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  • Writer's pictureEvelyn Chen

Challenges to the Asset Management Industry

One external factor affecting the asset management industry over the next 3 years will be changing regulations. After a decade of global regulatory reforms defined by the financial crisis and misconduct issues, the regulatory environment is now changing profoundly. In 2019, the US Securities and Exchange Commission (SEC) adopted new regulations governing the conduct of broker-dealers and their associated persons. This regulation imposes principles-based standards on broker-dealers and requires a broker-dealer to act in its retail customer’s best interest when making such recommendations. To meet this “best interest” standard, broker-dealers must, among other things, satisfy a number of requirements and specific obligations related to disclosure, standard of care, conflicts of interest, and compliance. Firms should prepare for changes driven both by Reg BI. When evaluating gaps in the current state, it is important to take a broad view that considers the potential impacts to people, processes, technology, and strategy. Firms should evaluate their business practices, particularly with regard to discretionary trading and account monitoring, to ensure the practices align with the SEC’s expectations for what constitutes an advisory activity. Reg BI requires firms to identify and manage conflicts of interest related to their business practices.


To that end, firms should consider developing formalized procedures for identifying, documenting, disclosing, and managing conflicts of interest. Under Reg BI, certain types of sales contests and sales quotas are explicitly prohibited, as they create conflicts for broker-dealers and their associated persons to act in the best interest of their retail customers. As such, firms should evaluate their sales practice and compensation programs to ensure they meet standard-of-care obligations. As required by various obligations, firms should holistically evaluate the life cycle needs of their customers and their representatives to determine the potential impacts and associated costs that may result from complying with the new requirements. Firms should also evaluate their overall readiness efforts and the collective impact of potentially overlapping, duplicative, or divergent requirements. These evaluations can help to ensure a firm is efficiently and effectively meeting all of its regulatory requirements. As with any major change initiative, successful implementation and workforce adoption will require an effective strategy for communication, training, and change management. Firms should carefully consider the impacts on employee retention and overall company engagement.


Another external factor affecting the asset management industry will be Brexit. The key impact of any decision to leave will be uncertainty. There is uncertainty on every possible front. For a start, the mode of exit is unknown. As well known, there are four countries with different engagements with the EU — Norway, Iceland, Turkey and Switzerland — which provide some clues on potential exit paths. However, there are other exit paths that are in the fray, including a most-favoured nation approach or negotiating separate free-trade agreements. It is noteworthy that many Eurosceptics envisage a very different relationship with the EU altogether which does not fit comfortably into any of the above paths. This is undoubtedly a factor that increases uncertainty since it involves starting from scratch in negotiating trade and other access privileges. An equally big issue is whether there are threats to the UK’s domination in European banking and whether attempts are made to bring within the EU rather than be based ‘offshore’ in London. In a worse case, where access rights are not as good (‘passporting’) and where some activity moves to the Eurozone, UK employment and growth prospects are at stake given the size of the financial sector. The UK’s natural competitive advantages will not go away, but there are risks to this UK success story. Uncertainty created means markets will turn more volatile in an attempt to ‘price’ the risk, negatively affecting equities and other asset classes. In an environment characterised by high asset prices and low growth potential, asset management may struggle to perform well.


In the long-term, asset management firms must consider how technology affects them. One big change affecting asset management will be cybersecurity, especially now that there is increased scrutiny from regulators on issues such as cyber resilience. Cyber resiliency is the ability to operate business processes in normal and difficult scenarios without adverse outcomes. Resiliency strengthens a firm’s ability to detect and respond to process or technology failures. It also bolsters a firm’s ability to quickly return to business as usual if an attack occurs, while reducing financial loss, customer harm and reputational damage. Several years ago, the United States Securities and Exchange Commission (SEC) alerted the financial community about an increasing spate of cyberattacks on the sector. It now requires firms to adopt written policies to protect clients’ private information, anticipate potential cybersecurity events, and have clear procedures in place instead of reacting to a breach after it occurs. Guidance documents recommend additional measures that funds and advisors may wish to consider when developing cybersecurity resiliency. When developing their cybersecurity initiatives, firms need to weigh the potential threats against their appetite for risk by gathering information, questioning and simulating the types of attacks they’re most likely to face.

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