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To serve the investors of tomorrow, leading asset managers need to react quickly to the COVID-19 induced volatile market. In an industry normally held back by legacy, the time is now to act as swiftly as possible to implement changes to operating models, digital innovation, regulatory issues and the work environment.
Here in Luxembourg, the collective sense of urgency amongst asset managers, asset servicers, professionals, fund associations, regulators and legislators has worked wonders in providing clarity and transparency in finding solutions at a time of need. We saw that such a joint effort has worked very well. This in turn contributed to more stability and business certainty despite what was going on around us.
The COVID-19 crisis has inspired change in many long-standing pillars of the Luxembourg asset management industry. At present, we are witnessing digital innovation initiatives taking center stage through the Association of the Luxembourg Fund Industry’s 2025 Ambition Paper. Changes to intercountry agreements for cross-border workers are also being discussed, which will possibly bring about a permanent increase in the number of days that the tax authorities allow French, Belgian and German residents to work from home. Last but not least, a renewed focus on ESG means an acceleration in mainstream adoption seems likely in the coming months. Positive change is on the horizon, and the industry is buzzing with innovation.
1. Redefining business and operating models
What it means
COVID-19 has crystallized the need for asset managers to transform business and operating models to become more resilient, agile and flexible in a challenging environment.
Potential impact on asset managers
- Digital or bust – a greater sense of urgency to digitize operations and client interactions
- Resilience of the supply chain and third party due diligence may be key
- Partnerships e.g. with FinTechs will likely be important for innovation and new routes to market
What to think about:
- Strategic evaluation – where will you play in a contracting and shifting market?
- Digital transformation – how can you expedite digital solutions and emerging technology?
- Partnerships – have you identified partners, alliances and vendors to co-develop and distribute products and services to advisors and retail investors?
2. Accelerating digital, transforming through technology
What it means
The industry has been slower to adopt new technologies than many other sectors. COVID-19 has been an awakening
Potential impact on asset managers
- Increasing numbers of fund managers will work with technology providers and platforms who offer scalable processes and tools
- Internal capabilities will be rapidly built out – with cloud the foundation
- Automation and artificial intelligence will proliferate, to enhance digital channels and improve the investor experience
What to think about:
- Intelligent automation & emerging technologies – can you accelerate automation at scale and increase the use of innovative technologies?
- Digital interactions – how will you develop new digital capabilities for investment advisors and relationship managers?
- Cyber security – in a digital world, cyber threats could rise. Do you have sufficiently robust protocols and protections for the new environment your business is moving into?
3. An evolving risk & regulatory landscape
What it means
Regulators want to encourage recovery and growth, but ensure that happens in a controlled way that protects financial stability and takes greater care of customers.
Potential impact on asset managers
- Operational resilience will move to the top of the agenda – business continuity planning, cyber security, AML
- Regulators will expect technology to make investing simpler and cheaper for investors – but be safe and secure too
- Firms will be expected to put clients’ interests before their own, with a strong focus on stewardship
What to think about:
- Re-evaluate processes and controls to ensure operational resilience
- Enhance your stress testing scenarios of systemic risks such as liquidity management and leverage
- Think about ‘what you should do’, not ‘whether you can do it’: individual accountability, culture/ethics, governance
4. Redesigning the future of work
What it means
Operating in a more decentralized environment has focused minds on the need for change as a new future of work emerges.
Potential impact on asset managers
- Asset managers will rethink how, when and where they operate. Attitudes to the office could be altered for years to come
- Office space will be re-evaluated; working from home some of the week will be a permanent feature for most
- Many other factors come into play. Corporate purpose, positive impact on communities, compelling value propositions, connected communities, seamless interfaces – all will be critical
What to think about:
- Are you building a brand that has purpose beyond profit?
- Are you delivering a digitally augmented experience for staff?
- Are your people development, performance management and reward frameworks fit for the future model of working?
5. Embedding ESG across the investment approach
What it means
The shift towards sustainable finance has markedly accelerated. In the wake of COVID-19, this trend will be even more pronounced.
Potential impact on asset managers
- In the next 3 years, it is expected that the AUM could be ‘sustainable’, up from 25% now
- ESG becomes a strategic issue that must be embraced across every aspect of business models, operations and communications
- It’s not only a question of climate and carbon. An interconnected world means societal issues, other environmental factors, business ethics, equality, governance, values – all are critical
What to think about:
- Is your business demonstrating a strategic approach on ESG aspects and principles?
- Are your ESG-related disclosures and communications supported by credible data and evidence?
- Think about involving independent advisors in designing your approach and providing assurance
6. Look East: navigating business opportunities in China
What it means
China has long been recognized as the biggest single opportunity for new business and growth in the asset management industry – COVID-19 hasn’t changed that.
Potential impact on asset managers
Beyond a world dominated by COVID-19-related restrictions on economic activity, we anticipate opportunities for fund managers to either expand their existing footprint or enter China for the first time.
- Recent regulatory developments indicate a positive direction of travel for doing business in the future in China. These include:
- the relaxation of foreign ownership restrictions - such as the scrapping of foreign ownership caps on retail fund management companies this April.
- the expansion of offshore investment opportunities - including plans to launch a Greater Bay Area (GBA) Wealth Management Scheme, which will enhance
- For companies with an existing presence in mainland China, evolving their current operating models into a coherent target state will be a critical objective, while those who have not yet established a presence may need to carefully consider their options for market entry
- Hong Kong (SAR) has long been seen as a gateway into the rest of China. KPMG research conducted amongst HKIFA member institutions found a positive outlook for the future of Hong Kong’s fund management industry, underpinned by the city’s experienced talent pool, product diversity, open market, robust regulatory framework and proximity to mainland China
What to think about:
- Do you have a ‘China strategy’ with clearly defined goals and targets?
- What will your China operating model be?
Whatever the strategy and model may be, it is clear a considerable amount of investment is needed for entering the Chinese market, meeting local regulations and guidelines, setting up infrastructure, building up brand recognition, hiring the right talent and adapting to the local culture. But given the potential size of the reward, many (if not most) non-Chinese asset managers are thinking long and hard about what it will take to succeed in this growing, dynamic and volatile market.
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