www.pwc.com/awminsightsAsset & WealthManagementInsightsStrategies forchanging timesInsights from PwC’sglobal ‘asset and wealthmanagement practiceSeptember 2016
Asset and Wealth Management Insights - September 2016ContentsForeword3Sink or swim:why wealth management can’t afford to miss the digital wave4ETFs: A roadmap to growth6Asset management in the social era8Key themes driving peak US merger and acquisitionactivity10Strengthening Hong Kong’s role as anasset management centre12Redefining business success in a changing world14Contacts182 PwC AWM Insights September 2016
ForewordBarry BenjaminGlobal Asset & Wealth Management LeaderPwC US 1 410 659 [email protected] to this edition of Asset & Wealth Management Insights,which focuses on strategy at a time of far-reaching and fundamentalchange in the sector.It’s no exaggeration to say that a numberof major trends are relentlessly reshapingasset and wealth management. Every areaof firms’ activities is arguably affected– from product design, to portfoliomanagement, marketing and operations.So significant is the magnitude of changethat firms have no choice but to review andre-engineer their strategies.In this September 2016 edition of Asset &Wealth Management Insights, we showcasePwC research into some of the more criticalstrategic challenges facing asset managers.ETFs are now an important part of mosttraditional asset managers’ product lineup; we identify the themes that will marktheir continued growth. Turning to wealthmanagement, we explain why firms can’tafford to miss the digital wave. We alsoreport how asset management is embracingsocial media. In Asia’s fast-growing market,we show how Hong Kong is positioningitself as the centre for accessing China.And, we also highlight the communicationgap between company CEOs and theinvestors in their firms.Finally, our research shows how this periodof change is driving high levels of M&A.Firms are looking to gain expertise andreposition themselves, especially in highgrowth areas such as ETFs androbo-advice.Please read more in the selection ofarticles. Do get in touch if you would like tolearn more.Barry BenjaminPwC AWM Insights September 2016 3
Asset and Wealth Management Insights - September 2016Sink or swim:why wealth management can’tafford to miss the digital waveDigital technology willdifferentiate between those firmsthat thrive and those that losemarket share.Michael SpellacyGlobal Wealth LeaderPwC [email protected] 1 917 562 1366Andreas LenzhoferPrivate Banking and Wealth ManagementCo-Leader Strategy&PwC Strategy& m 41 79 820 08 03Justin OngAsia-Pacific Asset and WealthManagement LeaderPwC [email protected] 65 6236 3708The world is living through one of the mosttransformative times in human history.The rise of technology has altered how welive and the speed with which we engagewith one another. But how does thisimpact wealth management – a propositionpredicated on personal service, whereclients pay for solutions and advice tailoredto their individual investment goals,day-to-day financial needs and attitudesto risk?Time to move beyond humancapitalUntil now, wealth management’spersonalised response has relied onhuman effort. But digital and algorithmicinnovation is creating the possibility ofmore and more of the wealth manager’srole being delegated to technology and, inturn, is potentially opening up the sectorto new FinTech players with very differentways of doing things.Wealth management firms cannot assumethat length of experience, brand prestige oreven the quality of their client relationshipswill insulate them from this possibility.Current levels of satisfaction and advocacyamong wealth management clients aremodest at best.Plus, a younger cohort of high-net-worthindividuals (HNWIs) is emerging, whetherthrough their own enterprise or wealthtransfer. As millennials grow in economicpower, firms will be courting a techimmersed generation that has grown upin a world of economic instability and whoare, as a result, highly adaptable, restlessand fickle in their choice of brands andservice providers.1 PwC Global FinTech Survey 2016.4 PwC AWM Insights September 2016Keeping ahead of digitaldisruptionToday, 83% of business leaders surveyedin a PwC global survey of the financialservices sector believe they are at risk oflosing business to standalone FinTechcompanies, and wealth managementis seen to be one of the sectors mostvulnerable to disruption, with more thana fifth of such businesses believed to beat risk.1 To survive in a digital world thatis evolving at breakneck speed, wealthmanagement firms urgently need totake action to demonstrate their valueto existing and future clients – and tokeep pace with the new waves of digitalopportunity that are emerging.In our report, ‘Sink or swim: why wealthmanagement can’t afford to miss thedigital wave,’ we drew on quantitativeresearch with more than 1,000 high networth individuals throughout Europe,North America and Asia, plus qualitativeinterviews with 100 relationshipmanagers and a number of CEOs of wealthmanagement firms and FinTech innovators.This unparalleled access allowed us toassess the appetite and expectations amongthe world’s wealthy for digitally drivensolutions and, by contrast, the lack ofreadiness among wealth managers to meetthis appetite.
We also examined how front, middleand back office technology applicationscould help to advance the role of wealthmanagement firms, deliver efficienciesand allow their proposition to remaincompelling and distinctive in the face ofcompetition from tech-driven newcomers.Wealth managers currently rank amongthe slowest adopters of digital technologyin the global financial services sector. Nowis the time to start making up lost ground.Below are five of the report’s key findings: HNWIs enthusiastically adopttechnologyAmbitious but troubled by concerns andanxieties, HNWIs strongly believe in payingfor expert advice to help them reach theirfinancial and non-financial goals – anattitude that the wealth managementindustry is ideally positioned to leverageand scale up through skilful use of digitaltechnology to improve efficiency andresponsiveness. T he wealthy and technology: digitalexpectations are growingThe world’s wealthy are integrating digitaltechnology into their day-to-day lives asrapidly as everyone else. Although theymay have reservations about technologythat draws on their personal data, cedinginformation is seen as a necessary price forenjoying the convenience that personaliseddigital services can bring. T raditional wealth managers arevulnerable to FinTech newcomersResistance to digital adoption amongwealth managers, combined with a clientbase that does not feel a particularlystrong affiliation to its current providers, iscreating a sector that is acutely vulnerableto digital innovation from potential FinTechincomers. T here is an option to combine the bestof human and technological capitalWealth management is dangerouslybehind the curve in its adoption of digitaltechnology compared both to otherfinancial services such as banking, andother consumer sectors. But there areemergingopportunities that the industry ispowerfully positioned to exploit toadvance its position. These include usingtechnology to improve the services offeredby relationship managers and becomingdata custodians – trusted recipients ofclient data that allows them to respond to abroad range of client needs.Low client advocacyOnly 39%of clients are likely to recommend theircurrent wealth manager – falling to 23%among US 10m clients F irms that resist technologicalinnovation will become lesscompetitiveRealising the possibilities of digital willrequire wealth management firms notsimply to have a digital strategy but abusiness strategy that genuinely embedstechnology into their whole cultureand value proposition. Rather than justan add-on, digital has the potential tocompletely transform every stage of thewealth management journey, from howexisting clients are advised and serviced tohow prospective clients are identified andmarketed to.Conclusion: Making digitalpersonal by making thepersonal digitalThe wealth management industry nowneeds to provide both its current andfuture clients with a substantially evolvedservice model or risk losing market share.Faced with low levels of client advocacyand a rising appetite among its targetaudience for digitally-enabled living,CEOs of traditional wealth managementfirms need to accelerate their efforts tointegrate technology into their business.By overestimating their current technologyoffering, firms are now critically vulnerableto FinTech innovators who can presentthe world’s wealthy with slick andhighly personalised ways to manage andcoordinate their assets, and leverage theirreal-time personal data continuously tomake better financial decisions.Source: PwC Strategy& Global Wealth ManagementSurvey 2016This article is an extract from ‘Sink orswim: why wealth management can’tafford to miss the digital wave.’ The fullreport is accessible here.PwC AWM Insights September 2016 5
Asset and Wealth Management Insights - September 2016ETFs: A roadmap to growthRapid growth will more thandouble ETF assets to US 7trillion by 2021, with six themescharacterising this period ofgrowthNigel BrashawPartner, Global ETF LeaderPwC US 1 617 530 [email protected] O’CallaghanPartner, EMEA Asset and WealthManagement LeaderPwC Ireland 353 1 792 [email protected] TsuiPartner, Asia ETF LeaderPwC Hong Kong 852 2289 [email protected] are dominating flows in assetmanagement, reaching a record US 351billion globally in 2015.2 Record regionalETF flows were achieved in Europe andCanada, while the US and Asian regionsapproached near record flows in 2015.3Based on a variety of factors, participantssurveyed for our ‘ETFs: A roadmap togrowth’ paper anticipate even more ETFgrowth across North America, Europe andAsia, with global ETF assets expected toexceed US 7 trillion by 2021 (up fromUS 3 trillion at the end of 2015).The calculations of on our Global ETFGrowth Model corroborate surveyparticipants’ expectations.In our paper, we identify six themes thatwill characterise this period of growth forETFs.Growth – The ETF industry has achievedtremendous growth since its inception in1993. We expect accelerated growth overthe next five years, with a focus on newmarkets, expanding distribution channelsand asset classes.Distribution – The ETF market has becomeincreasingly crowded, particularly in NorthAmerica and Europe. Successful firms willlikely need to invest in investor education,establish strong distribution channelsto gather assets, and differentiate theirproducts in these congested markets.2 BlackRock, “BlackRock Global ETF Landscape:Industry Highlights,” December 2015.3 Ibid6 PwC AWM Insights September 2016Products – Today, the majority of globalETF assets are in passively managedinvestment products. However, over thepast few years, there has been an increasedfocus on smart beta investment products,which are structured around factorsother than market capitalisation, such asdividends, earnings, value, momentum,quality and size. Many of the firms thatwe have spoken with are also evaluatingopportunities to launch fixed income andactively managed ETFs.The global ETF (Exchange Traded Fund) industry continues to experience rapid change, presenting bothopportunities and challenges. We highlighted a number of key themes in our successful publication called‘ ETF 2020: Preparing for a new horizon’, including global growth, regulations, distribution channels,technology and investor education. Building upon these ETF 2020 themes, throughout this paper, wehighlight insights gained from our latest ETF survey as well as PwC perspectives on key developments whichwill help drive further ETF growth, including products, markets and distribution. Successful ETF firms willcapitalise on these opportunities, address challenges and differentiate themselves from increasingly crowdedmarkets across North America, Europe and Asia.ETFs:A roadmap to growthwww.pwc.com/etfroadmapRegulation – Given the significant growthand innovation of ETFs, regulators acrossthe globe continue to focus on investorprotection, which may slow some of thegrowth and innovation of ETFs. However,there are also some regulations that mayhelp to foster more ETF growth.Technology – Advances in technologyand data analytics with respect to productcreation, markets and distribution havesignificantly contributed to the growthand innovation of ETFs. The continueddigital evolution of the ETF industry willlikely transform client relationships andexpand distribution capabilities in terms ofcommunications, sales and customisation.Globalisation – Many ETF sponsors areseeking to expand their global footprint,which presents both opportunities andchallenges. Firms will need to navigatecomplex regulations and tax laws, as wellas establish strong working relationshipswith local capital markets to expand theirETF product offerings globally.
ConclusionThe market for ETFs is likely to grow at ahealthy rate over the coming years. Newfirms are expected to enter the ETF space,either organically or through acquisitions.More investor segments are likely tocontinue to find new and different waysto use ETFs as part of their investmentstrategy.Over the next five years, we expect thatthere will be increasing competition inETF markets across the globe, and firmswill likely need to continue to seek ways todifferentiate themselves in these crowdedmarkets. Continued focus on investoreducation, adapting product offerings toevolving regulations, navigating complexglobal markets, and establishing strongdistribution partners will be some of thekeys to success.Further advances in the use of big data,digital technology and social media willhelp to improve decision-making processes,provide opportunities for ETF sponsorsto streamline costs, and transform clientrelationships in terms of communications,sales and distribution.Figure 1: Prediction for Global ETF AUM over the next five years30%28%This article is an extract from our paper“ETFS: A roadmap to growth.”(41% expectUS 7 trillion or more)About the surveyPwC surveyed executives fromapproximately 60 firms around theworld in 2015 using a combinationof structured questionnaires and indepth interviews. More than 70% ofthe participants were ETF managersor sponsors, with the remainingparticipants divided between assetmanagers not currently offering ETFsand service providers. Participatingfirms account for more than 80% ofglobal ETF assets.13%13%13%2%US 5 trillionor lessUS 6 trillionUS 7 trillionUS 8 trillionUS 9 trillionUS 10 trillionor moreSource: PwC, “2nd Annual Global ETF Survey,” 2015, www.pwc.com/us/etf.Note: Due to rounding, the percentages may not add up to 100%.PwC AWM Insights September 2016 7
Asset and Wealth Management Insights - September 2016Asset management in thesocial eraOur research shows that socialmedia is becoming a vitalcomponent of marketing, offeringsignificant opportunitiesDariush YazdaniPartner, Market Research Centre LeaderPwC [email protected] 352 49 48 48 21 91Gary MeltzerPartner, Americas Asset and WealthManagement LeaderPwC US 1 646 471 [email protected] OngAsia-Pacific Asset and WealthManagement LeaderPwC [email protected] 65 6236 3708The proliferation of the digital economy isgiving birth to new internet-based businessmodels in a vast array of industries. It hasdrastically changed the way companiesdeliver services to their customer base, howthey interact with clients and the vehiclesthey use to market their products.We are living in a social era wherebusiness-to-customer (B2C), business-tobusiness (B2B) and peer-to-peer (P2P)communications are rapidly evolving,driven by the growing ubiquity of newdigital technologies, such as mobiledevices and applications. Moreover, therise of social media at the global level hasdrastically changed the way people interactand communicate with each other andwith companies.Social media has altered the basicrules of interaction, making one-waycommunication old fashioned. Peopleare now able to communicate with theirpeers all over the world on a 24/7 basisin the digital space, where a plethora ofnew tools enable real-time and multi-usercommunications.At the same time, social media hasenabled new communication channels forcompanies that allow them to reach theircurrent and potential customers, distributetheir content, promote their products,monitor their brands and reputationas well as improve client retention andacquisition practices.4 Badgeville, The rise of Millenials, 2014.5 The demographic cohort born between 1980 and2000, which follows Generation X.6 Social Business Engine and Dell, DigitalTransformation, 2015.8 PwC AWM Insights September 2016Social media is now playing a considerablerole in purchasing decisions, as televisiondid in the past. A survey conducted byBadgeville4 in 2014 showed that 63% ofmillennials,5 the next cohort of investors,stay updated on brands through socialnetworks and a majority says socialopinions have influenced their purchasingdecisions. Another study by Social BusinessEngine and Dell6 showed that 75% of B2Bbuyers were also influenced by informationthey found on social media.Despite the growing importance ofsocial media in our daily lives, thelevel of engagement in social networksvaries substantially from one industryto the next in light of the nature of theservices provided and, hence, regulatoryconstraints.Sectors like consumer products andtechnology have already embedded socialmedia in their DNA and business models.They use social channels as cost-effectivemarketing tools to test new products andtarget specific customer segments or toachieve efficacious customer service,among other things.This article is an extract from our ‘Assetmanagement in the social era’ report,published jointly with Caceis InvestorServices, which provided an update onthe state of asset management’s use ofsocial media and the leading players in thisarena. To do this, we conducted in-depthinterviews with leading asset managersin order to assess the importance of socialmedia channels in their digital strategies,the risks they face related to socialplatforms and their visions of the future.We also established a set of metricsused to assess the performance of assetmanagers on Facebook, LinkedIn, Twitterand YouTube. Further, desktop researchidentified specific insights on currenttrends, regulations and new businessmodels in the social media space.Below are the report’s four key findings:1. Social media networksbecome an integral part ofasset managers’ marketingmix The share of asset managers presenton social media today stands at 89%(73% excluding LinkedIn), up from60% in 2013. Of the 89% of asset managers with atleast one active account dedicated toasset management, 21% are interactive.
2. Europe is taking a stepforward In 2016, there are three European firmsin the top ten users of social media,while in 2013 there was just one. Inaddition, ten European players are nowin the top 25, while in 2013 there wereseven. Regulators are participating in thistrend by issuing new guidelines at thecountry level.3. T wo-way communication isa must The share of asset managers withinteractive accounts jumped from 9%in 2013 to 21% in 2016. The share ofaffiliated asset managers that haveinteractive accounts also increased from11% in 2013 to 41% in 2016. Asset managers are focusing theirefforts on recruitment and educationalcontent for investors to engage withtheir audience.4. Leveraging best practicesfrom other industries offersnew opportunities While banks are starting to provideaccount management and payments viasocial media, distributing funds throughsocial media networks is an untappedoption. Creating channels solely dedicated tocustomer services-related requests couldenhance the customer experience ofasset managers’ clients. Social media has the potential toprovide vital insights about investmenttrends and customers’ preferences andto enhance client profiling practices.ConclusionIn light of the growing ubiquity of socialmedia in people’s daily lives, businessenvironments and investment spaces, assetmanagers will keep betting on this arena.Our interviews confirmed that budgets andhuman resources dedicated to social mediamanagement are increasing in the assetmanagement industry and this trend willmaintain momentum going forward.Social media channels are not justadditional channels to deliver corporatemessages to a diverse global audience, theyare also a pool of valuable informationand insights. Social media is amongthe favourite ways to discover opinionson products, services and companies,particularly among millennials, who willsoon represent the new wave of investors.So mining social channels, with the use ofsophisticated analytics tools brought to lifeby technological advancements, could bea valuable option for asset managers. Theadoption of “social listening” tools couldhelp them to streamline their productdevelopment practices according tocustomers’ changing needs.effective communication practices. Inaddition, operational challenges such ascontent creation which is, according to ourinterviews, a very time-consuming practicecoming with high reputational risks are atthe top of the asset management industryagenda concerning social media.That said, social media is opening upopportunities for the asset managementindustry, as is happening in other sectors.It is essential for asset managers toembed social media in their strategies inorder to better address communicationwith audiences and, most importantly,to carefully listen to and be part of theshifting investor sentiment in almost realtime.This article is an extract from our ‘Assetmanagement in the social era’ report,published jointly with Caceis InvestorServices.Social media could also represent a newdistribution channel for asset managerslooking at reaching retail investors andfacilitating the subscriptions to funds. Thiscould unlock new fund-related revenuesand broaden asset managers’ potentialcustomer bases. In addition, as investorsare becoming accustomed to expectingfrom financial services providers thesame level of speed, personalisation andsimplicity offered by technology firms likeGoogle and Amazon, creating social mediaaccounts dedicated solely to customerservices issues could enhance the customerexperience. At the same time, the creationof corporate accounts on social medianetworks for investment firm employeesthat deal with client portfolios on a dailybasis could also better meet clients’ needs,as is the case for other industries such astechnology and consumer goods.Some challenges still remain. The evolvingregulatory framework and uncertainty inthe legal domain with regards to financialpromotion on social media channels isforcing asset managers to look carefully atwhat they say on social networks, aimingto respect privacy issues while maintainingPwC AWM Insights September 2016 9
Asset and Wealth Management Insights - September 2016Key themes driving peakUS merger and acquisitionactivityWe believe that nine key themesare driving high levels of M&Aactivity in asset and wealthmanagement. While some areexpected to impact the near term,others will shape future dealactivity.Samiye YildirimDirector, FS Transactions ServicesPwC US 1 646 471 [email protected] O’CallaghanPartner, EMEA Asset and WealthManagement LeaderPwC Ireland 353 1 792 [email protected] OngAsia-Pacific Asset and WealthManagement LeaderPwC [email protected] 65 6236 3708Merger and acquisition activity among USasset and wealth managers has recentlyreached levels matching previous peaks.There are sound strategic reasons for thisupsurge. Firms are seeking to repositionthemselves and protect profitability inthe face of shifting customer demands,rising regulation and the need to embracetechnology.The number of deals in 2015 rose by 65%to 142 compared with the previous year,although total deal value fell short of theprevious year. The themes below show thestrategic rationale for mergers continues.But much will depend on market volatility. Record year for independent managerdeals: After sitting on the side lines forover five years after the financial crisis,independent asset managers finallyreturned to the deal markets in 2015.Following in the footsteps of the privateequity (PE) firms which sold a largenumber of firms the year before, thiswas the year they came back to the dealtables. The 142 deals announced was thelargest number in the sector for 10 years.It compared to 86 deals in 2014 and 105deals in 2007, which was the secondhighest level of deal activity over thelast 10 years. Whether or not this trendcontinues depends on how buyers andsellers react to market volatility as wellas regulatory uncertainties. We expecteager buyers and sellers with strategicrationale will press ahead, maybe usingcontingent purchase price mechanisms.But less certain buyers and sellers maywait for a more stable environment. Turbulent stock markets andeconomic uncertainty: Most of themajor global indices struggled to postpositive returns in 2015. Marketswere turbulent in the second half ofthe year, unsettled by weak economic10 PwC AWM Insights September 2016growth, significant market drops inChina, uncertainty around the timingand quantum of interest rate hikes andfalling commodity prices. These factorsimpacted investment returns as well asthe capital deployed by investors. Weexpect such headwinds to continue in2016. Deal volumes and the number ofmega deals will depend on the severityof these factors. However, we expectsmaller strategic deals will continue. Valuations have come down slightly:Deal valuations took a beating due to thevolatility in global equity markets andhigher level of uncertainty in many of theindustry’s sub-sectors. As we reportedin 2014, deal valuations stabilised butvaried from transaction to transaction,depending on the acquisition candidate’scharacteristics (growth prospects,profitability, size, synergies, etc.) andthe deal’s potential risk factors. Pricedispersion remained high in 2015 whilevaluations moved lower to between fourand 15 times EBITDA (after eliminationof some outliers, particularly the roboadvisor and small ETF deals). Also,the level of uncertainty in transactionscaused buyers to push for more earn-outarrangements. Continued consolidation across allsub-sectors: Asset management marginsare being threatened by fee pressuresfrom clients and overall expense controland transparency demands from clients,fund boards and regulators. What’smore, increased spending on regulatorycompliance and reporting, as well astechnology, is putting further pressureson margins. Consolidation has achievedcost synergies, as well as fulfillingother strategic or growth objectives.The two key strategic reasons drivingconsolidation have been expansion ofproduct offerings and development ofmulti-asset capabilities to serve clientneeds. Additionally, managers that havestruggled to differentiate themselves arelooking to merge with others, hopingthe combined firm’s resources will doso. These trends have affected smallerindependent managers most of all, whichis why there are so many mergers.
US asset management deal trendsNo. of deals in billions160 25140 20120100 1580 106040 52002006200720082009n Disclosed deals n Non-disclosed deals201020112012201320142015 0Disclosed deal valueSource: Thomson Reuters, SNL Financial and PwC analysis Changing investor demands: Shiftinginvestor demands are significantlyaffecting assets under management.While US equity mutual funds lost 170billion of assets in 2015, exchangetraded funds (ETFs) attracted 231billion of net new cash flows during the11-month period to December 2015. Weexpect ETF assets to reach 7 trillion by2020. In addition, there are a growingnumber of investors looking for solutionbased multi-asset class managers, whichcan produce goal oriented returns vs.absolute returns against a benchmark.It is possible that medium-to-largemanagers may want to diversify andbuild out multi-asset capabilities throughM&A. Minority interest deals: Minorityinterest deals continue to remain popularamong both buyers and sellers. Specialistplatforms have raised several billionsof dollars in recent years and have beenacquiring minority equity interestsin successful alternative managers.Such deals benefit buyers by providingaccess to fast-growing managers anddiversification of investment; sellersbenefit from liquidity without losingcontrol, as well as access to a strategicpartner that can accelerate growththrough distribution strength andproduct development expertise. Weexpect minority deal activity to continueto be robust – both as new players enterthe minority investment market andexisting players deploy the significantcapital already raised. Private equity firms were busy asthe buyers and the sellers of assetmanagers: In 2015, PE firms wereactive buyers and sellers, executing alarge number of mega deals. Three outof the top five disclosed deals involvedPE firms. The level of deal activitydemonstrates this savvy group of buyers’belief in the opportunities presentedwithin the asset and wealth managementsector. New technology: There was anincreased number of M&A deals toacquire technology targets, particularlyin the robo-advisor space. As notedin PwC’s Asset Management 2020publication, entitled ‘A Brave NewWorld,’ the demand for a seamless,integrated and tailored customersolutions, as well as the need to obtainoperational efficiency, is leading togreater interest in technology. Smallerfirms which lack the resources to deploycutting-edge technology have reasonto merge with larger players to remaincompetit
Private Banking and Wealth Management Co-Leader Strategy& PwC Strategy& Switzerland [email protected] 41 79 820 08 03 Justin Ong Asia-Pacific Asset and Wealth Management Leader PwC Singapore [email protected] 65 6236 3708 Sink or swim: why wealth management can't afford to miss the digital wave