Weak Economy, Regulations Hampering Growth, Finds KPMG Survey
The weak economic environment and new regulations have slowed down the pace of investment management companies, according to industry executives surveyed by KPMG LLP.
While the survey of 100 U.S. 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 gloomy.
“The burden of new regulations was a focal point,” KPMG said.
Of the asset managers surveyed, 61 percent said regulatory pressures pose the “most significant barrier” to their company’s growth. In addition, 70 percent of them said they are concerned with the overall regulatory climate in the U.S.
The KPMG survey was conducted in May to June 2011, which reflects the responses of 100 senior executives in the investment management industry.
Based on revenue in the most recent fiscal year, 34 percent of respondents work for institutions with annual revenues exceeding $10 billion, 31 percent with annual revenues in the $1 billion to $10 billion range, and 35 percent with revenues in the $100 million to $1 billion range. Sixty-three percent of the respondents work for publically held companies, while 37 percent represent privately held firms.
“Investment management executives were not optimistic that the economy will experience a recovery anytime soon,” KPMG noted.
While more than half of the executives said they expect a moderate improvement next year, in a separate question, 57 percent 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,” said 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,” he added.
On the other hand, the asset managers indicated that dealing with regulatory and internal control needs will represent the second largest increase in spending over the next year, next to information technology.
Asked to identify what actions (multiple) they would need to take to comply with regulatory changes, 68 percent pointed to improving existing internal policies and procedures, while 63 percent pointed to strengthening information technology platforms and enabling applications, 59 percent said strengthening risk management processes, 46 percent identified developing a strong internal training program for staff, and 40 percent chose enhancing financial reporting procedures.
IT investments, acquisitions, market expansion
About 75 percent of the asset managers said their companies have “significant” cash on their balance sheets and 24 percent already are investing the cash, and an additional 27 percent expect to be investing by the first quarter of 2012.
They expected the top three high-priority investment areas, where the cash will be applied, to include technology (25 percent), strategic acquisitions (21 percent) and expansion into new markets (18 percent).
When asked which areas they are looking to increase spending over the next year, 57 percent said information technology, 29 percent identified regulatory and control environment, while 26 percent 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,” said Seymour.
In the KPMG survey, 61 percent of the investment management executives expected their headcount to increase over the next year, with 29 percent expecting an increase of between 1-3 percent, 20 percent expecting a 4-6 percent increase and 10 percent saying the increase will be in the range of 7-10 percent.
Only 2 percent expected an increase of more than 10 percent. In addition, 29 percent expect their headcount to remain flat and 11 percent expected a fall in headcount.
‘Transparency and relationships between asset managers and investors improving’
Transparency has improved between investment managers and investors since the financial crisis, according to 54 percent of respondents, while 38 percent have seen no real change. On the other hand, 9 percent said it is too early to tell.
In addition,49 percent of those surveyed said they believe that relationships between investment managers and investors have improved, while 37 percent said they have seen no real change, and 15 percent 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,” said Seymour.