wealth & Asset Management is on course for a rockier ride than we forecasted six months ago. The prospect of interest rate rises and investors regaining their appetite for risk has been replaced with a likely prolonged period of low interest rates, volatility in financial markets, and more sluggish growth in household wealth following the Brexit vote
But there are opportunities for wealth and asset managers to mitigate the bumps along the road, and demonstrate their value to clients. ↓ [... more]
The flight to safety
Increased investor uncertainty and a deteriorating economic outlook will take their toll on asset prices, meaning AUMs are likely to rise by just 1.5% per year between 2016 and 2019, compared to 7.7% last year.
Growth won’t be uniform across the sector. Investor uncertainty is likely to favour defensive funds with strong track records, driving a flight to quality across the fund management sector. Fund flows into bonds are likely to outpace other asset classes, despite slower economic growth and the prospect of more quantative easing (QE) suppressing yields even further. While that implies a shift away from equities, cheaper share prices will help support demand so that AUM in equities will recover by 2019. The turbulence already seen in commercial real estate means property AUM will fall this year and next, after more than doubling in the previous three years.
Demonstrating value in a low growth world
Adverse markets bring with them business challenges as well as allocation challenges. Focusing on clients’ lifetime needs, rather than simply selling them products, has driven success for the industry. But now, new technology gives customers more options at their fingertips, testing their loyalty. Demonstrating the value a manager provides is imperative to retention, especially as weaker market conditions mean delivering consistently high returns will become more problematic. This makes client reporting and communication even more important, and digital capabilities will be central to this.
We expect downward pressure on fees among those unable to demonstrate performance. In turn, these companies will need to manage investment costs carefully. Reduced fees, for instance, could be facilitated by greater incorporation of smart beta strategies or use of Exchange-Traded Funds (ETF) where appropriate.
Regulators and customers are also demanding more transparency. Already this year some fund managers have stopped charging clients for the research they use, absorbing the costs rather than passing them on. This is part of a wider simplification of fee structures that we expect to continue.
Structural sector change continues
The pressure to lower costs and improve returns has driven rapid sector consolidation in recent years. We expect this to continue, with fewer generalist funds on the market and more specialist ones. Several asset managers will look to build or buy their own retail distribution networks in the medium term, while insurers may look to broaden their offering and fill product gaps to match the new retirement landscape. Meanwhile, a weak pound following the EU referendum could stimulate interest from possible US buyers.
Like other parts of the financial services industry, Wealth & Asset Management will be closely watching negotiations on the terms of the Brexit and in particular, passporting. This will especially affect those distributing funds abroad.
In the meantime, total AUM for UK focused companies are set to increase, albeit at a slower rate, aided by an ageing population with investable assets, and increasing flexibility in how they are permitted to use these assets in retirement.
Recent market volatility and a slowing economy present speed bumps to growth, but the successful wealth and asset managers will be those who avoid short-term, tactical plays and focus on a long-term strategy. Possible outcomes of the Brexit negotiations will also play a part in aspects of strategy development.
Wealth and asset management highlights:
Adverse market movements and investor uncertainty will drive a flight to quality, and favour wealth and asset managers that can best demonstrate value to their client.
- Total AUM will grow 1.5% per year from 2016-2019, compared to 11.3% from 2012-15.
- We expect AUM to increase from £932b in 2015 to £990b by 2019.
- A flight to safety means that by 2019, bond holdings will have grown by 10% from their 2015 level.
- AUM in property funds will not see any growth by 2019, following the reputational damage real estate suffered in the post-Brexit vote.