Description
Global markets continue to regroup in the wake of the worst financial crisis in memory. While the eurozone appears to have stabilized of late, there are fundamental unresolved issues that could see the region slip into crisis any moment.
FINANCIAL SERVICES
Industry Insights
A snapshot of the key trends,
issues and challenges facing
the investment management
industry
March 2013
kpmg.com
KPMG INTERNATIONAL
Introduction
To say that these are interesting times in the investment management industry
would be an understatement.
Global markets continue to regroup in the wake of the worst ?nancial crisis
in memory. While the eurozone appears to have stabilized of late, there are
fundamental unresolved issues that could see the region slip into crisis any
moment. Despite an increasing focus on growth from emerging markets, many
observers remain skeptical due because of the serious governance challenges
facing many of these regions. Then, of course, there’s the unrelenting storm of
regulatory change that continues to drive industry transformation and restructuring
in markets around the world. And as the backdrop to all of this, the ?nancial services
industry continues to scramble to rebuild the public trust that was shattered in
the aftermath of the ?nancial crisis and the wave of high-pro?le bankruptcies and
scandals that followed.
Further complicating matters is the fact that today, even as the industry works to
reclaim some semblance of normalcy, it is facing new threats from a crop of bold
industry disruptors with the potential to alter the landscape of the investment
management industry beyond recognition.
Indeed, interesting times.
What better time, then, to query the investment management business’s top minds
about their thoughts, insights, concerns and predictions for the industry? We sat
down with more than 30 Chief Executive Of?cers from a range of investment
management ?rms throughout Europe. The objective was simple: to understand
what are the most important and top-of-mind issues impacting the businesses of
the industry’s leaders. Perhaps understanding and addressing these issues could
help our clients gain an edge in this complex and competitive market.
The results of our discussions with this group of CEOs were illuminating, thought-
provoking and, as some readers may ?nd, perhaps a bit unsettling. Their candid
observations and predictions paint a portrait of an industry that, on one hand, is still
coming to terms with the after-effects of the ?nancial crisis while, on the other, is
bracing itself for seismic change on a number of key fronts. There are ?ve areas, in
particular, that are seen to be in?uencing the industry:
2 Industry Insights
© 2013 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
An unrelenting storm
of regulatory change...
continues to drive
industry transformation.
1. Geopolitical instability - while always a pressure on markets,
transformational changes in the energy sector, the Middle
East, and China as well as developments in the eurozone
are signi?cantly in?uencing investment management.
2. Regulatory change -the implementation of regulations is
forcing asset managers to look carefully at their operating
and business models.
3. Changes to distribution models - competitive and
market driven pressures are forcing ?rms to change
their distribution models resulting in a signi?cant shake
up of the industry.
4. Due diligence and transparency - in the “post-Madoff”
era these have increasingly become the focus of
CEOs and leaders in ?rms around the world.
5. Impact on new potential market players -
technological advancement has opened the
door to the potential for new market entrants
that could threaten current market players.
Alas, it would appear that turmoil and ?ux are the
order of the day for the investment management
industry for the foreseeable future. The industry,
still recovering from one crisis, is entering an
era in which is beset on all sides by challenges
and potential dif?culties. As Albert Einstein
observed, however, “In the middle of
dif?culty lies opportunity.” While this
wave of rapid, transformative change will
undoubtedly leave a number of casualties
in its wake, many of the leaders we spoke
with suggest it will also present valuable
opportunities for the most proactive,
agile and forward-thinking players
to evolve, to adapt and to continue
to lead the industry forward in the
years to come.
3 Industry Insights
© 2013 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
The emergence of a new global order
A glance at the headlines of any daily newspaper quickly underscores the reality
that, from a geopolitical perspective, countries from virtually every corner of the
world remain in a state of incredible tension and ?ux. Indeed, there appears to be
a new global order and set of alliances emerging, the results of which will likely
lead to massive changes across the globe in the coming years.
Not surprisingly, the energy sector remains one of the key focal points of all this
attention, with seismic shifts taking place on both the supply and demand sides of
the ledger. Among the 34 countries that comprise the Organization for Economic
Co-operation and Development (OECD), oil and coal consumption remain in decline,
while consumption in China continues to increase at a rapid pace. There’s also a
signi?cant, new source of petroleum on the world stage, as the super-?elds of Iraq
are fully operational. In addition, the Shatt al-Arab river (Arabic for ‘Stream of the
Arabs’), which lies on the border of Iran and Iraq, has been opened for shipping for
the ?rst time in more than three decades, giving oil tankers access to Basra and
paving the way for a dramatic increase in oil exports from Iraq. The big winners
remain the OPEC countries, as demand for petroleum increases and oil prices
continue to climb.
There are signi?cant shifts taking place in the west as well, as the massive extraction of
natural gas and oil from North America’s shale beds have led to plummeting prices for
natural gas. At the same time, an increasing number of coal-?red electricity generating
plants continue to be converted to natural gas, given the combined attractiveness of the
commodity’s low emissions as well as its low price.
Still on the energy front, coal remains the backbone of global electricity generation, with
China still ranked as the world’s largest coal producer at more than 3 billion tonnes per
year. Despite its place atop the coal production hierarchy, China still continues to import
coal from countries including Australia to meet the country’s unrelenting demand for
energy. The United States is the second-largest producer of coal at a current production
rate of 936 million tonnes per year.
On the political scene, numerous countries in the Middle East, including Egypt,
Syria and Libya to name just a few, continue to witness high levels of instability,
upheaval and unrest. In addition, anti-US sentiment continues to run rampant
throughout much of the region, particularly in Iran, where the chant for Friday
prayers is ‘Death to America’.
The geopolitical outlook
4 Industry Insights
© 2013 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
Numerous countries
in the Middle East...
continue to witness
high levels of instability,
upheaval and unrest.
The geopolitical outlook
Meanwhile, there remains a high degree of concern among many countries (with
the US and Israel at the top of the list) that Iran is enriching uranium not for purposes
related to energy generation as the country continues to state publicly but, rather,
as part of its pursuit of a nuclear armaments program. On a related note, the US
continues to have as one of its key foreign policy goals to prevent Israel from
conducting a pre-emptive bombing strike on Iran.
Given the effects and implications of globalization, there are few countries (if any)
that are immune from the signi?cant degree of uncertainty and tension on the
global stage. Clearly, there are more questions than answers at this point in time.
One thing, however, is clear: the coming months and years will bring with them
profound geopolitical changes that will have extensive, real-world implications
for the investment management industry.
Spotlight on China
With respect to the world’s most populous country, there are a number of
important political and economic factors in play that could translate into signi?cant
implications for the investment management industry going forward. First and
foremost is the fact that China continues to be in a state of political transition with
the recent changes to the country’s politburo. Historically, such periods of political
transition have tended to dampen policy change in China, an effect that may well
be exacerbated during an economic slowdown like the one the country is currently
experiencing. As such, China’s governing of?cials may be more inclined to maintain
the status quo from an economic standpoint, which would likely translate into yet
another wave of investment-led economic stimulus.
And while small and medium enterprises continue to represent a key driver of
employment throughout China, many of these businesses are having increasing
dif?culty accessing the bank funding they need to ?nance growth.
Another growing trend that will likely have signi?cant implications for China down
the road is the fact that a signi?cant percentage of its wealthy inhabitants are actively
looking to leave the country to live elsewhere. A recent survey of 980 Chinese
residents with more than USD1.6 million in assets found that 46 percent were
seriously considering emigrating. An additional 14 percent have already emigrated
or are currently in the process of doing so. Only 40 percent of the country’s wealthy
class is not actively considering leaving China. This potential exodus of wealth from
the world’s largest country represents a signi?cant challenge for the government and
would have signi?cant rami?cations for the country’s economy.
5 Industry Insights
© 2013 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
Given its vast population and economic might, it’s clear that what happens in China
will undoubtedly have implications for much of the rest of the world. As several
astute business writers have observed, “If China sneezes, we’ll catch more than a
cold.” It remains to be seen how the country will respond to this period of economic
sluggishness and impending political change. In any event, the investment
management industry would be well-served to monitor closely the happenings
in China and to respond accordingly depending on the new realities the winds of
change bring in the months ahead.
Old wealth in the new order
With all of this instability on the global geopolitical stage, many of the members
of the world’s ‘old economic guard’ are ?nding themselves in unfamiliar and
unpleasant territory, forced to cope with a host of political and economic time
bombs. The eurozone is in utter disarray, with member countries struggling to
come to terms with solutions to the unprecedented debt crisis that threatens to
tear the region apart.
Greece appears all but certain to default and while the country only represents
2.5 percent of European GDP, with private investors already having taken a
75 percent ‘haircut’ on Greek debt, the country has essentially already defaulted
on its debt obligations.
1
The real questions with respect to Greece today are,
“Who cares” and “Does it really matter?” What should be of greater concern is
the potential contagion effect and the resulting impact on Spain, Italy and other
struggling, debt-laden countries in the eurozone.
Spain represents another source of economic and political concern. The country,
which is the fourth-largest economy in the eurozone, has suffered a massive real
estate collapse and currently has an unemployment rate of approximately 25
percent
2
which is putting social cohesion under threat. At the same time, yields
on Spanish bonds are hovering between 6.5 percent and seven percent,
3
which
is placing an unsustainable burden on the country in terms of interest payments.
And international consulting ?rm Oliver Wyman is currently reviewing the potential
risk in Spanish banks’ balance sheets, which have already written down real estate
debts by a whopping 30 percent.
There are similar concerns in Italy, where there is a cliff of re?nancing on
the horizon, with 40 percent of Italian debt being held by other countries and
1
http://www.minfin.gr/portal/en/resource/contentObject/id/0dac0191-f4fb-46eb-8df2-536893feb187
2
http://www.cbc.ca/news/business/story/2012/10/26/spain-unemployment.html
3
http://www.businessinsider.com/spain-bond-yields-2012-5
6 Industry Insights
© 2013 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
The world’s ‘old
economic guard’ are...
forced to cope with a host
of political and economic
time bombs.
50 percent of that debt due to be re?nanced within the next two years.
4
Markets
are also discounting the value of Italian banks, as the widely-held view is that
the Italians have underestimated the risks on their balance sheets through their
exposures to sovereign debt, loans to small and medium enterprises and for real
estate and cross-?nancing.
For its part, the US is dealing with a massive and growing divide between the
elite wealthy and the remaining 99 percent of the population – an income gap
5
that
continues to spawn unrest and protests, including the infamous ‘Occupy’ movement,
throughout the country. To grasp the nature of the income divide in the country that
still lays claim to the world’s largest economy, consider that in 2010, 37 percent of
the country’s total personal wealth was generated by the top 0.1 percent of the
population. The next 56 percent of personal wealth was generated by the rest of the
top one percent of the population, while the remaining seven percent of personal
wealth was created by the bottom 99 percent of the population.
Japan, that former economic powerhouse, continues to be an economic laggard,
with the outlook for the country’s gross domestic product remaining grim by all
measures. And many of the investment management industry executives we spoke
with suggested that the country’s proposed introduction of a new consumption tax
would likely serve to depress, rather than stimulate, economic growth in the region.
Meanwhile, widely-respected observers including Paul Krugman and Richard
Layard, professors from Princeton University and the London School of Economics,
respectively, argue in their ‘Manifesto for Economic Sense’ that there is no
evidence that the drastic austerity measures currently being implemented by a
growing number of countries will help increase con?dence or spawn a recovery.
Rather, they say, that while the best economic policies will differ between countries,
they must be based on a correct, fact-based analysis of the problems at hand.
While the ‘old wealth’ has its hands full coping with the challenges associated
with the shifting geopolitical landscape, there exists substantial opportunity for
many of the world’s emerging markets. What remains to be seen, however, is
whether these emerging markets countries will be successful in meeting the
short-term challenges posed by factors including political stability, government
effectiveness, regulatory quality, rule of law and control of corruption to name but
a few. Indeed, it appears the future may well belong to the countries that are able
to overcome these challenges.
4
http://blogs.ft.com/the-a-list/2011/11/29/italys-debt-must-be-restructured/#axzz2KnZtHFwJ
5
From a presentation Professor Marvin Zonis, University of Chicago made at the Funds Forum
International in Monaco June 12.
7 Industry Insights
© 2013 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
Of the many byproducts of the global ?nancial crisis, perhaps one of the most
prevalent and far-reaching nearly ?ve years later is the enormous wave of
regulatory change that continues to serve as one of the major drivers of industry
transformation and restructuring. And while the US and the European Union remain
the primary epicenters for this regulatory change, we are also witnessing similar
reforms being introduced in jurisdictions including Hong Kong, China and Australia
among others. In addition, there are a number of ambitious new ‘local’ regulatory
initiatives, such as the Foreign Account Tax Compliance Act (FATCA) in the US and
the Alternative Investment Fund Managers Directive (AIFMD) in the European
Union that promise to have wide-reaching cross-border implications.
With the after-effects of the ?nancial crisis still fresh in their collective minds, many
of the world’s governments are clamoring to institute layer upon layer of stringent
?nancial regulation. For the most part, these new regulations are tougher and more
comprehensive than any of their predecessors, with complex new requirements
and many more products falling into scope. Some of the areas hardest hit by this
‘tsunami of regulatory change’ include alternative investment managers and funds,
the complex reporting demands associated with systemic risk of private funds and
funds distribution.
As part of this regulatory backlash, there is a swift and simultaneous shift toward
greater governance, increased transparency and enhanced due diligence as these
things become industry best practices, driven in part by regulatory change and in
part by demand by institutional investors. In particular, we are continuing to witness
an increased focus on governance and operational due diligence in the hedge funds
space, which has historically been one of the ?nancial industry’s most enigmatic
segments.
The AIFMD will have a signi?cant impact on AIFMs’ overall businesses. The
pressure was ratcheted up yet another level when the long-awaited Level 2
Implementing Measures were released in late December 2012, providing AIFMs
with a set of detailed rules for implementation. Indeed, with the July 2013 deadline
fast approaching, AIFMs that have not yet started preparing in earnest for the
Directive should be feeling an acute sense of urgency to do so at the earliest
opportunity. The business implications of the Directive are signi?cant, the amount of
work to be done is substantial and the timelines for preparation and are increasingly
short. The Directive promises to bring fundamental change to alternative fund
managers both inside and outside the European Union, as managers will be forced
to deal with requirements including having suf?cient substance in the management
entity regarding risk and portfolio management functions, valuation and compliance
An avalanche of global
regulatory change
8 Industry Insights
© 2013 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
The enormous wave
of regulatory change...
continues to serve as one
of the major drivers of
industry transformation.
function and the documenting and disclosing of business operations, risk
management, compliance arrangements, due diligence and selection process.
AIFMs will need to make extensive changes to their business models to comply
with the AIFMD. Perhaps the most high-pro?le element in this regard has to do with
the appointment of a depositary. At this stage in the game, the number of suitable
depositaries that are ready, willing and able to offer the services spelled out under
the Directive is relatively small. Furthermore, given the few depositaries that are
prepared to deliver this key service, some may stop accepting new clients in order
to mitigate the risks of having too large a client roster while they’re dealing with
the AIFMD ‘learning curve’. The appointment of a depositary is one of the most
important strategic decisions managers are tasked with under the AIFMD and this
process will require signi?cant changes to the internal organization of both the
AIFM and the depositary.
Business transformation opportunities
Amid the profound and widespread changes taking place throughout the global
?nancial services industry in 2012, there will undoubtedly continue to be a
number of business transformation opportunities. For example, facing the intense
political and regulatory strain associated with changes such as those associated
with the Volcker Rule (part of the Dodd-Frank Wall Street Reform and Consumer
Protection Act), some ?nancial services companies are opting to divest of their
asset management arms, generating signi?cant opportunities for those seeking
to acquire.
Other players may choose to capitalize on the changing landscape of the global
?nancial services industry by adapting their business models, expanding their
footprints via increased geographic coverage and/or introducing new products
tailored for the new realities of the market and the new regulatory regimes.
It is also likely that investors’ demands for increased transparency around investments
and risk management will lead to increased operational infrastructure costs, resulting
in a pro?tability squeeze throughout the investment management industry.
Another byproduct of this new and more rigorous set of regulatory regimes will be
the increased need for ?rms to ef?ciently and effectively manage the resulting ‘Big
Data’ related to clients, investments and compliance. Investment managers that
have not already done so would be well advised to leverage advances in technology
in order to better handle the impending exponential growth in data management
requirements (particularly related to their risk and compliance functions) as well as
to help reduce the associated costs.
Industry Insights 99
© 2013 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
As part of the process of gathering these insights into the current state of the
investment management industry, KPMG talked to 25 CEOs and heads of
distribution of European asset management companies to better understand how
distribution models are evolving and to help pinpoint some of the more pressing
challenges and potential opportunities for growth. One thing seems abundantly
clear: With the continuing tidal wave of regulatory change, severe margin
compression and increased market volatility, asset managers will be under intense
pressure to reorganize their businesses in order to adapt to the ‘new normal’.
When asked about the various forces of change currently acting on distribution
models in the industry, the executives we spoke with provided a number of eye-
opening insights and predictions. Perhaps the most shocking assertion from the
CEOs we spoke with was that between 20 and 30 percent of the people and
companies in the asset industry today will virtually disappear over the course of
the next decade. While it remains to be seen if this ominous prediction will come
to fruition, if true, it will translate into signi?cant turmoil for the industry.
Our group of executives also said they anticipated relentless pressure on margins,
a trend they don’t see going away anytime soon.
Among the other potential ‘forces of change’ they discussed were a shift to lower-
priced products, the continuing wave of regulatory change and the stark realization
that, for the time being at least, market volatility is the new norm.
The move to solutions
While there are certainly some ominous storm clouds on the horizon relating to the
challenges associated with factors such as scalability, complexity and hidden costs,
many industry players remain optimistic and focused on working toward solutions
that will help position them for pro?tability and success in the future. For instance,
asset managers say they’re looking for deeper and longer-term client relationships.
As a result, they say there is currently signi?cantly more effort being invested in
extending the scope and duration of relationships with existing clients.
Retail intermediaries, on the other hand, say simpli?cation is the key and that
they’re seeking simple, outcome-oriented product sets that they can then sell,
in turn, to their end customers.
Evolving
distribution models
10 Industry Insights
© 2013 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
For their part, institutional clients say they are looking for product sets designed
to help them better cope with the current market challenges associated with factors
including long-dated liabilities, in?ation and market volatility to name but a few.
Leading players reshaping their distribution models
and strategies
As part of the ongoing evolution of the industry landscape, many providers are
opting to make strategic changes to their distribution models. For example, in
order to better maintain intimacy with local clients, some providers are re?ning
their business models to help ensure what they consider to be a more appropriate
balance between global and local operating structures. Others, perhaps looking to
move up the value chain in the eyes of their clients, are putting an increased focus
on what they consider to be ‘solutions’ rather than simply ‘products’.
Another tactic being employed by some players is the reorganizing or integration
of their client-facing teams. One particular asset manager located in Brazil chose
to co-locate their front and back of?ce staff in order to enable greater levels
of transparency for their end-to-end processes and to pave the way for better
communication and more seamless collaboration between teams.
Yet other providers are opting to invest more in the product knowledge and selling
skills of their sales teams. Indeed, the composition of sales teams throughout much
of the industry is changing signi?cantly, with highly quali?ed candidates, many who
possess PhDs, taking their places on the team to help provide a more analytical
perspective.
Another common theme mentioned by a number of executives was the need to
‘manage for margin’ by reducing complexity wherever possible in the value chain.
But by far, the number one issue of importance according to these executives
was being able to provide existing clients with better service. To that end, more
and more sales forces are ?nding themselves conducting ‘structured selling’ and
investing in getting to know their client companies through the coordinated pursuit
of ongoing dialogue with clients.
11 Industry Insights
© 2013 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
While there are a number of challenges facing the industry going forward, two that
we have yet to address in this paper are the implications associated with operational
risk in an evolving marketplace and the challenges associated with cost.
Operational risk
As many of our interview subjects told us, one of the most signi?cant risk factors
facing the industry today is the relatively new reality that operational risk is now
central to their business models. This shift has much more fundamental implications
than simply increasing budget allocations to better understand due diligence. Ever
since the Madoff scandal made international headlines, operational due diligence
has been viewed as part of the overall value proposition and, indeed, as a source
of alpha.
One of the more often-overlooked aspects of operational due diligence is the
need to perform an external audit of Information Technology (IT) infrastructure on a
periodic basis to ensure the company’s IT infrastructure is robust enough to handle
the demands associated with the growing complexity of instruments and markets.
Indeed, for many ?rms, it is proving to be a constant and pressing challenge
to update legacy platforms in order to adapt to this ever-changing investment
environment.
In addition, the increasing complexity of the trading environment implies the
need for substantial improvements in areas such as counterparty and collateral
management, speci?cally with respect to over-the-counter (OTC) derivatives.
And ?nally, the collapse of companies including Lehman Brothers, Bear Stearns and
others has helped shine a spotlight on the importance of employing independent
asset valuations whenever possible. Given that illiquid assets are frequently marked
to model rather than marked to market suggests the importance of such external
and independent valuations.
Industry
challenges
12 Industry Insights
© 2013 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
Going forward, the companies that win in the area of operational transparency will
be those that are quick to introduce and maintain mechanisms to monitor each link
in the operational due diligence chain. In addition, the implementation of robust
IT-related processes will be key to enhancing the high degree of transparency that
investors and regulators have come to expect and, indeed, demand.
Cost structures
The business models of many asset managers are also being challenged by the fact
that costs are rising more quickly than revenues. This new reality has helped focus
attention on what is considered to be a general lack of transparency in the area of
cost structures. On that note, many asset managers currently face the challenge
of understanding and accurately measuring their cost structures and appropriately
allocating costs across their various product lines.
It is advisable for companies to adopt transparent managerial accounting practices
in order to enable themselves to better understand and control costs throughout the
entire value chain. Perhaps one of the more obvious alternatives might be for ?rms to
apply cost accounting principles that are common in other industries, but which have
not been generally applied in the asset management sector to date. It will be essential
to examine and reappraise these costs broken down into categories including
product, market data and customer, along the entire value chain.
Ultimately, the winners will be those ?rms that are able to implement ?exible and
ef?cient IT-based ?nancial accounting systems that are fully operational and that
know how to allocate and deploy these resources to maximum effect on behalf
of their ?rms.
Industry Insights 13
© 2013 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
Even as the global investment management industry struggles to adapt to a rapidly
changing landscape, it ?nds itself facing a new set of serious threats from outside
its traditional sphere of competition. The stark reality is that there’s an entirely new
?nancial services industry emerging today that didn’t even exist ?ve or six years
ago. Thanks to incredible advances in technology and the ‘sector creep’ of industry
giants like Google and Facebook, these industry disruptors are rapidly developing
new business models that have the potential to fundamentally change the status
quo in the investment management industry. These changes are taking place at a
time when many of the world’s ‘traditional’ ?nancial services providers are suffering
from signi?cantly diminished levels of trust from the consuming public. It is within
this context of seismic change that newcomers to the ?nancial services industry are
identifying opportunities to enter the market with disruptive business models that
may have a much broader appeal to key consumer segments. With that in mind, here
is a quick look at just a few potential industry disruptors and the scope of the impact
they could have, in a relatively short timeframe, on the ?nancial services industry.
Apple
In the past year, Apple became the largest company in the world as measured by
market capitalization. The company also has more than 400 million iTunes accounts,
all attached to valid credit card holders.
6
That’s a sizable and loyal client base from
which to build a potential banking entity. Imagine if Apple were to enter the ?nancial
services arena with its Net Promoter Score (used to gauge client loyalty) of 70,
compared with the major ?nancial services brands, which have either low or negative
Net Promoter Scores. In addition, research from advertising ?rm Saatchi and Saatchi
reveals that companies like Apple, that create love and respect with their customers,
are able to generate much higher client loyalty than other companies.
Google
What would motivate Google to enter the banking industry? As bank robber
Willie Sutton once famously stated, ‘Because that’s where the money is.’ Banking
wouldn’t be the ?rst, nor last, industry that Google disrupted. The company has
already caused signi?cant challenges for the telecom, GPS, news media and
advertising industries to name a few. Not only would a ?nancial services offering
lead to increased usage of the Google family of products (e.g. Chrome, gmail, etc.)
but it would help diversify the company’s revenue streams and arguable lead to
bene?ts for its customers, including ease of use, cost savings and an improved
online banking experience.
Potential
industry disruptors
6
http://www.forbes.com/sites/schifrin/2013/02/07/preferred-apple-idea-ignore-einhorn-and-buy-netflix/
14 Industry Insights
© 2013 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
Facebook
With more than a billion registered users who already use the site as their ‘virtual ID’,
Facebook has access to more personal data and information on users’ behavior than
any other company on the planet. And in 2011, 15 percent of the company’s revenue
was generated by processing payments (primarily by users making purchases within
social games).
7
Having already succeeded in the dif?cult task of convincing nearly a
billion people to use their site as a virtual ID online, the road to becoming a virtual wallet
would be a breeze in comparison. Just the thought of Facebook entering the ?nancial
services industry would have to be enough to make even the most even-keeled
banking executive sleep with one eye open.
In addition to these potential ?nancial services disruptors that already exist as going
concerns in other industries (Apple, Google and Facebook), there is also another
crop of bold, new companies on the horizon, preparing to fundamentally challenge
the status quo. While each is approaching the industry from a slightly different
angle and business model, they are all based on one or more of the following key
emerging trends: Namely, that data is the new gold, the increasingly important role
of trust in business, the area of social media research and the move toward impact
investing. Here are just a few of the emerging entrants with the potential to disrupt
segments of the ?nancial services industry:
Wealthfront
Wealthfront is an SEC-registered online ?nancial advisor catering to the young and
tech- savvy Silicon Valley community. The company, which only offers investments
in ETFs and index funds is already thought to have millions of customers using
its services. The company has adopted a ‘freemium’ model, whereby the ?rst
USD25,000 is managed free of charge and the next USD10,000 is managed free
if you introduce a friend to the service. The company only charges 25 basis points
on assets managed above this threshold. Using modern portfolio theory, users are
able to work out their model portfolio in 60 seconds. These unique and innovative
features seem to be popular with Wealthfront’s target market, many of whom
dislike ‘traditional’ banks and asset managers.
The company’s marketing positioning centers around ‘making it easy’ and uses
slogans such as ‘Join the revolution’, ‘The wave has begun’ and ‘Wall Street, take
notice’. While Wealthfront’s services are not yet available to the public, it’s only a
matter of time before that happens.
7
http://gigaom.com/2012/05/17/are-facebook-credits-the-key-to-the-social-networks-future/
15 Industry Insights
© 2013 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
Dataminr
This real-time social media analytics company picks up more than 340 million
tweets each day, which it then uses to predict events on behalf of clients in the
?nancial and government sectors. The company represents an entirely new
category of social media analysis. Their analytics engine has the potential to
transform social media streams into actionable signals for ?nancial services
and government clients, providing what amounts to one of the earliest-warning
systems on the market. How effective are the company’s algorithms? Dataminr
reported the death of Osama bin Laden a full 25 minutes before President Obama’s
announcement that the terrorist leader had been killed. Clearly, this represents a
powerful new breed of social media analysis tool that has signi?cant potential to
disrupt aspects of the ?nancial services industry.
SNTMNT
Along the same lines as Dataminr, SNTMNT describes itself as the ?rst Application
Program Interface (API) in the world that gives predictions based on Twitter sentimen
for all S&P 500 stocks. The company says its algorithm provides an extra indicator on
top of fundamentals and technical analysis.
SNTMNT’s ‘machine learning’ algorithms generate an indicator capable of predicting
share price movements between one and seven days into the future with an accurac
rate of 56 percent. The company employs a two-step process as part of its offering.
The ?rst is natural language processing that is sourced from Twitter, Facebook, blogs
and news sites to identify what it calls ‘mood states’. Then, they employ machine
learning and predictive analysis to make their predictions.
SNTMNT’s products include something called ‘Trading Indicator’ which provides
hourly/daily predictions of S&P 500 stocks with an accuracy of 60 percent based
on Twitter and another called ‘Financial Sentiment’ that uses a special algorithm
that deals with ?nancial jargon and which has a rate of accuracy of 84.3 percent.
t
y
16 Industry Insights
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17 Industry Insights
© 2013 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
18 Industry Insights
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e
s
Conclusion
19 Industry Insights 19
© 2013 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
The global investment management industry has entered a period of unprecedented
change and turmoil. As the industry continues to work to put the global ?nancial crisis
in its rearview mirror, it ?nds itself forced to contend with a host of challenges and
threats from an array of external forces.
As the CEOs with whom we spoke indicated, there are a number of key issues that will
require careful attention from the investment management industry in the days ahead:
• First and foremost is the continued instability on the geopolitical scene. Whether
related to the changes in the energy sector, the political scene in the Middle
East, developments in the eurozone or the continuing rise of China, these
developments will have massive implications for the industry.
• The continuing wave of regulatory change will also continue to serve as a driver
of industry transformation, including potential changes in business models,
implications related to Big Data, possible divestitures and more.
• The continued pressure on margins in the investment management industry will
likely lead to signi?cant changes to industry distribution models, with some of th
CEOs we spoke with predicting as much as 30 percent of the people/companies
in the asset industry today will disappear in the next 10 years.
• In the `post-Madoff’ era, investment managers will also be pressured to reasses
their approaches to operational due diligence, independent asset valuations and
operational transparency. At the same time, there will be increased importance
placed on the transparency of accounting practices as costs continue to rise
more quickly than revenues.
• And fnally, there’s the clear and present threat posed by technology companies
such as Google, Facebook and a legion of nascent start-ups looking to capitalize
on technology to disrupt the face of the ?nancial services industry.
We will continue to monitor these issues and developments in the coming
months, as well as the industry’s responses to these changes, threats and
opportunities-responses that will undoubtedly play a key role in determining
the fate of the investment management industry for years to come.
Contacts
UK
Tom Brown
Global Head of Investment Management
KPMG in the UK
T: +44 20 76942011
E: [email protected]
ASPAC
Martin Blake
Partner
KPMG in Australia
T: +61 2 9335 8316
E: [email protected]
Jacinta Munro
Partner
KPMG in Australia
T: +61 3 9288 5877
E: [email protected]
US
James Suglia
Partner
KPMG in the US
T: +1 617 988 5607
E: [email protected]
kpmg.com/socialmedia
The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although
e endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that
t will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination
f the particular situation.
2013 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated
ith KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International
r any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights
eserved.
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esigned by Evalueserve.
ublication name: Industry Insights
ublication number: 121295
ublication date: March 2013
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doc_295089004.pdf
Global markets continue to regroup in the wake of the worst financial crisis in memory. While the eurozone appears to have stabilized of late, there are fundamental unresolved issues that could see the region slip into crisis any moment.
FINANCIAL SERVICES
Industry Insights
A snapshot of the key trends,
issues and challenges facing
the investment management
industry
March 2013
kpmg.com
KPMG INTERNATIONAL
Introduction
To say that these are interesting times in the investment management industry
would be an understatement.
Global markets continue to regroup in the wake of the worst ?nancial crisis
in memory. While the eurozone appears to have stabilized of late, there are
fundamental unresolved issues that could see the region slip into crisis any
moment. Despite an increasing focus on growth from emerging markets, many
observers remain skeptical due because of the serious governance challenges
facing many of these regions. Then, of course, there’s the unrelenting storm of
regulatory change that continues to drive industry transformation and restructuring
in markets around the world. And as the backdrop to all of this, the ?nancial services
industry continues to scramble to rebuild the public trust that was shattered in
the aftermath of the ?nancial crisis and the wave of high-pro?le bankruptcies and
scandals that followed.
Further complicating matters is the fact that today, even as the industry works to
reclaim some semblance of normalcy, it is facing new threats from a crop of bold
industry disruptors with the potential to alter the landscape of the investment
management industry beyond recognition.
Indeed, interesting times.
What better time, then, to query the investment management business’s top minds
about their thoughts, insights, concerns and predictions for the industry? We sat
down with more than 30 Chief Executive Of?cers from a range of investment
management ?rms throughout Europe. The objective was simple: to understand
what are the most important and top-of-mind issues impacting the businesses of
the industry’s leaders. Perhaps understanding and addressing these issues could
help our clients gain an edge in this complex and competitive market.
The results of our discussions with this group of CEOs were illuminating, thought-
provoking and, as some readers may ?nd, perhaps a bit unsettling. Their candid
observations and predictions paint a portrait of an industry that, on one hand, is still
coming to terms with the after-effects of the ?nancial crisis while, on the other, is
bracing itself for seismic change on a number of key fronts. There are ?ve areas, in
particular, that are seen to be in?uencing the industry:
2 Industry Insights
© 2013 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
An unrelenting storm
of regulatory change...
continues to drive
industry transformation.
1. Geopolitical instability - while always a pressure on markets,
transformational changes in the energy sector, the Middle
East, and China as well as developments in the eurozone
are signi?cantly in?uencing investment management.
2. Regulatory change -the implementation of regulations is
forcing asset managers to look carefully at their operating
and business models.
3. Changes to distribution models - competitive and
market driven pressures are forcing ?rms to change
their distribution models resulting in a signi?cant shake
up of the industry.
4. Due diligence and transparency - in the “post-Madoff”
era these have increasingly become the focus of
CEOs and leaders in ?rms around the world.
5. Impact on new potential market players -
technological advancement has opened the
door to the potential for new market entrants
that could threaten current market players.
Alas, it would appear that turmoil and ?ux are the
order of the day for the investment management
industry for the foreseeable future. The industry,
still recovering from one crisis, is entering an
era in which is beset on all sides by challenges
and potential dif?culties. As Albert Einstein
observed, however, “In the middle of
dif?culty lies opportunity.” While this
wave of rapid, transformative change will
undoubtedly leave a number of casualties
in its wake, many of the leaders we spoke
with suggest it will also present valuable
opportunities for the most proactive,
agile and forward-thinking players
to evolve, to adapt and to continue
to lead the industry forward in the
years to come.
3 Industry Insights
© 2013 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
The emergence of a new global order
A glance at the headlines of any daily newspaper quickly underscores the reality
that, from a geopolitical perspective, countries from virtually every corner of the
world remain in a state of incredible tension and ?ux. Indeed, there appears to be
a new global order and set of alliances emerging, the results of which will likely
lead to massive changes across the globe in the coming years.
Not surprisingly, the energy sector remains one of the key focal points of all this
attention, with seismic shifts taking place on both the supply and demand sides of
the ledger. Among the 34 countries that comprise the Organization for Economic
Co-operation and Development (OECD), oil and coal consumption remain in decline,
while consumption in China continues to increase at a rapid pace. There’s also a
signi?cant, new source of petroleum on the world stage, as the super-?elds of Iraq
are fully operational. In addition, the Shatt al-Arab river (Arabic for ‘Stream of the
Arabs’), which lies on the border of Iran and Iraq, has been opened for shipping for
the ?rst time in more than three decades, giving oil tankers access to Basra and
paving the way for a dramatic increase in oil exports from Iraq. The big winners
remain the OPEC countries, as demand for petroleum increases and oil prices
continue to climb.
There are signi?cant shifts taking place in the west as well, as the massive extraction of
natural gas and oil from North America’s shale beds have led to plummeting prices for
natural gas. At the same time, an increasing number of coal-?red electricity generating
plants continue to be converted to natural gas, given the combined attractiveness of the
commodity’s low emissions as well as its low price.
Still on the energy front, coal remains the backbone of global electricity generation, with
China still ranked as the world’s largest coal producer at more than 3 billion tonnes per
year. Despite its place atop the coal production hierarchy, China still continues to import
coal from countries including Australia to meet the country’s unrelenting demand for
energy. The United States is the second-largest producer of coal at a current production
rate of 936 million tonnes per year.
On the political scene, numerous countries in the Middle East, including Egypt,
Syria and Libya to name just a few, continue to witness high levels of instability,
upheaval and unrest. In addition, anti-US sentiment continues to run rampant
throughout much of the region, particularly in Iran, where the chant for Friday
prayers is ‘Death to America’.
The geopolitical outlook
4 Industry Insights
© 2013 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
Numerous countries
in the Middle East...
continue to witness
high levels of instability,
upheaval and unrest.
The geopolitical outlook
Meanwhile, there remains a high degree of concern among many countries (with
the US and Israel at the top of the list) that Iran is enriching uranium not for purposes
related to energy generation as the country continues to state publicly but, rather,
as part of its pursuit of a nuclear armaments program. On a related note, the US
continues to have as one of its key foreign policy goals to prevent Israel from
conducting a pre-emptive bombing strike on Iran.
Given the effects and implications of globalization, there are few countries (if any)
that are immune from the signi?cant degree of uncertainty and tension on the
global stage. Clearly, there are more questions than answers at this point in time.
One thing, however, is clear: the coming months and years will bring with them
profound geopolitical changes that will have extensive, real-world implications
for the investment management industry.
Spotlight on China
With respect to the world’s most populous country, there are a number of
important political and economic factors in play that could translate into signi?cant
implications for the investment management industry going forward. First and
foremost is the fact that China continues to be in a state of political transition with
the recent changes to the country’s politburo. Historically, such periods of political
transition have tended to dampen policy change in China, an effect that may well
be exacerbated during an economic slowdown like the one the country is currently
experiencing. As such, China’s governing of?cials may be more inclined to maintain
the status quo from an economic standpoint, which would likely translate into yet
another wave of investment-led economic stimulus.
And while small and medium enterprises continue to represent a key driver of
employment throughout China, many of these businesses are having increasing
dif?culty accessing the bank funding they need to ?nance growth.
Another growing trend that will likely have signi?cant implications for China down
the road is the fact that a signi?cant percentage of its wealthy inhabitants are actively
looking to leave the country to live elsewhere. A recent survey of 980 Chinese
residents with more than USD1.6 million in assets found that 46 percent were
seriously considering emigrating. An additional 14 percent have already emigrated
or are currently in the process of doing so. Only 40 percent of the country’s wealthy
class is not actively considering leaving China. This potential exodus of wealth from
the world’s largest country represents a signi?cant challenge for the government and
would have signi?cant rami?cations for the country’s economy.
5 Industry Insights
© 2013 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
Given its vast population and economic might, it’s clear that what happens in China
will undoubtedly have implications for much of the rest of the world. As several
astute business writers have observed, “If China sneezes, we’ll catch more than a
cold.” It remains to be seen how the country will respond to this period of economic
sluggishness and impending political change. In any event, the investment
management industry would be well-served to monitor closely the happenings
in China and to respond accordingly depending on the new realities the winds of
change bring in the months ahead.
Old wealth in the new order
With all of this instability on the global geopolitical stage, many of the members
of the world’s ‘old economic guard’ are ?nding themselves in unfamiliar and
unpleasant territory, forced to cope with a host of political and economic time
bombs. The eurozone is in utter disarray, with member countries struggling to
come to terms with solutions to the unprecedented debt crisis that threatens to
tear the region apart.
Greece appears all but certain to default and while the country only represents
2.5 percent of European GDP, with private investors already having taken a
75 percent ‘haircut’ on Greek debt, the country has essentially already defaulted
on its debt obligations.
1
The real questions with respect to Greece today are,
“Who cares” and “Does it really matter?” What should be of greater concern is
the potential contagion effect and the resulting impact on Spain, Italy and other
struggling, debt-laden countries in the eurozone.
Spain represents another source of economic and political concern. The country,
which is the fourth-largest economy in the eurozone, has suffered a massive real
estate collapse and currently has an unemployment rate of approximately 25
percent
2
which is putting social cohesion under threat. At the same time, yields
on Spanish bonds are hovering between 6.5 percent and seven percent,
3
which
is placing an unsustainable burden on the country in terms of interest payments.
And international consulting ?rm Oliver Wyman is currently reviewing the potential
risk in Spanish banks’ balance sheets, which have already written down real estate
debts by a whopping 30 percent.
There are similar concerns in Italy, where there is a cliff of re?nancing on
the horizon, with 40 percent of Italian debt being held by other countries and
1
http://www.minfin.gr/portal/en/resource/contentObject/id/0dac0191-f4fb-46eb-8df2-536893feb187
2
http://www.cbc.ca/news/business/story/2012/10/26/spain-unemployment.html
3
http://www.businessinsider.com/spain-bond-yields-2012-5
6 Industry Insights
© 2013 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
The world’s ‘old
economic guard’ are...
forced to cope with a host
of political and economic
time bombs.
50 percent of that debt due to be re?nanced within the next two years.
4
Markets
are also discounting the value of Italian banks, as the widely-held view is that
the Italians have underestimated the risks on their balance sheets through their
exposures to sovereign debt, loans to small and medium enterprises and for real
estate and cross-?nancing.
For its part, the US is dealing with a massive and growing divide between the
elite wealthy and the remaining 99 percent of the population – an income gap
5
that
continues to spawn unrest and protests, including the infamous ‘Occupy’ movement,
throughout the country. To grasp the nature of the income divide in the country that
still lays claim to the world’s largest economy, consider that in 2010, 37 percent of
the country’s total personal wealth was generated by the top 0.1 percent of the
population. The next 56 percent of personal wealth was generated by the rest of the
top one percent of the population, while the remaining seven percent of personal
wealth was created by the bottom 99 percent of the population.
Japan, that former economic powerhouse, continues to be an economic laggard,
with the outlook for the country’s gross domestic product remaining grim by all
measures. And many of the investment management industry executives we spoke
with suggested that the country’s proposed introduction of a new consumption tax
would likely serve to depress, rather than stimulate, economic growth in the region.
Meanwhile, widely-respected observers including Paul Krugman and Richard
Layard, professors from Princeton University and the London School of Economics,
respectively, argue in their ‘Manifesto for Economic Sense’ that there is no
evidence that the drastic austerity measures currently being implemented by a
growing number of countries will help increase con?dence or spawn a recovery.
Rather, they say, that while the best economic policies will differ between countries,
they must be based on a correct, fact-based analysis of the problems at hand.
While the ‘old wealth’ has its hands full coping with the challenges associated
with the shifting geopolitical landscape, there exists substantial opportunity for
many of the world’s emerging markets. What remains to be seen, however, is
whether these emerging markets countries will be successful in meeting the
short-term challenges posed by factors including political stability, government
effectiveness, regulatory quality, rule of law and control of corruption to name but
a few. Indeed, it appears the future may well belong to the countries that are able
to overcome these challenges.
4
http://blogs.ft.com/the-a-list/2011/11/29/italys-debt-must-be-restructured/#axzz2KnZtHFwJ
5
From a presentation Professor Marvin Zonis, University of Chicago made at the Funds Forum
International in Monaco June 12.
7 Industry Insights
© 2013 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
Of the many byproducts of the global ?nancial crisis, perhaps one of the most
prevalent and far-reaching nearly ?ve years later is the enormous wave of
regulatory change that continues to serve as one of the major drivers of industry
transformation and restructuring. And while the US and the European Union remain
the primary epicenters for this regulatory change, we are also witnessing similar
reforms being introduced in jurisdictions including Hong Kong, China and Australia
among others. In addition, there are a number of ambitious new ‘local’ regulatory
initiatives, such as the Foreign Account Tax Compliance Act (FATCA) in the US and
the Alternative Investment Fund Managers Directive (AIFMD) in the European
Union that promise to have wide-reaching cross-border implications.
With the after-effects of the ?nancial crisis still fresh in their collective minds, many
of the world’s governments are clamoring to institute layer upon layer of stringent
?nancial regulation. For the most part, these new regulations are tougher and more
comprehensive than any of their predecessors, with complex new requirements
and many more products falling into scope. Some of the areas hardest hit by this
‘tsunami of regulatory change’ include alternative investment managers and funds,
the complex reporting demands associated with systemic risk of private funds and
funds distribution.
As part of this regulatory backlash, there is a swift and simultaneous shift toward
greater governance, increased transparency and enhanced due diligence as these
things become industry best practices, driven in part by regulatory change and in
part by demand by institutional investors. In particular, we are continuing to witness
an increased focus on governance and operational due diligence in the hedge funds
space, which has historically been one of the ?nancial industry’s most enigmatic
segments.
The AIFMD will have a signi?cant impact on AIFMs’ overall businesses. The
pressure was ratcheted up yet another level when the long-awaited Level 2
Implementing Measures were released in late December 2012, providing AIFMs
with a set of detailed rules for implementation. Indeed, with the July 2013 deadline
fast approaching, AIFMs that have not yet started preparing in earnest for the
Directive should be feeling an acute sense of urgency to do so at the earliest
opportunity. The business implications of the Directive are signi?cant, the amount of
work to be done is substantial and the timelines for preparation and are increasingly
short. The Directive promises to bring fundamental change to alternative fund
managers both inside and outside the European Union, as managers will be forced
to deal with requirements including having suf?cient substance in the management
entity regarding risk and portfolio management functions, valuation and compliance
An avalanche of global
regulatory change
8 Industry Insights
© 2013 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
The enormous wave
of regulatory change...
continues to serve as one
of the major drivers of
industry transformation.
function and the documenting and disclosing of business operations, risk
management, compliance arrangements, due diligence and selection process.
AIFMs will need to make extensive changes to their business models to comply
with the AIFMD. Perhaps the most high-pro?le element in this regard has to do with
the appointment of a depositary. At this stage in the game, the number of suitable
depositaries that are ready, willing and able to offer the services spelled out under
the Directive is relatively small. Furthermore, given the few depositaries that are
prepared to deliver this key service, some may stop accepting new clients in order
to mitigate the risks of having too large a client roster while they’re dealing with
the AIFMD ‘learning curve’. The appointment of a depositary is one of the most
important strategic decisions managers are tasked with under the AIFMD and this
process will require signi?cant changes to the internal organization of both the
AIFM and the depositary.
Business transformation opportunities
Amid the profound and widespread changes taking place throughout the global
?nancial services industry in 2012, there will undoubtedly continue to be a
number of business transformation opportunities. For example, facing the intense
political and regulatory strain associated with changes such as those associated
with the Volcker Rule (part of the Dodd-Frank Wall Street Reform and Consumer
Protection Act), some ?nancial services companies are opting to divest of their
asset management arms, generating signi?cant opportunities for those seeking
to acquire.
Other players may choose to capitalize on the changing landscape of the global
?nancial services industry by adapting their business models, expanding their
footprints via increased geographic coverage and/or introducing new products
tailored for the new realities of the market and the new regulatory regimes.
It is also likely that investors’ demands for increased transparency around investments
and risk management will lead to increased operational infrastructure costs, resulting
in a pro?tability squeeze throughout the investment management industry.
Another byproduct of this new and more rigorous set of regulatory regimes will be
the increased need for ?rms to ef?ciently and effectively manage the resulting ‘Big
Data’ related to clients, investments and compliance. Investment managers that
have not already done so would be well advised to leverage advances in technology
in order to better handle the impending exponential growth in data management
requirements (particularly related to their risk and compliance functions) as well as
to help reduce the associated costs.
Industry Insights 99
© 2013 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
As part of the process of gathering these insights into the current state of the
investment management industry, KPMG talked to 25 CEOs and heads of
distribution of European asset management companies to better understand how
distribution models are evolving and to help pinpoint some of the more pressing
challenges and potential opportunities for growth. One thing seems abundantly
clear: With the continuing tidal wave of regulatory change, severe margin
compression and increased market volatility, asset managers will be under intense
pressure to reorganize their businesses in order to adapt to the ‘new normal’.
When asked about the various forces of change currently acting on distribution
models in the industry, the executives we spoke with provided a number of eye-
opening insights and predictions. Perhaps the most shocking assertion from the
CEOs we spoke with was that between 20 and 30 percent of the people and
companies in the asset industry today will virtually disappear over the course of
the next decade. While it remains to be seen if this ominous prediction will come
to fruition, if true, it will translate into signi?cant turmoil for the industry.
Our group of executives also said they anticipated relentless pressure on margins,
a trend they don’t see going away anytime soon.
Among the other potential ‘forces of change’ they discussed were a shift to lower-
priced products, the continuing wave of regulatory change and the stark realization
that, for the time being at least, market volatility is the new norm.
The move to solutions
While there are certainly some ominous storm clouds on the horizon relating to the
challenges associated with factors such as scalability, complexity and hidden costs,
many industry players remain optimistic and focused on working toward solutions
that will help position them for pro?tability and success in the future. For instance,
asset managers say they’re looking for deeper and longer-term client relationships.
As a result, they say there is currently signi?cantly more effort being invested in
extending the scope and duration of relationships with existing clients.
Retail intermediaries, on the other hand, say simpli?cation is the key and that
they’re seeking simple, outcome-oriented product sets that they can then sell,
in turn, to their end customers.
Evolving
distribution models
10 Industry Insights
© 2013 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
For their part, institutional clients say they are looking for product sets designed
to help them better cope with the current market challenges associated with factors
including long-dated liabilities, in?ation and market volatility to name but a few.
Leading players reshaping their distribution models
and strategies
As part of the ongoing evolution of the industry landscape, many providers are
opting to make strategic changes to their distribution models. For example, in
order to better maintain intimacy with local clients, some providers are re?ning
their business models to help ensure what they consider to be a more appropriate
balance between global and local operating structures. Others, perhaps looking to
move up the value chain in the eyes of their clients, are putting an increased focus
on what they consider to be ‘solutions’ rather than simply ‘products’.
Another tactic being employed by some players is the reorganizing or integration
of their client-facing teams. One particular asset manager located in Brazil chose
to co-locate their front and back of?ce staff in order to enable greater levels
of transparency for their end-to-end processes and to pave the way for better
communication and more seamless collaboration between teams.
Yet other providers are opting to invest more in the product knowledge and selling
skills of their sales teams. Indeed, the composition of sales teams throughout much
of the industry is changing signi?cantly, with highly quali?ed candidates, many who
possess PhDs, taking their places on the team to help provide a more analytical
perspective.
Another common theme mentioned by a number of executives was the need to
‘manage for margin’ by reducing complexity wherever possible in the value chain.
But by far, the number one issue of importance according to these executives
was being able to provide existing clients with better service. To that end, more
and more sales forces are ?nding themselves conducting ‘structured selling’ and
investing in getting to know their client companies through the coordinated pursuit
of ongoing dialogue with clients.
11 Industry Insights
© 2013 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
While there are a number of challenges facing the industry going forward, two that
we have yet to address in this paper are the implications associated with operational
risk in an evolving marketplace and the challenges associated with cost.
Operational risk
As many of our interview subjects told us, one of the most signi?cant risk factors
facing the industry today is the relatively new reality that operational risk is now
central to their business models. This shift has much more fundamental implications
than simply increasing budget allocations to better understand due diligence. Ever
since the Madoff scandal made international headlines, operational due diligence
has been viewed as part of the overall value proposition and, indeed, as a source
of alpha.
One of the more often-overlooked aspects of operational due diligence is the
need to perform an external audit of Information Technology (IT) infrastructure on a
periodic basis to ensure the company’s IT infrastructure is robust enough to handle
the demands associated with the growing complexity of instruments and markets.
Indeed, for many ?rms, it is proving to be a constant and pressing challenge
to update legacy platforms in order to adapt to this ever-changing investment
environment.
In addition, the increasing complexity of the trading environment implies the
need for substantial improvements in areas such as counterparty and collateral
management, speci?cally with respect to over-the-counter (OTC) derivatives.
And ?nally, the collapse of companies including Lehman Brothers, Bear Stearns and
others has helped shine a spotlight on the importance of employing independent
asset valuations whenever possible. Given that illiquid assets are frequently marked
to model rather than marked to market suggests the importance of such external
and independent valuations.
Industry
challenges
12 Industry Insights
© 2013 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
Going forward, the companies that win in the area of operational transparency will
be those that are quick to introduce and maintain mechanisms to monitor each link
in the operational due diligence chain. In addition, the implementation of robust
IT-related processes will be key to enhancing the high degree of transparency that
investors and regulators have come to expect and, indeed, demand.
Cost structures
The business models of many asset managers are also being challenged by the fact
that costs are rising more quickly than revenues. This new reality has helped focus
attention on what is considered to be a general lack of transparency in the area of
cost structures. On that note, many asset managers currently face the challenge
of understanding and accurately measuring their cost structures and appropriately
allocating costs across their various product lines.
It is advisable for companies to adopt transparent managerial accounting practices
in order to enable themselves to better understand and control costs throughout the
entire value chain. Perhaps one of the more obvious alternatives might be for ?rms to
apply cost accounting principles that are common in other industries, but which have
not been generally applied in the asset management sector to date. It will be essential
to examine and reappraise these costs broken down into categories including
product, market data and customer, along the entire value chain.
Ultimately, the winners will be those ?rms that are able to implement ?exible and
ef?cient IT-based ?nancial accounting systems that are fully operational and that
know how to allocate and deploy these resources to maximum effect on behalf
of their ?rms.
Industry Insights 13
© 2013 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
Even as the global investment management industry struggles to adapt to a rapidly
changing landscape, it ?nds itself facing a new set of serious threats from outside
its traditional sphere of competition. The stark reality is that there’s an entirely new
?nancial services industry emerging today that didn’t even exist ?ve or six years
ago. Thanks to incredible advances in technology and the ‘sector creep’ of industry
giants like Google and Facebook, these industry disruptors are rapidly developing
new business models that have the potential to fundamentally change the status
quo in the investment management industry. These changes are taking place at a
time when many of the world’s ‘traditional’ ?nancial services providers are suffering
from signi?cantly diminished levels of trust from the consuming public. It is within
this context of seismic change that newcomers to the ?nancial services industry are
identifying opportunities to enter the market with disruptive business models that
may have a much broader appeal to key consumer segments. With that in mind, here
is a quick look at just a few potential industry disruptors and the scope of the impact
they could have, in a relatively short timeframe, on the ?nancial services industry.
Apple
In the past year, Apple became the largest company in the world as measured by
market capitalization. The company also has more than 400 million iTunes accounts,
all attached to valid credit card holders.
6
That’s a sizable and loyal client base from
which to build a potential banking entity. Imagine if Apple were to enter the ?nancial
services arena with its Net Promoter Score (used to gauge client loyalty) of 70,
compared with the major ?nancial services brands, which have either low or negative
Net Promoter Scores. In addition, research from advertising ?rm Saatchi and Saatchi
reveals that companies like Apple, that create love and respect with their customers,
are able to generate much higher client loyalty than other companies.
What would motivate Google to enter the banking industry? As bank robber
Willie Sutton once famously stated, ‘Because that’s where the money is.’ Banking
wouldn’t be the ?rst, nor last, industry that Google disrupted. The company has
already caused signi?cant challenges for the telecom, GPS, news media and
advertising industries to name a few. Not only would a ?nancial services offering
lead to increased usage of the Google family of products (e.g. Chrome, gmail, etc.)
but it would help diversify the company’s revenue streams and arguable lead to
bene?ts for its customers, including ease of use, cost savings and an improved
online banking experience.
Potential
industry disruptors
6
http://www.forbes.com/sites/schifrin/2013/02/07/preferred-apple-idea-ignore-einhorn-and-buy-netflix/
14 Industry Insights
© 2013 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
With more than a billion registered users who already use the site as their ‘virtual ID’,
Facebook has access to more personal data and information on users’ behavior than
any other company on the planet. And in 2011, 15 percent of the company’s revenue
was generated by processing payments (primarily by users making purchases within
social games).
7
Having already succeeded in the dif?cult task of convincing nearly a
billion people to use their site as a virtual ID online, the road to becoming a virtual wallet
would be a breeze in comparison. Just the thought of Facebook entering the ?nancial
services industry would have to be enough to make even the most even-keeled
banking executive sleep with one eye open.
In addition to these potential ?nancial services disruptors that already exist as going
concerns in other industries (Apple, Google and Facebook), there is also another
crop of bold, new companies on the horizon, preparing to fundamentally challenge
the status quo. While each is approaching the industry from a slightly different
angle and business model, they are all based on one or more of the following key
emerging trends: Namely, that data is the new gold, the increasingly important role
of trust in business, the area of social media research and the move toward impact
investing. Here are just a few of the emerging entrants with the potential to disrupt
segments of the ?nancial services industry:
Wealthfront
Wealthfront is an SEC-registered online ?nancial advisor catering to the young and
tech- savvy Silicon Valley community. The company, which only offers investments
in ETFs and index funds is already thought to have millions of customers using
its services. The company has adopted a ‘freemium’ model, whereby the ?rst
USD25,000 is managed free of charge and the next USD10,000 is managed free
if you introduce a friend to the service. The company only charges 25 basis points
on assets managed above this threshold. Using modern portfolio theory, users are
able to work out their model portfolio in 60 seconds. These unique and innovative
features seem to be popular with Wealthfront’s target market, many of whom
dislike ‘traditional’ banks and asset managers.
The company’s marketing positioning centers around ‘making it easy’ and uses
slogans such as ‘Join the revolution’, ‘The wave has begun’ and ‘Wall Street, take
notice’. While Wealthfront’s services are not yet available to the public, it’s only a
matter of time before that happens.
7
http://gigaom.com/2012/05/17/are-facebook-credits-the-key-to-the-social-networks-future/
15 Industry Insights
© 2013 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
Dataminr
This real-time social media analytics company picks up more than 340 million
tweets each day, which it then uses to predict events on behalf of clients in the
?nancial and government sectors. The company represents an entirely new
category of social media analysis. Their analytics engine has the potential to
transform social media streams into actionable signals for ?nancial services
and government clients, providing what amounts to one of the earliest-warning
systems on the market. How effective are the company’s algorithms? Dataminr
reported the death of Osama bin Laden a full 25 minutes before President Obama’s
announcement that the terrorist leader had been killed. Clearly, this represents a
powerful new breed of social media analysis tool that has signi?cant potential to
disrupt aspects of the ?nancial services industry.
SNTMNT
Along the same lines as Dataminr, SNTMNT describes itself as the ?rst Application
Program Interface (API) in the world that gives predictions based on Twitter sentimen
for all S&P 500 stocks. The company says its algorithm provides an extra indicator on
top of fundamentals and technical analysis.
SNTMNT’s ‘machine learning’ algorithms generate an indicator capable of predicting
share price movements between one and seven days into the future with an accurac
rate of 56 percent. The company employs a two-step process as part of its offering.
The ?rst is natural language processing that is sourced from Twitter, Facebook, blogs
and news sites to identify what it calls ‘mood states’. Then, they employ machine
learning and predictive analysis to make their predictions.
SNTMNT’s products include something called ‘Trading Indicator’ which provides
hourly/daily predictions of S&P 500 stocks with an accuracy of 60 percent based
on Twitter and another called ‘Financial Sentiment’ that uses a special algorithm
that deals with ?nancial jargon and which has a rate of accuracy of 84.3 percent.
t
y
16 Industry Insights
© 2013 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
17 Industry Insights
© 2013 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
18 Industry Insights
© 2013 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
e
s
Conclusion
19 Industry Insights 19
© 2013 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
The global investment management industry has entered a period of unprecedented
change and turmoil. As the industry continues to work to put the global ?nancial crisis
in its rearview mirror, it ?nds itself forced to contend with a host of challenges and
threats from an array of external forces.
As the CEOs with whom we spoke indicated, there are a number of key issues that will
require careful attention from the investment management industry in the days ahead:
• First and foremost is the continued instability on the geopolitical scene. Whether
related to the changes in the energy sector, the political scene in the Middle
East, developments in the eurozone or the continuing rise of China, these
developments will have massive implications for the industry.
• The continuing wave of regulatory change will also continue to serve as a driver
of industry transformation, including potential changes in business models,
implications related to Big Data, possible divestitures and more.
• The continued pressure on margins in the investment management industry will
likely lead to signi?cant changes to industry distribution models, with some of th
CEOs we spoke with predicting as much as 30 percent of the people/companies
in the asset industry today will disappear in the next 10 years.
• In the `post-Madoff’ era, investment managers will also be pressured to reasses
their approaches to operational due diligence, independent asset valuations and
operational transparency. At the same time, there will be increased importance
placed on the transparency of accounting practices as costs continue to rise
more quickly than revenues.
• And fnally, there’s the clear and present threat posed by technology companies
such as Google, Facebook and a legion of nascent start-ups looking to capitalize
on technology to disrupt the face of the ?nancial services industry.
We will continue to monitor these issues and developments in the coming
months, as well as the industry’s responses to these changes, threats and
opportunities-responses that will undoubtedly play a key role in determining
the fate of the investment management industry for years to come.
Contacts
UK
Tom Brown
Global Head of Investment Management
KPMG in the UK
T: +44 20 76942011
E: [email protected]
ASPAC
Martin Blake
Partner
KPMG in Australia
T: +61 2 9335 8316
E: [email protected]
Jacinta Munro
Partner
KPMG in Australia
T: +61 3 9288 5877
E: [email protected]
US
James Suglia
Partner
KPMG in the US
T: +1 617 988 5607
E: [email protected]
kpmg.com/socialmedia
The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although
e endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that
t will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination
f the particular situation.
2013 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated
ith KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International
r any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights
eserved.
he KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International.
esigned by Evalueserve.
ublication name: Industry Insights
ublication number: 121295
ublication date: March 2013
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