The asset management industry is set to contend with a trio of challenges in 2016, facing a volatile market, more regulation, and an increased threat of disruption, according to The Every Fund Survey 2016 by Multifonds.
The accompanying report noted that the survey was conducted in a less stable environment than it has been in previous years. A turbulent market means investors are unsettled, which has led to uncertainty for fund managers.
In order to focus more on their core competencies, fund managers are outsourcing operations, the report said. This can help them to improve efficiency and automation, and to better cope with the costs of regulatory compliance.
However, the report said: “While the industry is seeking to reduce costs and increase efficiency, regulation seems to be pulling industry participants in the opposite direction.”
Although not all respondents could comment on the costs of regulatory compliance, among those who could, the costs were found to be considerable – 64 percent said they have seen costs of compliance rise over the last 12 months.
Of their company’s whole IT spend, 22.1 percent said 20 to 50 percent was dedicated to regulatory compliance. A further 7.3 percent said that more than half of their IT budget goes on this, and 5.9 percent said their firm sets aside 5 percent or less for regulatory compliance.
Unsurprisingly, changes to technology systems was named as one of the biggest challenges of regulatory compliance, identified by 47.2 percent of respondents.
The volume of regulatory reporting was also noted as a challenge by 47.2 percent, while ambiguity in regulatory specifications and operational changes were rated as the third and fourth biggest challenges, highlighted by 42.4 percent and 40.8 percent, respectively.
When asked about the main impacts of regulation, 64 percent of respondents said it increases costs to investors, while 58.4 percent said it improves investor protection. A further 54.4 percent said it increases transparency.
However, although 30.4 percent said the environment can help the regulators themselves to identify systemic trends and events, 26.4 percent said regulation stifles innovation and 14.4 percent went so far to say that it “kills the industry”.
The majority of survey respondents said they anticipate the threat from a new disruptor within the next two years, with 42.4 percent saying the ‘partly agree’ and 12 percent saying they ‘strongly agree’. Only 3.2 percent ‘strongly disagreed’ and 16.8 percent said they didn't know.
The report said: “The key things that disruptors look for in an industry are inefficiencies and a high cost of manufacturing and distribution – these are all currently present across the asset management industry. As has been shown in other industries, game-changing new disruptors are the ones that find ways to exploit inefficiencies in mature markets.”
It went on: “The asset management industry is a highly regulated industry and it could be this regulation that is the deciding factor in how quickly and widely disruption occurs. However, if the industry doesn’t evolve, then someone else will eventually step in.”
Regulation emerged as the most significant barrier to entry for disruptors, named as a challenge for them by 74.4 percent of respondents. This was followed by back-office complexity, identified by 36.8 percent, and access to appropriate investment products, noted by 24 percent.
Keith Hale, executive vice president for client and business development at Multifonds, called the issues of volatility, regulation and disruption, a “looming triple whammy”.
He said: “The asset management industry needs to adapt quickly or risk disruption in a negative sense of the word.”
Hale added: “Arguably the tsunami of regulation is proving to be a double-edged sword for the industry. On the one hand, it is currently providing a buffer against disruptive brands entering the market. But on the other, it can drive up costs, which will be passed onto investors unless automation and technology is leveraged better.
“Collectively the funds industry should work together to look at ways to increase automation, improve efficiency and reduce costs.”
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