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Examining Impact of COVID -19 on Wealth and Asset Management Firms
Ashok Bhat Practice Lead, Capital Management Services, Financial Services, HCL | April 17, 2020
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COVID -19 has seen a worldwide social disruption and business impact. This blog aims to examine its impact on Wealth and Asset Management Industry. I would like to highlight my perspective of the analysis in three aspects:

Examining the impact of COVID-19 on wealth and asset management firms. #wealthmanagement #assetmanagement #COVID19 @hclfs

  1. Current challenges faced by Asset and Wealth Management firms due to COVID -19
  2. Post COVID – 19 impact on Asset and Wealth Management firms
  3. Post COVID -19 opportunities for IT service providers with Asset and Wealth Management firms

By large the industry expects the COVID -19 lockdown to end in quarter. Let me discuss the above-mentioned aspects in detail.

  1. Current challenges faced by Asset and Wealth Management firms due to COVID -19

    In this period, the primary focus of the Wealth and Asset Management firms now is on cash preservation for the next three mo­nths, and protecting costs structures for portfolio firms.

    • Market volatility and capital depletion has created issues with Fund NAV determination. From investor’s point of view there is a need for proactive communication to investor on the fund performance divergence.
    • Reduced price discovery, low liquidity and increased valuation risk are forcing firms to reassess their valuation process, policies and controls.
    • The SEC, FINRA, IRS and other reporting regulatory authorities are continuously providing new guidance and relief which is likely to bring in regulatory changes that could affect planning for people, reporting, third-party risk and other contingencies.
    • Investor needing credit and liquidity to meet their expenses are likely to push significant portfolio liquidation and redemptions. This could result in tax ramifications and they may encounter illiquid markets and/or distressed values.
    • Large areas of fixed income markets, such as corporate debt are showing growing signs of stress. Significant liquidity in passive products is largely untested.
    • The need to segregate and assess market impact on market linked and not market impacted guaranteed products.
    • In this situation since it’s a global phenomenon, even the backup locations are inaccessible, and social distancing now require employees and vendors adopt remote working for long periods of time and this can stress the technology and security infrastructure or show weak spots.
    • Third-party service providers that drive key processes could run into issues. For example – Need for change best execution formulae due to high market volatility or lack of market liquidity, impairment of counterparty trade settlement etc.
    • Besides maintaining social distancing, firms may need to make special disclosures on the effects of COVID-19 on their business in their current financial statements regulatory filing. These could include risk factors, impairment, debt, liquidity, and management discussion and analysis (MD&A).

  2. Post COVID – 19 impact on Asset and Wealth Management firms

    The market is very hopeful that the governments will gain victory over COVID-19 within a quarter. As the COVID -19 sunsets, firms are likely to:

    • Take measures to improve and rebuild customer confidence in their investment portfolios and retirement benefits would have substantially depleted– possible restructuring of fees and charges as many of them would be credit strapped.
    • It could elevate the need to use data and analytics to fine-tune their customer, product and pricing strategy to meet customer expectations.
    • Macroeconomic and industry conditions may lead to triggering events and will then lead to changes and revision of forecasts, models and assumptions. With AUM likely to be down by 20%-30% due to COVID 19 impact, we may witness a drive for massive cost cuts.
    • Since the COVID-19 period has forced branch lockdowns leaving investors no option but to use online and digital services, the firms could see possible drive and upsurge in demand for digital channels and therefore the need to upscale and upgrade them.
    • COVID-19 could possibly trigger regulation changes on fees, commissions, advice, risk assessment, margin exposures, investment strategies, portfolio valuations etc.
    • If the COVID -19 period stretches longer it could create workforce reduction. There could also be probable salary restructuring from commission based to increased fixed salary component or full time employment along with changes in benefits.   
    • Firms may reprioritize capital allocation plans and may look for possible mergers and acquisitions for business sustenance and survival.
    • There could be thrust in the industry for retirement planning with investment protection, digital estate planning.
    • The firms are likely to expand the scope of operational resiliency and building contingency plans beyond preventing threats to being prepared and put strategies in place to operate during periods of massive social disruption.
    • Social distancing is likely to continue and a need to evolve into new ways of structuring workspaces and new modes of working like remote working.
    • The market could see large scale sale of portfolio for tax harvesting and large number of portfolio gifting to take advantage tax exemptions due to low value of portfolio value.

  3. Post COVID -19 opportunities for IT service providers with Asset and Wealth Management firms

    Post COVID -19 could see some opportunities for IT vendors:

    • As the COVID -19 settles from the outflows and valuations, asset and wealth management firms might find it financially attractive to outsource additional non-core functions further — beyond tax and into compliance, legal and some middle-office activities. 
    • Firms are likely to look for cost take out advantage of outsourcing Technology-Operations- Infrastructure as a bundled together as a service.
    • There could be possible IT and digital services supplier consolidation – Preference may be given to key suppliers who can offer can range of services, geographical spread and most importantly, those who were able to supported & align to business needs during the lockdown period.
    • Investment & Wealth Management firms may see need to invest in cyber security digital services with new ways of remote working of employees and outsourcing partners to address associated cyber and security threats.
    • There is likely to be investments in client life cycle management – enhancing self-service options, building digital onboarding and client services.
    • We may see possible investments in integrated portal/advisor desktop for digitization for Advisors and product distribution channels.
    • With streamlined staff and vendors there could be a possibility for increased need for automation of routine as well as complex jobs with use of newer user configurable automation tools.
    • Regulatory changes could affect planning for people third-party risk, reporting requirements and contingencies.
    • IT vendors may see many possible IT integration opportunities in consolidation phase with possible acquisition -mergers of Asset and Wealth Management business.
    • Large scale sale and gift of portfolio for tax harvesting and advantages can create large volumes of tax forms and potential IT and operations work.

The long term investment perspective is that the fears of coronavirus will eventually stabilize which is quite different from short-term market and economic reactions. We need to keep a close watch on how soon the COVID-19 lockdown ends. Extension of the lockdown beyond 3 months can change the perspective altogether with possible fears on setting a long term depression period.

References:

  1. https://www.pwc.com/us/en/library/covid-19/coronavirus-asset-and-wealth-management.html
  2. https://www.capco.com/Intelligence/Capco-Intelligence/Impact-of-Coronavirus-COVID19-on-Wealth-and-Asset-Management
  3. https://www.mckinsey.com/industries/financial-services/our-insights/wealth-management-in-asia-navigating-the-impact-of-coronavirus
  4. https://www2.deloitte.com/us/en/insights/economy/covid-19/investment-management-impact-of-covid-19.html
  5. https://www.mercer.com/our-thinking/wealth/impact-of-covid-19-on-alternative-assets.html