Asset management tax leader at KPMG dives deep into trends driving product development, recruitment, and compliance concerns
Even as the most violent shocks of the COVID-19 pandemic fade further into the rearview mirror, the world is still dealing with reverberations and the occasional aftershock. Look at any given industry – financial services, say – and examples of radical change aren’t hard to find: digital disruption, an awakening to ESG, and a greater-than-ever focus on risk are just some examples.
Those themes, and more, reflected prominently in a national survey of asset managers conducted by KPMG earlier this year. The latest in a yearly series of research reports on the industry, it consolidates and distils insights from responses collected over the course of months from 700 firms representing over $2.1 trillion in assets.
One of the headline findings shows that asset managers have ramped up their focus on creating new products and services. Nearly three quarters of respondents (73%) cited it as a priority – a 19-percentage point acceleration over the past year – which makes sense in the context of increased market volatility.
“During the extended period of low volatility, you saw a lot of inflows into passive-type investment strategies and ETFs,” said Joseph Micallef, National Financial Services Industry Tax Leader & National Asset Management Tax Leader at KPMG, in an interview with Wealth Professional. “But as volatility, inflation, and economic uncertainty enter the picture, asset managers are facing increased demand for products to support strategies that can help weather the storm.”
Beyond the need for ballast and stability, Micallef said, is investors’ search for greater yields than the current low-rate environment supports via traditional fixed income investments. Looking outside the markets, he cited the ripple effect from the opening of regulatory floodgates to liquid alternatives in 2018, as well as how alternative offerings with non-correlated return profiles are more resistant to fee pressure than other more traditional products might be.
Teasing apart the strands of demand for alternative products, the survey revealed that appetite was highest for private debt and credit, which Micallef said have been supported by companies looking outside traditional lending institutions like banks for their financing needs. That was followed by hedge funds, a catch-all category that includes convertible arbitrage, global macro, and other strategies that firms are seeing more opportunities to deploy amid the COVID-19 recovery.
“On the private equity side, there’s also been a huge demand for funds that have specialization within technology, biotech, and healthcare,” he said. “Some of these smaller companies may have had difficulties before, but are now getting or attracting financing to get to the next stage of their development cycle. And going public isn’t necessarily for everybody, so there’s a lot of dry powder looking for the next big thing, which may drive up valuations for these types of investment opportunities.”
With the need for new products and offerings on the rise, there’s a trend of increasing competition among asset management firms for skilled and specialized professionals to support their operations. From where he sits, Micallef has been hearing about strong competition for portfolio managers, investor relations professionals, researchers, and data scientists among firms looking to expand their capabilities to service demand from current and prospective clients.
Aside from recruitment, Micallef said firms are very concerned with retaining their existing talent, valuable not just for their expertise honed on the job but also the enterprise value they possess. With all that in mind, he said it’s important for firms to differentiate and have an attractive job offering mix that considers not just compensation, but also technology, hybrid work, and other factors.
“It would be really hard to pinpoint one thing specifically,” he said. “It’s important from a hiring perspective to understand what types of incentives drive people. They could be looking for flexibility, or they could be looking for a unique challenge. When it comes to attracting top talent, I don’t think it’s a one-size-fits-all type of problem.”
Probably the most striking change, however, involves regulatory compliance. In its survey, KPMG found a 71% increase in concern amid tightening regulation and increasing compliance requirements. The issue isn’t necessarily new: the continuous margin pressures managers have faced have in part come from regulatory burden, which industry regulators have sought to address through various forms of burden reduction.
But as Micallef noted, it’s not uncommon for Canada to introduce regulation following other jurisdictions around the world. As an example, he noted how Europe has gone live with their ESG-related regulatory disclosure requirements under the EU SFDR, which spurred regulators in the U.S. and Canada to start envisioning what that regulatory framework will look like applied in a domestic context.
“You can almost see the writing on the wall when you think about cases like that,” he said. “These trends are not usually isolated in terms of one jurisdiction tackling an issue others aren’t dealing with, so I’m not surprised that regulation and managing regulatory compliance is now a top concern for the industry as a whole.”
Canadian asset managers aren’t looking out at a cloudless horizon by any means. But on the whole, Micallef said there’s a very strong sense of optimism across the industry. Even amid the challenges of market uncertainty and the prospects of deeper and more expansive regulation, he sees an attitude geared towards growth and transformation.
“I think we're going to see some very interesting developments as the industry continues to navigate and pivot over the existing market and business conditions they're facing,” he said.
