The dual impact of the persistently weak economic environment and new regulations is keeping investment management companies on a slow growth track, according to industry executives surveyed by KPMG LLP, the audit, tax, and advisory firm.
While the survey of 100 US investment management executives conducted in May – June 2011 revealed at the time that their biggest concern was around regulatory and legislative pressures, their views about an overall economic recovery were equally dour.
The burden of new regulations was a focal point, with 61 per cent of the asset managers indicating those pressures pose the most significant barrier to their company’s growth. In addition, 70 per cent of the executives said they are concerned with the overall regulatory climate in the US.
Investment management executives were not optimistic that the economy will experience a recovery anytime soon. While more than half of the executives said they expect a moderate improvement next year, in a separate question, 57 per cent indicated they don’t expect a complete recovery until the end of 2013 or even later.
"The executives told us that the combined impact of the uncertain regulatory and constricted economic environment is significantly inhibiting growth as they try to determine what moves they will need to make to maintain their competitive edge," says Dave Seymour, head of KPMG’s Investment Management practice. "The good news is that they are putting cash into play to improve their infrastructure and to prepare for future business needs."
Dealing with regulatory and internal control needs is expected to represent the second largest increase in spending over the next year, according to the asset managers, coming in behind information technology.
Asked to identify what actions (multiple) they would need to take to comply with regulatory changes, 68 per cent identified improving existing internal policies and procedures, 63 per cent pointed to strengthening information technology platforms and enabling applications, 59 per cent said strengthening risk management processes, 46 per cent identified developing a strong internal training program for staff, and 40 per cent chose enhancing financial reporting procedures.
In the KPMG survey, 75 per cent of the asset managers said their companies have "significant" cash on their balance sheets and 24 per cent already are investing the cash, and an additional 27 per cent expect to be investing by the first quarter of 2012. The top three high-priority investment areas they expect the cash will be applied to include: technology (25 per cent), strategic acquisitions (21 per cent) and expansion into new markets (18 per cent).
When asked to choose areas in which they are looking to increase spending over the next year, 57 per cent said information technology, 29 per cent identified regulatory and control environment, and 26 per cent said new products and services.
"Information technology is among the most important areas for these executives right now because system platform upgrades will be required for many firms to maintain their competitive advantages in addition to meeting new regulatory requirements, such as cost basis reporting, FATCA (Foreign Account Tax Compliance Act), and certain components of Dodd Frank," says Seymour.
In the KPMG survey, 61 per cent of the investment management executives said they are expecting to increase headcount over the next year, with 29 per cent expecting an increase of between 1-3 per cent, 20 per cent expecting a 4-6 per cent increase and 10 per cent saying the increase will be in the range of 7-10 per cent. Only 2 per cent expect an increase of more than 10 per cent. In addition, 29 per cent expect headcount will remain about the same and 11 per cent expects a decrease in headcount.
More than half (54 per cent) of the executives surveyed believe that transparency has improved between investment managers and investors since the financial crisis, while 38 per cent have seen no real change. Nine per cent said it is too early to tell.
In addition, nearly half of those surveyed (49 per cent) said they believe that relationships between investment managers and investors have improved, while 37 per cent said they have seen no real change, and 15 per cent said it is too early to tell.
"The current market turmoil reminds us again that rebuilding trust with investors is a critical step to seeing a full recovery in the industry," says Seymour.
