Wealth and asset management industry outlook for 2017 – EY

22 December 2016

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  • Managers’ focus for 2017 is on the fall-out of the FCA market study
  • 2017 to continue the trend of high regulatory investment
  • Shoots of positivity for hedge funds amid a challenging year ahead
  • Brexit continues to cast uncertainty on the market, and asset managers scenario plan in earnest

Gill Lofts, UK Head of Wealth and Asset Management at EY, comments: “2016 has been a mixed year for the asset management industry, but on the whole, managers have weathered the ups and downs in the market and major geopolitical change well. Aside from passive and ETF managers, those who will have also weathered the year most confidently are the managers with truly diversified offerings or specific alpha strategies.”

2017 to continue the trend of high regulatory investment

Lofts continues: “Investment in regulation has remained high throughout 2016, and this is not set to change as we enter the New Year, when we expect an ever increasing focus from the FCA. It comes as no surprise that MiFID II took the lion’s share of managers’ regulation and change budgets in 2016. In 2017, the senior management regime will have a significant impact on the industry, particularly with respect to governance, risk management frameworks and individual liability. In addition, the Competition Review will further challenge operational efficiency and transparency, putting greater demands on asset managers’ data and reporting capabilities, and their bottom line.”

Brexit unknowns means managers’ scenario planning continues

Lofts comments: “By and large, 2017 is a year still shrouded in mystery, as the uncertainties that the Brexit vote presents still loom. From the start of 2017, we expect firms to continue (or in some cases start) their Brexit programs in earnest, well ahead of Article 50 being triggered.

“The workload that comes with assessing the delegated authorities throughout managers’ global businesses will prove to be a significant task, as they look to determine appropriate business models for a post-Brexit world. The question of passporting and substance also still hangs in the air. Whilst some managers will be looking tactically to increase their presence in Dublin or Luxembourg, others are taking a longer term strategic view and looking at other viable EU jurisdictions. These alternatives may prove strategically more beneficial in the medium to longer term. However, we don’t predict any sort of mass exodus, and London is set to maintain its status as a global hub for asset management.”

As a nation of spenders there’s still a long way to go to incentivise saving

Lofts comments: “Continuing to create solutions and services to better meet the varying investment needs of UK investors will continue throughout 2017. Further clarity around the regulation of advice and guidance, coupled with the increasing adoption of digitalised and disruptive technologies will push this agenda forward. We are likely to see an increase in the number and type of new services and solutions being offered. That said, as a nation of spenders, rather than savers, there is still a long way to go in educating and incentivising UK consumers to save more. Nudging and gamification approaches will increase their impact in 2017, but it'll be a long journey.”

Managers look towards robotics and data analytics

Lofts concludes: “Efficiency across the value chain has, and still is, being held to question. In 2016, we saw increased attention on global operating model re-design, smart sourcing and outsourcing. Managers are taking a fresh look at what they will continue to run in-house versus what they will outsource, and also how they can best apply Robotic Process Automation and Advanced Data Analytics. 2017 should see new operating models start to emerge.

“Despite the various uncertainties that 2016 has thrown up, if the sector can remain nimble and react quickly to changing environments, 2017 could be another year of broadly steady performance. The sustainability of the sector will be protected and will flourish by long term thinking, as this is not a time for short termism.”

Managers’ focus for 2017 on the fall-out of the FCA market study

Simon Turner, Partner in EY’s Wealth and Asset Management practice, comments: “The FCA market study on asset management brought the active versus passive debate into sharp focus, along with the related issue of fee levels and their justification and transparency. The direction of travel is positive, as it heads towards a more transparent “all in” fee for funds, and for many the focus on so-called “closet trackers” will be welcome given the continued debate of funds that potentially do little more than hug an index. What is critical now is that the regulator’s focus is firmly on client outcomes rather than simply costs. If higher fees are levied for genuine outperformance or lack of correlation to a benchmark then they can be justified; if higher fees fail to deliver good results then, in most cases, “the market will decide” and those funds would come under pressure due to outflows.

The active versus passive debate continues

Turner continues: “As we enter 2017, it is also worth considering that a pro-passive / anti-active trend will have far stronger tailwinds in a rising market. The FTSE and the S&P have both risen sharply during 2016, and if 2017 sees poor economic data from the UK and US, we are likely to hear less fanfare around funds tracking a falling index, especially if stockpickers and hedge funds begin to outperform their passive counterparts. To a degree, the level of support for a lower-fee environment may depend on macro-economic and market forces as much as industry and regulatory arguments.”

Shoots of positivity for hedge funds amid a challenging year ahead

Zeynep Meric-Smith, Co-Lead for UK Hedge Funds at EY, comments: “Overall it has been a challenging year for hedge funds due to a lack of net asset inflows into the industry and difficult performance results. Looking forward for 2017, the challenges will by no means be lessened, compounded by the dramatically changed political landscapes both in the UK and the US. However, there are shoots of positivity growing with the expectation that the new government in the US will be supportive of the industry and continue to foster the benefits generated by it for savings and pensions. Given the nimble nature and ongoing investor demand for hedge fund strategies, we expect the rate of growth for start-ups to continue over the next year. It will remain a battle of quality over sheer quantity, especially in an environment where traditional asset managers’ are looking to up-skill their in-house capabilities and expand their alternative asset management footprint as they look to the sector for uncorrelated, diversifying returns.

Big data to transform front, middle and back office functions

Meric-Smith adds: “Technology will continue to play a big role in the success of hedge fund managers, by bringing costs, and with them, fees down. The most savvy managers will embrace developments in big data to improve the analytics of their front office, and invest in new ways of creating operational efficiencies in their middle and back office through automating processes and in a few instances, starting to transform business models. Innovative developments in technology are lowering the barriers to entry for new launches and start-ups too, which in turn will increase the efficiencies in the market place for all investors and funds, regardless of size.”