Asset & Wealth Management RevolutionPressure on profitabilityOctober 2018pwc/assetmanagement2 | Asset & Wealth Management Revolution: Pressure on profitabilitnullnullecutive nullmmarnull 31. nullnnullcape 52. nullur nullunnulltions nullr a nullturenullt operating monulll 13nullnclusion 23Appennullnull 24nullntacts 25ContentsAsset & Wealth Management Revolution: Pressure on profitabilitnull | nullAgainst this bacnullropnullasset annullnullalth managers are enulleriencing significant pressure on profitabilitnullin certain regions onullthe nullrlnull nullth other regions enullectenullto nullel the impact in the nullars aheanull Managers are also nullaling nullth unparallelenullchallenges annullnullveloping opportunities presentenullbnullintense nulle pressurenullpronullct innovationnullthe continuing realignment onullenullsting nullstribution channelsnullannullthe nullvelopment onullnenullonesnullnullis paper outlines our prenullctions nullr management annullpernullrmance nulles nullom nonulluntil 202nullannullinullntifies honullmanagers shoulnullreactnullnullnsistentlnullhighnullernullrming marnullts annullmanagersnullnenullnullalth nullom emerging marnulltsnullannullpositive net nullnull have nulliven the increase in AuMnullnullich hasnullin turnnullhelpenullnullel revenue gronullhnullnullnullvernullfirms havennullt been able to consistentlnullboost profitsnullAlthough AuM is set to gronullthrough 202null pressure on profitabilitnullnullll intensinullnulltoonullManagers nullo havennullt nullt manull nullastic changes to their operating monullls nullll neenullto null so in ornullr to nullnnullor even to survivenullAccornullng to the analnullis null pernullrmenullon the annual reports onullnull asset managers covering more than nullnull0tn in AuMnullthe overall ratio onullrevenues to AuM nullclinenullbnullnull81nullbetnullen 2012 annull201null At the same timenullthe average ratio onullcosts to AuM nullcreasenullbnull1nullnullnull largelnullas volumenullpernullnit costs nullcreasenullbecause onullgronullng AuMnullnullis has resultenullin an increase onull1nullnullnullin average operating marginsnullnullnullvernullitnulls important to note that not all managers have enulleriencenullthis rate onullincreasenullnulle gains have been limitenullto certain large managers annulla broanullr number onullniche managersnullnullis is proonullthat in the coming nullarsnullonlnullthose that trulnullembrace a transnullrmation agennull annullcreate value nullr investors nullll be successnulllnullWe estimate that nulles are linulllnullto continue nullclining through 202null nullis trennullnullll be innullencenullbnullthe continuenullrise onullpassives annullnenullr lonullnulle pronullcts linull smart betanullincreasenullinvestor annullregulatornullscrutinnullonullthe value nullr monenullthat managers provinullnullannullnenullnulle monullls in the active space that nullcus on pernullrmancenullnull line nullth the trennull null inullntifienullin our recent paper Asset & Wealth Management Revolution: Embracing Exponential Change (“Embracing Exponential Change”)nullnull outline here nullur nullunnulltions on nullich managers can builnulla target operating monulll to protect or even improve profitabilitnull1. Articulating value for money: nullvestors are loonullng to the AWM innullstrnullto provinull value nullr their monenullnullnulle constant intronullction onullnenullregulations aminullcompetitive nullvelopments in the marnullt nullll push managers to be even more enullcient annullto lonullr pricingnullOutcomenullasenullnulle structures have also begun to transnullrm the active lannullcapenullPassive planullrs have begun to nullel the sustainenullpressure onulllonullmargin pronullcts annullmove into nenullareasnullsuch as smart betanullMannullare also enullannullng into alternativesnullprovinullng the barbell investment enullosures a lot onullinvestors nonullseenull nulles nullr alternatives have been more resilientnullbut marnullt pressure is leanullng to more innovationnullas seen nullth outcomenullasenullnullesnullManagers neenullto nullcus on articulating their value propositionnull2. Strategic positioning wnulltnulls tnull plannull Regulatornullannullcompliance burnullns are nulliving up costs at the same time that investor annullregulatornullscrutinnullis nullrcing nulles lonullrnullManagers neenullto ensure that investment pronullcts annullrelatenullservices are continuouslnullupnulltenullto align nullth investorsnullnullnts annullneenullnullnullich nullrces firms to renullcus on strategic positioningnullManagers must nullcinull nullether thenullll operate as scale or niche planullrsnullnullther choice means changing certain things about the business nullbnullnulltermining the pronullct rangenulltarget marnullts annullnullstribution channels nullannullstriving nullr operational enullellencenullMannullfirms nullll struggle in the coming lonullnulle environmentnullannullthose nullthout a clear strategic positioning plan nullll be more linulllnullto nullilnullExecutive Summarynulle asset annullwealtnullmanagement nullnullnullinnullstrynulls revolution is well unnullr way. Assets unnullr management nullunull are increasingnullas are costs annullrevenues. nullt even tnullugnullcosts nullve gone upnulltnully nullve not risen as nullicnully as revenues for multiple reasonsnullinclunullng economies of scale annulltnull slow anullption of new tecnullologies. nullwevernullas investor annullregulator pressures builnullannullcompanies invest in infrastructure annulltalentnullcosts are linullly to begin creeping up. null | Asset & Wealth Management Revolution: Pressure on profitabilitnull3. nullransform tnullougnulltecnullology or be eliminatenull Anullances such as artificial intelligencenullmachine learningnullnullta harvesting annullprocessingnullannullrobotic process automation have begun to nullive the nullantum leap null sponull onullin Embracing Exponential Changenullnullere is potential nullr these technologies to create enullciencies annullcut costsnullparticularlnullin the nullont onullce annullin sales annullservicenullManagers that have nullt to nulluble nullnull on technologies annullanalnullics that enhance the investment process annullthe nullstribution nullnction nullll nullll behinnull 4. Anull fignull tnull battle for talent: nullrms neenulltechnullsavvnulltalent in a broanullning arranullonullpositionsnullannullnullunger nullrnullrs increasinglnullseenullcompanies that renullct their valuesnullchallenge themnullannullonullnullr both nullrnullannulllinull opportunitiesnullnulle AWM innullstrnullnullll neenullto nullnnullmentallnullchange its culture to entice nenulltalent to nullin annullhelp upsnullll current talentnullAlsonullmanagers nullll neenullto replace siloenullnullrnullng groups nullth integratenull multisnullllenullteamsnullnullese changes nullll come nullth costs but also nullll pronullce value in the long runnullAnull revolution: four transforming trennullnull Embracing Exponential Changenullnull inullntifienullnullur trennull that are revolutionising the AWM innullstrnullnullWe believe managers must unnullrstannull analnulle annullact on these interlinnullnulltrennullnull1. nullyersnullmarnulltAs lonullcost pronullcts continue to gain marnullt share annulllarge planullrs nullep outnullstancing the manullritnullonullthe innullstrnullnullth innovative pronullctsnulltechnological capabilitnullannullgeographic reachnullfirms neenullto be creative annullnullsciplinenull nullenullcan nullvelop pronullcts that fill marnullt voinullnullas long as their other capabilities arenullat a minimumnullcompetitivenull2. nullgital tecnullologies: null or nullenulle AWM innullstrnullis a nullgital laggarnull nullrms shoulnulltap technolognullto create a single statenullnullthenullrt platnullrm to help them nullom nullont to bacnull nullmpanies nullth siloenullteamsnulllimitenullautomatenullanullice capabilities annullan insunullcient unnullrstannullng onullthe broanullning role onulltechnolognullnullll nullll behinnull 3. nullnnullng tnull futurenulle AWM innullstrnullcontinues to planulla vital role in filling financing gapsnullManagers are becoming more involvenullin various nenullnullannullin some instances more availablenullasset classesnullinclunullng peernullonulleer lennullngnulltranull finance annullinnullastructure financingnullAs a nullcline in nullfinenullbenefit plans nullives gronullh in nullfinenullcontribution plansnullthe pursuit onullalternative pronullcts is creating significant marnullt nullmannull4. nulltcomes matterActivesnullpassivesnullsmart beta annullalter natives are becoming builnullng blocnull nullr multinullssetnulloutcomenullriven strategiesnullnullrge firms are creating multinullsset strategiesnullnullile small annullminullinullnullfirms are acting as suppliers onullthe builnullng blocnullnullnulle multinullcetenullnature onullthis changing marnulltplace creates opportunities nullr firms onullall sinulls annullinvestment stnulles nullas long as the nullcus is on nulllivering consistentnullsuperior investment returnsnullAsset & Wealth Management Revolution: Pressure on profitabilitnull | null21nullnull33null15null14null11nullPrice competition enullsts in evernullmature innullstrnullnullannullothers have long manull use onulltactics linull earlnullbirnullnullscountsnullvolume nullscountsnulllonullltnullnullscounts annullrenullcenullpricing on certain pronullcts to nullcilitate crossnullelling onullothersnullnulle asset annullnullalth management nullWMnullinnullstrnullis beginning to catch upnullAs pricing concerns become a realitnullnulla renenullnullnullcus on investment pernullrmance nullll become the nullnullselling pointnullAt the same timenulltechnolognullin the nullrm onullautomatenullanullice annullclient service nullll become a necessitnullnullnull our vienullnullas this occursnullthe innullstrnullnullll unnullrgo significant consolinulltion in certain nullvelopenullmarnulltsnullnullth up to 20nullonullthe firms currentlnullin enullstence either being acnullirenullor eliminatenullAs nulltailenullin our recent paper Asset & Wealth Management Revolution: Embracing Exponential Change (“Embracing Exponential Change”)nullnull enullect AuMnullcurrent connulltions prevailingnullto increase to nullnullnullnulltn bnull202null nullt mounting nulle pressure nullee nullgure 1null a shrinnullng number onullnullstribution channels annulla nullcus on investment pernullrmance nullll continue to nullsrupt business monulllsnullnullallenges lie aheanull but there are also enullraornullnarnullopportunities nullr talentenull nullcusenullstrategic managers to thrivenullLandscapenulle amount of assets unnullr management nullunull nulls increasenullfaster tnulln revenuesnullannullmanagers nullve been feeling sustainenullpressure on tnullir fees. Passives are nullminating tnull price war witnullactivesnullbut active managers are strinullng bacnullby cnullrging less annullcreating new fee monullls.1nullgure 1: nullstribution analysis of management fees: active mutual funnullnull2null2 vs. 2nullnulln 2012 n 201nullnullurce: Pnull nullobal AWM Research nullntrenullbasenullon nullpper annullMorningstarMore than 1null1null1null1nullnullnull0null1nullnull0null1nullnullnull0null1nullnullnull0nullnullor less15null4null24null1null22null1nullnull 201null nullnullonullnullnnull nullre painullbnullinvestors belonullannullinclunullng the nullightenullaverage management nulle onull0nullnullnullMoreovernull18nullonullnullnnull nullre painull0nullnullor less onullmanagement nullesnullnullnagement feenullof investorsnull | Asset & Wealth Management Revolution: Pressure on profitabilitnullnullranulltional funnullfees to fall by close to 2nullnulle nullar 201nullset another recornullnullr the innullstrnullnullnullobal AuM reachenullnullnull8nulltnnullan increase onullnullnullnullnullom 2012 nullee nullgure 2null nullnullvernullthe overall revenue pool grenullbnullonlnullnullnullnullin the same perionull innullcating the nullcoupling onullAuM gronullh nullom revenue gronullhnullWe anticipate that revenues per AuM nullr tranulltional longnullnlnullmanagers are set to nullll nullom 0null0nullin 201nullto 0null1nullbnull202nullnullis nullcrease in revenue to AuM nullll result nullom nullclining mutual nullnnullnullesnullMutual nullnnullnullaverage assetnulleightenullglobal management nulles nullll nullcline bnullalmost 20nullbnull202null reaching 0nullnull globallnullnullee nullgure nullnullWe estimate that the nulle nullop nullll be steepest benullre 2021 but then nullll nulltten as investors annullmanagers align on interests annullvalue nullr monenullnullnullvestorsnullsearch nullr nullversification annullincreasenullnullelnull nullll sustain the popularitnullonullalternativesnullbut null estimate that average management nulles nullll also nullcline nullbetnullen 1null1nullannull1nullnullnullnullpennullng on the asset classnullaccornullng to the Pnull nullobal AWM Research nullntrenullWhile mannullmanagers have neenullnullto enhance their target operating monulll to nullep their current marginsnullnullcusing even more on costnullnullnullctive operationsnullinclunullng pronullcing alpha annullmanaging risnull not all have nullne sonullnullgure 2: nullolution of global Aunullin nullnulltrillionnullnulln Mutual nullnnull n Mannulltes n Alternatives nullte: nullmbers manullnot sum nulle to rounnullngnullnullurce: Pnull nullobal AWM Research nullntre analnullisnullpast nullta basenullon nullppernullnullvestment nullmpannullnullstitutenullnullropean nullnnullannullAsset Management Associationnullnulltnullnullnullnullnulle nullnnullResearch annullPrenulln200null 200null 2012 201null 2020e 202null145.4111.2null.1null.null5null41.5null11.3null4.3null5.5null3null31nullnull2.51nullnull1null125.42nullnull5.3null43null42null43.343.411.413.null5nullnull4null55null5null.null21.1Asset & Wealth Management Revolution: Pressure on profitabilitnull | nullActive mutual funnullfees in nullrope annullAsia to nullop mostActive planullrsnullmanagement nulles nullll nullcline bnull1nullnullnullreaching 0nullnull in 202null nullnullvernullthe pace nullll nullnullnullr vastlnullacross regionsnullnulle nullop nullll be slonullst in the null nullnullere nulles are alreanull at the lonullst levels globallnullnullannullnullstest in nullropenullnullth prices nullr active mutual nullnnull enullectenullto nullll bnull2null0nullbetnullen 201nullannull202null nullis steep nullcline is anticipatenullas the Marnullts in nullnancial nullstruments nullrective null nullinullnullnullnullbecomes more entrenchenull investor scrutinnullgronullnullannullthe shinull to lonullnulle pronullcts continuesnullWenulle alreanull seen the enullnullct onullregulation on prices in the nullnullnullere the intronullction onullthe Retail nullstribution Revienullnullnullnullcausenullactive management nulles to nullll bnull2null betnullen 2012 annull201nullnull is im