Top Issues facing Asset Managers: Achieving operational excellence

Top issues facing asset managers

April 2012

www.pwc.com/us/assetmanagement

Contents

Top issues facing asset managers April 2012

01 Introduction

02 Governance

04 Navigating Risk Complexity

06 Navigating Regulatory Complexity

08 Delivering Cost-Effective Technology & Operations

10 FATCA and Global Information Reporting

12 Trust & Transparency

14 Maximizing Value from M&A

16 Pursuing Growth

18 Growing and Leveraging Human Capital

20 Conclusion

21 PwC Asset Management Contacts

Introduction

Dear clients, colleagues, and friends,

After the financial crisis of 2007-09, a recession and the volatile markets of 2011, the USand global economies have been undergoing a modest, if tentative, upturn, and the assetmanagement industry similarly has been recovering, experiencing improved valuations,increased assets under management and enhanced margins.

Even as it enjoys this mild resurgence, the industry continues to face challenging markets,the implementation of regulatory reform initiatives, competition for clients and talent andnew expectations from investors, regulators, industry partners and other stakeholders.

Under such circumstances, asset managers are attempting to generate improvedperformance results, rebuild profitability, manage risk, compete for talent and achieve theoperational excellence that will drive future growth.

This paper identifies nine key challenges that the asset management industry faces,describes at a high level how the relevant issues are evolving and outlines how somemanagers are responding to these conditions.

In spite of the challenges it faces, the asset management industry is positioned forperformance and future growth. However, success is not guaranteed nor will it beuniversal. The firms that succeed will be those that can take transformational steps toadapt to changes in the industry and take advantage of the opportunities opening up in theglobal marketplace. Those firms that can successfully adapt and compete will be thewinners in this larger arena.

PwC is committed to working with its clients and partners in the asset managementindustry to help them develop effective solutions for the business issues they encounter.We look forward to hearing your thoughts on these issues. Please feel free to contact any ofthe practice leaders listed in the back of this report or your local PwC representative withyour comments.

Barry BenjaminUS and Global Leader, Asset Management

April 2012 Top issues facing asset managers 1

Key considerations for asset managers

Since passage of the Sarbanes-Oxley Actof 2002, asset management companieshave seen an increased focus ongovernance and heightened fiduciaryexpectations for both executives anddirectors. Subsequent regulatoryinitiatives in the US and globally,including the Dodd-Frank FinancialReform and Consumer Protection Act of2010 (the Dodd-Frank Act), the BaselAccords and the Solvency II Directive,have helped to create what is effectively anew regulatory framework for the assetmanagement industry.

At the same time, the volatile markets ofthe past dozen years have also had animpact on asset management governance,with risk management programs,controls and conduct of companiessubject to increased scrutiny byshareholders, policymakers, regulators,investors and other stakeholders. There ispressure for enhanced transparency anddisclosure, increased executive anddirector accountability and a greatervoice for shareholders and otherstakeholders in decision-making.

In light of these new regulatory andstakeholder initiatives, the industry isrethinking its traditional organizationaland governance models, with greaterinvolvement and oversight by executivesand directors, especially board auditcommittees. In particular, many directorsare increasing their level of expertise,and are reconsidering the depth andbreadth of their oversight of a range of issues.

Alternative asset managers, too, are re-evaluating their governance models,including considering more formalcommittee structures, as the pressure fortransparency and disclosure is felt just askeenly as it is among managers oftraditional funds. Alternative assetmanagers have also been implementing arange of new controls in response toinvestor and regulatory expectations,which need to be coupled with stronggovernance oversight.

Oversight requirements are likely toincrease significantly during the next twoyears, as final rules generated by theDodd-Frank Act and other new laws are implemented.

The US Securities and ExchangeCommission (SEC), in particular, isfocused on how asset management firmsare assuring effective oversight of theiractivities. The SEC is especially looking athow fund boards are carrying out theirduties, as well as the extent to whichboards are partially or fully responsiblefor problems discovered within fundgroups, e.g., the role of boards inanalyzing fund expenses. SEC staffmembers are examining board meetingminutes to identify problems andevaluate whether boards have used goodjudgment in their oversight function.

Governance

2 Top issues facing asset managers April 2012

More than at any time in the past, asset management boards have significant oversight responsibilities and need helpexecuting their roles and responsibilities effectively.


Asset management directors mayconsider defining and periodicallyevaluating the appropriate governancecommittee structure, roles, decisionrights and supporting managementprocesses to drive effective decision-making, manage risk and enableimproved transparency. Management’sinformation and reporting practices alsocould be analyzed to help meet the needfor greater transparency and more timelydelivery of information.

Directors may need to undertake anactive dialogue with executives onemerging industry issues and challengesincluding, among others, regulatorycompliance, valuation and disclosure.Risk management is an ongoing concern,and requires a continuing effort toidentify and assess risk. Directors alsomight want to have greater insight of thecompliance program, to gain confidence

that it is reasonably designed andoperating effectively. In this regard,boards and executives could benefit froman independent assessment and analysisof the compliance program.

Directors will need to continue to closelymonitor compliance with existingregulations –and be mindful of new ones– affecting the industry and their funds.Given the increasing complexity ofregulatory requirements, asset managersmay wish to consider seeking directorswith specific types of relevant knowledgeand skills and create board sub-committees with expertise in such criticalfunctions as risk management,compliance, valuation and governance.Directors should be comfortable workingwith the details of such complex mattersas the use of derivatives, controls toprevent insider trading, valuation policiesand regulatory compliance.

Companies also may want to considercreating a risk management “road map”to identify potential threats, warningsigns and lines of defense early on, andpromote strong, respectful relationshipsamong directors, internal auditors, chiefcompliance officers and risk managementexecutives to better advanceunderstanding of issues such as trading strategies, valuation policies and compliance.

Communications between executives anddirectors could extend beyond quarterlymeetings and other regularly scheduledsessions. Given the rapid pace ofregulatory change, companies may wantto offer continuing education programs,especially given the important changes inregulations and corporate governance.

Looking ahead

How PwC can help• Assist managers in developing and

offering continuing educationprograms that can help directorsfurther understand their roles andacquire the technical and industryknowledge needed to discharge theirresponsibilities effectively.

• Aid boards and management inimproving their functioning byidentifying external benchmarkingdata and key performance indicators tohelp recognize opportunities forprocess improvement and cost savings.

• Define, and periodically evaluate, theappropriate governance committeestructure, roles, decision rights andsupporting management processes todrive effective decision-making,manage risk and enable transparency.

• Assess the existing risk managementprogram or perform an independentrisk analysis to compliment the viewprovided by management. Boards needconfidence that their firm and its fundshave no unintended or undiscoveredkey risks, and existing legacy riskmanagement programs may not beadequate to meet these expectations inan evolving environment.

• Periodically assess management’sinformation and reporting practices tomake them more responsive to theneed of the board, investors and otherstakeholders for more transparencyand timely delivery of information.

• Assist boards in their complianceoversight responsibilities by evaluatingthe fund/adviser’s complianceprogram, and providing feedback on itsdesign, operation, and effectiveness, aswell as conduct analyses of particularcompliance-related problems orconcerns that may arise.

The financial crisis and its aftermathhave caused deep reflection within theasset management industry on theeffectiveness of risk management in itscurrent form. Economic uncertainly andthe resulting correlation and convergenceof risk factors – such as credit, market,liquidity and valuation risks – duringperiods of heightened market volatilityand stress have underscored the need fora more proactive and adaptive approachto risk management.

In addition to economic risks, there aretax risks which asset managers arerecognizing need to be a part of their riskmanagement function. No longer is taxsimply an adjunct function to a firm’sday-to-day operations; instead, it isbecoming a fully integrated part of thefirm’s risk management function. This requires asset managers and theirtax departments to approach the taxfunction differently.

External forces also are driving change,with the bar being raised significantly interms of expectations around sound riskmanagement and governance practices,for both traditional and alternative assetmanagers. An increasingly complexregulatory climate has significantlyheightened demands for risk oversight,transparency and accountability.Investors also expect institutional-qualitygovernance, processes and controls from

their asset managers and are seekinggreater transparency and disclosuresaround the firm’s risk managementpractices than ever before.

Additionally, the SEC has beenconducting aggressive investigationsstemming from problems that emergedduring the financial crisis. This may haveimplications for firms’ risk managementprograms: possible weaknesses andfraudulent valuations of portfolioholdings; possible misrepresentationsconcerning the risk of specific productsand investment strategies; and complexstructured products.

In addition, recent high-profile caseshave involved operational errors,allegations of fraud, rogue trading,insider trading and improper use ofinformation or disclosure. Headline-making investigations and enforcementactions threaten severe reputationaldamage to firms that fail to manage theiroperations through rigorous risk andcontrol programs.

Each of these trends is likely to continuefor the foreseeable future, increasing thecomplexity and interconnectedness ofrisk. The confluence of these factors iscompelling asset managers to formalizeand improve their risk managementprocess with enhanced risk oversight,transparency and accountability.

The Internal Revenue Service and itscounterparts around the world also haveincreased their activities, performingaudits in the belief that all possible taxrevenue is not being collected. In order tobe prepared for these audits, which canbe intensive, firms need to preparedifferently than in the past. Well-organized files, documentation ofpositions taken and the assistance ofexperienced dispute resolution resourcesare part of the tax infrastructure neededfor this process.

As transparency around risk managementincreases, it also will be critical to aligndescriptions of the risk managementpolicies, procedures and disclosuresmade to investors, regulators and otherswith the firm’s risk management controlsin practice.

Beyond the requirements of a changingand more complex tax environment,transparency is also being demanded byboth investors and governments (e.g., viameasures such as FATCA). The requestsfor information, sometimes within shorttimeframes, place a toll on the taxfunction. Failure to obtain theinformation quickly and accurately canput a firm at tax risk, as well as shakeinvestor confidence in the firm’s riskmanagement processes. More and more,investor due diligence processes inquireinto a firm’s operations, tax function andtax positions taken.

Navigating Risk Complexity


The financial crisis and its aftermath have raised questions about the effectiveness of risk management. Economicuncertainty, the convergence of risk factors and new regulations add to the complexity of risk management.


Looking aheadEconomic uncertainty, volatile marketconditions, tax scrutiny and an evolvingregulatory environment are likely tocontinue for the foreseeable future, andasset managers – both traditional andalternative – are adapting and refiningtheir risk management strategies and controls.

Asset managers increasingly are lookingto re-tool their risk managementprograms to place greater emphasis onnewer, emerging risks or those that mightbe considered improbable in nature.Firms are placing more focus onmonitoring both the internal andexternal environment to spot developing

trends, understand theinterconnectedness with other risks andplan appropriate risk mitigationstrategies. In addition, managers arereassessing their tax functions, which arebeing asked to address new compliancerequirements, more complex processes,smaller tolerances for error andexpectations that they be a part of risk management.

Asset managers are likely to continuefocusing on strengthening the linkagesbetween risk, regulation and businessstrategy with increased focus on anenterprise-wide approach to riskmanagement. Expect a heightened focus

on operational risk, compliance risk,service provider risk, tax risks, fraud riskand liquidity risks while balancingregulatory demands for increasedtransparency and due diligence.

While approaches to risk managementand the formality of risk managementprograms continue to vary across theindustry, common practices areemerging, including identification of the types of risks that most assetmanagers are looking to mitigate andprocesses to identify, assess and report onenterprise risks.

How PwC can help

• Assess and benchmark riskmanagement function, organizationand framework.

• Assist with the design andimplementation of an enterprise-widerisk management framework andorganization for identification andmanagement of financial, business andoperational risks.

• Perform analyses to identify tax issues,prepare supporting documentation andreduce the risk of protracted audits or adjustments.

• Provide professional services inconnection with the development oftesting programs around key riskcontrols (e.g., use of models, content and quality of risk reportingand information).

• Assist with risk management policy development.

• Document tax policies, conductanalyses and perform training on avariety of tax issues (e.g., permanentestablishment) which may have beenset out at the beginning of a business oroperation but could create issues if notrevisited in light of new requirementsor evolving circumstances.

• Support asset managers in thedevelopment and assessment of risk methodologies for market, credit, operational, liquidity andfunding risks.

• Assist with the development andassessment of trading supervisionprograms and controls.

• Provide professional services inconnection with the development andimplementation of risk managementtechnology solutions.

• Conduct financial product andwithholding tax analyses on a periodicbasis to reduce the potential forunexpected tax situations.

• Help with the design and assessment ofvaluation-related processes includingindependent price verification, sourcesof valuation data and methodologiesand model controls.

• Assist with transaction due diligenceon target company portfolios and riskprocesses and controls.

• Assist with tax audit processes throughexperienced dispute resolution teams

• Conduct state nexus studies todetermine whether liabilities exist.


Asset managers face unprecedentedregulatory and compliance challenges.The Dodd-Frank Act imposes newobligations and new regulatoryframeworks, with additional rules still tobe issued. In addition to the Dodd-FrankAct, regulators are imposing other newrules that will have significant impact onthe asset management industry.

The new rules govern many, if not most,aspects of the asset management business– the advice provided, the way securitiesare traded, how funds are marketed, thedisclosures provided and personaltrading by employees.

New regulations require that advisers toprivate funds – hedge funds and privateequity funds – register with the SEC asinvestment advisers, submit newinformation on Form ADV and come intocompliance with the Investment AdvisersAct of 1940. This is a significantundertaking since it requires compliancewith new disclosure, recordkeeping,custody, compliance program andsupervisory requirements.

Private fund managers also are requiredto submit data on the new Form PF(Private Fund), intended to provide thegovernment with a measure of systemicrisk. Form PF will require changes inoperational, data and compliance policiesand procedures for many private fundmanagers. Most asset managers have

their initial Form PF compliance datesduring 2012. To meet this deadline, theyare assessing the extent to which theycurrently collect the needed data,determining whether their technologysystems are sufficiently robust to gatherall of the required data and testing theirability to collect and submit the data.

Many asset managers are affected byother new US regulations: requiringadvisers to commodity funds to registerwith the Commodity Futures TradingCommission (CFTC); imposing reportingrequirements on “large traders”;prohibiting banks from managing orsponsoring the Volcker Rule’s “coveredfunds”; creating new prohibitions onpolitical contributions (pay-to-play); andproviding bounties for “whistleblowers”to bring information about violations toregulators. New regulations for moneymarket funds are expected to gaintraction. Outside the US, many assetmanagers will be affected by a range ofnew regulations, including the newEuropean Union’s Alternative InvestmentFund Managers Directive (AIFM Directive).

In addition to new regulations, regulatorshave higher expectations of registeredinvestment advisers today – they willdemand that firms have robustgovernance processes and currentcompliance programs with rigoroustesting. The SEC will assess the firm’scompliance program during

examinations, and may deem an adviserto be “higher risk” if it has a weakcompliance program, or its seniormanagers do not appear to support ahealthy “culture of compliance” withinthe firm.

The SEC is also taking steps to investigateand bring enforcement cases in the assetmanagement industry. Having created aspecialized unit, the SEC’s enforcementstaff is investigating practices rangingfrom having an ineffective complianceprogram, to abuses involving valuation,sales practices and disclosure, allocationsof expenses and securities, performanceclaims, insider trading, and other types ofcompliance problems. The consequencesof non-compliance can be significant, anda compliance failure can be detrimental,even fatal, to a firm’s business.

Beyond regulatory expectations,investors, clients and prospective clientsare demanding greater transparency andconfidence that the manager has strongcompliance and internal controls. Withincreased demands for accountability,senior executives and boards also needconfidence that their firm has no hiddencompliance problems. Existingcompliance programs may not beadequate to meet these expectations. The chart below shows some of the keycompliance challenges for assetmanagement firms today.

Navigating RegulatoryComplexity



New regulations issued under Dodd-Frank and other legislation are changing how asset managers do business.Additional rulemakings and stepped-up oversight and enforcement promise even more pressing challenges.

Looking ahead

How PwC can help

Staying current with new regulations andhaving the means to provide effectiveimplementation will be daunting enoughfor asset managers, but the year aheadpromises even more pressing challenges –accelerated rulemakings as well ascontinued higher investor expectationsand regulatory oversight and enforcement.

Asset management firms will want totake a hard look at the operation,resources and effectiveness of theircompliance programs, particularly in thekey risk areas. Senior managers, chiefcompliance officers and directors willcontinue to see increased regulatory andinvestor expectations with respect tocompliance programs, and may benefitfrom having an independent analysis ofthe compliance program.

Additional forthcoming regulations mayinclude those affecting money marketfunds, target-date funds, use ofderivatives, mutual funds’ distributionexpenses, and broker-dealers’ standard ofcare. Asset managers operating outside ofthe US may have to comply with newrequirements of foreign jurisdictions,including the Basel Accords and theEuropean Union’s AIFM Directive.

• Provide regulatory compliance andregulatory risk management servicesthat include everything from an initialrisk assessment to a thoroughcompliance analysis to thedevelopment and monitoring of aneffective, ongoing complianceprogram, to assistance in training firm employees.

• Assist directors, senior managers and chief compliance officers byconducting an analysis of the design,operation and effectiveness of thecompliance program.

• Conduct risk-targeted analyses in areas of concern and providerecommendations concerning robustcompliance practices.

• Assist asset management firms indeveloping the forensic testing,reporting metrics, surveillance,monitoring and training features of thecompliance program.

• Assist asset managers with preparing tofile Form PF, through a three-phase,firm-wide assessment of compliancereadiness with a thorough evaluationof the firm’s ability to collect the datarequired for completion of the form.

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The operations function has always beena highly complex, yet essential, part ofthe asset management industry. Even while asset managers areresponding to a changing regulatoryregime and increased oversight, they alsoare experiencing an increase intransaction volumes and complexity,placing stress on their front, middle andback office systems.

Market volatility and pressure on feesalso have concentrated the attention ofasset managers on their operationalprocesses as a way to control costs. Inorder to streamline processing andincrease profitability, asset managers are

focusing on technology and operationsenhancements to drive efficiencies. Thesehave become increasingly importantgiven the continued trend towards profitmargin erosion and rising expenses.

The demands on asset manageroperations functions are growing becauseof expanded regulatory oversight, newrules, new and more complex assetclasses and investment strategies andgrowing investor expectations. Assetmanagers also are seeking to driveoperational efficiencies in response toindustry-wide drivers such as feecompression and flat or decreasing assetlevels and to respond to complex tax

requirements, especially when multiplejurisdictions are involved. Some firmsalso have underinvested in technology,have not consolidated or integratedsystems after mergers or continue to usemanual processes.

Failure for these functions to perform asexpected places asset managers atmultiple risks, including higher costs dueto inefficiency or errors, losses because ofproblems with execution, unmet clientexpectations and regulatory violationsthat can result in reputational damage orfinancial loss.

Delivering Cost-EffectiveTechnology & Operations


Asset managers continue to evaluate opportunities to increase operational excellence and efficiency. Third-partyservicing relationships allow managers to leverage technology investment, realign operations and eliminate costswhile receiving high-quality specialized services with established service levels.


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Looking aheadMany asset managers are seeking thecapabilities necessary to execute properlyat each stage of the operations function,whether by developing the neededexpertise and resources in-house oracquiring them through outsourcing.

Some functions lend themselvesparticularly well to outsourcing,including middle office operations suchas corporate actions processing. Thescope of outsourcing is also expanding tothe front office, where functions such asresearch are reengineered, with lower-level data management tasksconsolidated and transferred toproviders, while value-added dataanalysis remains in-house.

Workflow management tools areincreasingly being used to standardizeboth system and operational processes toimprove efficiency, provide greatertransparency and create an increased rateof straight-through processing. Workflowtools can also allow processes to becomemore portable to either on-shore or off-shore centers of excellence.

Asset managers are investing moreheavily in data management strategiesand platforms to improve efficiency,management reporting, and compliancereporting and oversight, as well as toallow for the ability to switch externalservice providers more readily, shouldthe need arise. Traditional methods ofdata warehousing are being

supplemented by more virtual datawarehousing, where information isretrieved and assembled for reportingupon demand from multiple underlyingtransactional source systems.

Many asset managers are seeking greatermulti-asset class coverage within theirsupport platforms, be they in-house oroutsourced. Historically, securities havebeen processed separately fromderivatives, and alternative investmentstrategies have been processed separatelyfrom traditional investment strategies.Rather than simply creating theappearance of integration on clientstatements, firms are realizing that multi-asset class convergence can generateneeded processing efficiencies.

How PwC can help

• Aid asset managers in achievingoperational excellence by improvingtheir operating model, defining keyprocess control points andbenchmarking to leading practices withpeer asset managers.

• Assist asset managers in achievinggreater efficiencies through definingand enabling process driven workflowand providing solutions to driveprocess-centric document managementacross key aspects of the organization.

• Assist in implementing operational and technology improvements in areassuch as sustainable cost managementand control, business processexecution, and organizational design improvements.

• Perform analyses for operations andtechnology platform enhancements,conduct due diligence on prospectivevendors and provide professionalservices in connection withimplementation of technology, systemsand process improvements.

• Assist in the development of an IT strategy which more effectivelyaligns technology investments andinitiatives with business priorities andindustry trends, while identifyingsolutions for gaps in key capabilitiesand underlying infrastructure.


New tax and regulatory requirements,investor expectations, the globalization ofthe asset management industry and theincreasing scope and complexity ofproducts are combining to increase theglobal information-gathering andreporting demands facing assetmanagers. The most significant reportingdemands come from US laws enacted inrecent years, notably the Foreign AccountTax Compliance Act of 2009 (FATCA), forwhich regulations providing guidancewere proposed on February 8, 2012.

FATCA is intended to prevent US citizensand residents from evading federalincome tax on US-sourced incomegenerated from investments in or throughnon-US entities, offshore funds and otherforeign financial institutions (FFIs). Thenew documentation and reportingrequirements are meant to increase thetransparency of the income of US citizensand residents.

The requirements include greatertransparency about investors, such asadditional data to be collected, analyzedand reported. In order to comply with theregulations, data may have to becombined from internal sources and fromthird-party service providers. Systemsmay need to be enhanced to store,calculate and report the data.

There is a large operational and businesscomponent to FATCA for asset managersto consider, since compliance affectsnumerous functions throughout anorganization. These include existinginvestor relations, investorcommunications, tax withholding andreporting, compliance, legal andregulatory, including know-your-customer (KYC) and anti-moneylaundering (AML) compliance.

Many asset managers currently rely onthird-party service providers(administrators, custodians, etc.) to havea role in these functions and expect thatthese service providers would also have arole in FATCA compliance. However,many providers have not yet offeredFATCA compliance services to the assetmanagement industry.

In many cases, asset managers will needto work with their service providers toput in place systems to comply with awide range of data computation andreporting requirements.

FATCA’s key compliance dates remain inplace. Offshore funds, foreign financialinstitutions and non-financial foreignentities which fail to meet FATCA’sreporting requirements will be subject toa new 30 percent withholding tax on awide range of US-sourced income,including dividends, interest and gross proceeds.

If applied, the 30 percent withholding taxcould make most US investmentsuneconomical: For example, if a fund hasany material turnover, the tax couldexceed the fund’s net asset value.Consequently, most offshore funds thathave meaningful direct or indirect USinvestments will have to enter intoforeign financial institution agreements;many also will need to make substantialchanges to customer information andreporting systems.

Additionally, the US, France, Germany,Italy, Spain and the United Kingdomannounced they will explore a commonapproach to FATCA implementationthrough domestic reporting andreciprocal automatic informationexchange based on existing bilateral taxtreaties. This multilateral effort will allow

FFIs to report information to their localtax authorities instead of directly to theIRS. The Treasury Department has madeit clear that the information required tobe reported to local tax authorities willnot be materially different from therequirements enumerated in theproposed regulations.

FATCA is only one of several informationreporting measures intended to give theIRS more information on offshore USinvestment activities in order to enhanceits enforcement abilities. Othermandates, such as the Report of ForeignBank and Financial Accounts (“FBAR”),potential compliance with the FinancialTransactions Tax (“FTT”) and managingglobal withholding tax on capital gainseach offer their own information-gathering and reporting compliancechallenges. For example, new regulationspublished in 2011 compel many whopreviously had no FBAR reportingobligation to file reports.

The European Union’s AlternativeInvestment Fund Managers Directive(AIFM Directive), adopted by the Councilof the European Union in 2011, willaffect US alternative investmentmanagers selling to or raising funds fromEuropean investors; compliance willrequire stronger controls, recordkeepingand reporting. The directive’s provisionsare to be translated into national law byeach of the EU’s members by 2013 andasset managers will be watching closelyas this legislation advances.

Beyond regulatory-driven demands forincreased reporting, investors haveheightened expectations for increasedfund transparency, more accuratereporting and greater accountability andgovernance on the part of asset managers.

FATCA and GlobalInformation Reporting


Offshore funds or other foreign financial institutions could be subject to a 30 percent US withholding tax if they fail tocomply with new documentation requirements, due diligence procedures and reporting obligations.


Looking ahead

How PwC can help

With regulatory reporting requirementschanging quickly and severe penalties fornon-compliance, asset managers areclosely monitoring developments in thedrafting of new rules, standards andguidelines for information reporting.

Among the concerns addressed by theproposed FATCA regulations were thetreatment of local distributors, thetreatment of funds that prohibit sale toUS persons and the application to foreignpartnerships. In some cases, they reducethe overall burden imposed on foreignfunds. However, they have also addedcomplexity in areas specific to assetmanagement. FATCA, as a whole, willstill significantly affect business practices,policies and procedures for many in theasset management industry.

FATCA’s main deadline to enter into anFFI Agreement is set for July 1, 2013.Some have suggested that the proposedregulations have either delayed FATCAcompliance or that the efforts aroundcompliance for the asset managementindustry have been substantiallymitigated, but this is not correct. There is still a substantial amount ofwork to be done.

Although these regulations are onlyproposed, and not final, they providesufficient guidance for fund managers tobegin assessing what information gapsexist, determining what systems changeswill need to be made and communicatingwith their service providers and investorsto address the looming effective dates ofthese rules and make the necessarychanges to their business processes andprocedures in order to comply withFATCA’s requirements.

Asset managers can begin by getting upto speed on FATCA and staying abreast ofdevelopments such as the issuance ofupdated Forms W-8, a draft FFIAgreement and the release of the finalregulations. Although the proposedregulations provide a great deal moreguidance compared to that which hadbeen released previously, there is still agood deal of guidance to come. Theproposed regulations also still leave someopen questions on a number of topics.

Compliance officers and counsel, who arethe most likely to be charged with signingresponsibility, can identify which fundsand clients will fall within their FATCAfootprint, identify the requirementsassociated with those funds and clientsand develop a plan for moving forward.

FATCA implementation agreements mayneed to be put in place with serviceproviders, intermediaries or distributorsfor the functions performed by thesethird parties, with the relevant roles andresponsibilities defined. Asset managerswill need to begin communicating withthese parties.

Many asset managers are trying tocoordinate FATCA compliance withongoing measures to more efficientlycomply with the requirements of FBAR,the AIFM Directive and other newregulations. Evolving investorexpectations may become even more of aminefield for the unwary. Thecombination of market declines andlosses due to managerial negligence orcriminal action has caused both retail andinstitutional investors to demand greatertransparency and accuracy inperformance reporting and disclosures.

Asset managers that proactively provide a higher level of reporting, includingthird-party assurance reporting, andadopt policies and procedures to increase clarity will be able to gain acompetitive advantage.

• Aid asset managers in determining howthey are affected by FATCA, FBAR andother new regulatory requirements.

• Assist asset managers with initiating aFATCA compliance program tofacilitate compliance regarding:

– Fund entities, including FundInvestment Vehicles, SPVs,Disregarded Entities and Blocker, etc.;

– Fund investors, including the duediligence process for new andpreexisting investors;

– Internal operational impacts arisingfrom these requirements; and

– Business impacts on relationshipswith third-party service providersand distributors.

• Address common technology andoperations challenges facing assetmanagers, including:

– Technology and operationsgovernance with regard toconsistency, aligning initiatives andbuilding flexibility;

– Reliance on KYC/AML systems whereinformation may be insufficient,changes in circumstances may makeinformation unreliable or there arevariations in data quality;

– Expansive number of entityclassifications for FATCA makes theclassification exercise onerous, datastorage difficult and tracking theimpacts complicated;

– Aggregation of account holderbalances with data quality issues,data privacy laws, defining“relationship manager” and specialaggregation requirements based on a relationship manager’sknowledge; and

– Analysis and remediation of pre-existing accounts can be difficultwith diverse data housingenvironments, the need for third-party analysis and the need tocoordinate manual work.

Build the necessary global accountopening process and standards, as well as systems and infrastructure needed tofor compliance.


The demands of a global marketplace,increasingly complex products and adecade of market volatility and financialscandals have generated a new awarenessand sophistication among assetmanagement stakeholders includinginvestors, consultants and regulators.

The resulting stakeholder scrutiny,together with new regulation, drivesdemand for greater transparency in allaspects of the industry, includingcompliance, operations and controls,performance reporting and tax. Seniorexecutives and directors concerned aboutfulfilling their fiduciary responsibilitiesalso are demanding enhanced reportingfrom subordinates. As a result, greatertransparency in fund management,confidence in reporting accuracy andbetter accountability and governancehave become top priorities.

Asset managers increasingly are findingthat, after concerns about the accuracy ofasset manager data and statements,enhanced transparency can build trustwith investors and consultants alike.Managers who provide information in atimely, accurate and useful manner cangain a competitive advantage inattracting assets.

Demands for enhanced, more frequentdue diligence have been reinforced byrecent market volatility, with investorsseeking greater knowledge of managerpolicies, procedures and investmentholdings and independent verification ofmanager-provided information as part ofenhanced due diligence processes.Compliance with stated investmentobjectives and requirements increasinglyis a concern, especially amonginstitutional investors.

Regulators are a second source ofpressure for manager transparency.Regulators throughout the world areseeking increased access to relevantinformation and expanding oversight and enforcement, especially in the USand Europe.

New and more complex regulations,including more closely alignedaccounting standards, are placingcompeting and sometimes conflictingpressures on asset managers. There is aneed to report on new data points thathistorically have not been required, suchas investment data in Form PF, as well as investor data required by FATCA.Some firms also lack the internal

regulatory awareness, knowledge and procedures to respond to the new requests in a complete andsustainable manner.

These reporting requirements requiresophisticated systems to support requests,especially when real-time data arerequired (as opposed to the period-enddata typically requested in the past).More effort is required to developaccurate reports and information andthen analyze the results. The task iscomplicated by the increasing tendencyto use multiple back-office serviceproviders, administrators and primebrokers, many of which may not be usingcompatible systems.

Trust & Transparency


Awareness and sophistication have increased among investors, regulators and other stakeholders. Increasingly, theydemand higher levels of transparency around performance, holdings, investment strategies and other matters.


Looking aheadThe increased demands for investor- andregulatory-driven operations,performance, compliance and taxinformation reporting are challengingexisting reporting systems and burdeningstaff. The fact that many requests are inreal time rather than historical in natureadds an additional level of complexity.

One problem many managers areencountering is that they have multiplelegacy systems, often with differenttechnology platforms, to collect anddisseminate information. Gathering thedata needed out of such legacy systemscan be inefficient and typically is notsubject to scalable enhancements. Somedata systems, especially those that recordtransactions related to complexderivative products, entail manual entriesor work-around calculations.

Requirements in this area are likely tocontinue to increase. The finalization of anumber of new regulations in the 2012-13 timeframe, with their own requireddata streams, will only add to thereporting burden, especially if the dataare generated through overlaid systems.

How PwC can help

• Assist asset managers by helping themto establish the governance andcontrols expected by investors,regulators and other stakeholders,particularly to provide greatertransparency into all aspects of thefund, the fund manager and the fund administrator or firm performing valuations.

• Help managers respond to thechallenges they face by assisting themin building their infrastructure andenhancing their processes and controlsacross a number of areas, includingcompliance, performance, operationsand tax reporting.

• Identify scalable solutions includingdata warehouses that, combined with astrong internal control framework, can enable the efficient delivery of transparent data to meet stakeholder requests.

• Assess the existing infrastructure andsupporting control environment andconduct ongoing, independentverification of management-providedinformation, including theeffectiveness of the controlenvironment and a manager’sperformance track record.


In recent years, many asset managershave found both organic and inorganicgrowth very difficult to achieve. As theystrive to grow revenues and earnings,they are examining their portfolio ofproducts, distribution relationships andthe globalization and localization needsof their businesses.

Some are attempting to strengthen theirmarket position, growth potential andearnings through the use of mergers andacquisitions. Pure-play asset managershope to use acquisitions to expand theirproduct offerings, distribution channelsand geographical footprint. Smallerplayers seek consolidation in order toattract investors and spread theiroperating costs over a larger base.

Yet, despite optimism that M&A activitywould strengthen, activity has been muchslower than expected, and dealvaluations remain lower than they havebeen historically.

High levels of uncertainty created by theslow economic recovery, volatile marketsand regulatory changes slowed downM&A activity, making 2011 the worstyear in global asset management M&A inthe last five years.

The North American asset managementmarket is mature; therefore, sustainableorganic growth is hard to achieve.Although there are many sophisticatedasset management firms, the sector ishighly fragmented and some firms lackefficiency. If executed well, M&A can create competitive advantage andprovide scale, which, in turn, could bring efficiencies.

Accordingly, North American assetmanagement firms are likely to return tothe market when the conditions improveand they find strategic acquisition targetsthat will be accretive to their businesses.

Some of the slowness is attributable tothe continued volatility in the market,which results in uncertainty aboutgrowth prospects in the near- and mid-term and is suppressing valuations.Although the desire for M&A remainsstrong among buyers, particularly firmsbased in Canada and Asia, lowervaluations are making prospective sellerswary of putting their businesses up forsale. Unless they are forced to sell, thesecompanies are waiting for animprovement in pricing before returningto the M&A market.

Other issues – regulatory approvals,integration of operations and the largenumber of new regulations comingonline whose impacts and costs areuncertain – pose additional challenges to firms seeking to successfully combine operations.

Finally, private equity firms, which hadbeen concentrating on improving theperformance of their portfoliocompanies, are playing a growing role innew deal-making. Their participation islikely to continue to increase, given thatmany firms have significant amounts offunds awaiting investment.

Maximizing Value from M&A



M&A volume and valuations have dropped. However, factors such as a push for scale, divestitures by European banks of theirasset management arms and the need for private equity funds to deploy capital could bring sellers back into the market.

Looking aheadAs indicated earlier, M&A volume hasdropped significantly since the financialcrisis. Many prospective sellers areholding back in the hope that valuationsas well as earnings will improve in thenear future.

Investors continue to worry about riskand de-leverage their portfolios,economic growth for developed countrieshas been disappointing and factors suchas significant competition and increasedoperating costs are further depressinggrowth and profitability.

On the other hand, there are manypositive factors that could result inimproving M&A activity. There areinterested buyers in the market, includinglocal and foreign corporate buyers andprivate equity firms. Both the level ofinterest from potential buyers as well as

an improving economic outlookpotentially could push valuations up andbring sellers back into the market.

A large contribution to the expectedimprovement in M&A activity is expectedto come from European bank divestitures.Certain European banks are already wellon their way with divestiture of theirasset management arms. If they aresuccessful, it will increase deal values.

Business factors also play a role. Both thetraditional and alternative assetmanagement sectors are fragmented.With pressure on revenues and theincreased cost of compliance, the profitsof many companies are hurting, whichmay increase consolidation in theindustry as companies seek scale and efficiencies.

In this environment, asset managementfirms are evaluating their business,assessing the key markets and producttypes they want to play in and exploringM&A as a means to achieve strategicgoals. This is likely to lead to the sales ofnon-performing or non-scale businesses;similarly, the proposed Volcker Rule mayforce institutions to sell off proprietarytrading desks or investments inalternative managers.

Deal activity may increase as the marketoutlook clears and banks execute carve-outs. The situation with European banks,and more broadly the increasing capitalrequirements for regulated entities, maycreate opportunities for pure-play assetmanagers and private equity firms toacquire asset management businesses.

How PwC can help

• Aid managers in implementing mergerand acquisition transactions by using adeep knowledge of the industry toidentify possible partners and performfinancial, tax and operations duediligence in advance of negotiations.

• Assist with strategy development andmarket research, includingdevelopment of market insightsrelating to countries around the worldusing PwC’s global network.

• Provide due diligence assistance including:

– Business and financial due diligence;

– Analysis of third-party audit workpapers of the target company;

– Tax due diligence;

– Human resources due diligence;

– Regulatory compliance due diligence;

– Information technology due diligence;

– Operational due diligence;

– Risk management due diligence;

– Complex accounting support; and

– Control environment assessment.

• Assist with tax and accountingstructuring and integration planningand synergy analysis to promote themost advantageous financialpositioning in advance of transactions.

• Assist with support drafting sale andpurchase agreements (e.g., earn-outand closing balance sheet and workingcapital adjustment mechanism, repsand warranties, etc.).

• Assist with capital markets-relatedneeds (e.g., debt offerings, financial reporting).

• Assist with M&A process developmentand improvement.

• Provide closing balance sheet diligenceand purchase price adjustment support.

• Assist with post-merger integrationplanning, management and executionincluding operational, humanresources and synergy analysis; providesupport with product and marketdeployment, development ofappropriate compensation structuresand upgrading technology andoperations infrastructure.


Economic uncertainty, low interest ratesand continued market volatility areaffecting investor attitudes, the search foropportunities by asset managers andmanagers’ relationships with advisers,brokers and other intermediaries.

Investors are seeking not only higherreturns in a low-yield environment butalso more customized solutions to theirinvestment needs. They also are insistingon greater transparency in all of theirinteractions with managers andintermediaries, including such matters asperformance, expenses and risk.Responding to each of these needscomplicates operations and adds tomanagement costs.

As the provisions of the Dodd-Frank Actand other new legislation areimplemented, more demandingregulation is continuing to affectmanagers and their business models.

Finally, intermediaries and distributors,operating between managers and theirend customers, are increasinglyimportant gate keepers.

With this backdrop, the pressure toachieve growth goals and remaincompetitive can be a challenge for asset managers.

Asset management companies are closelyscrutinizing their business and trying todetermine how to restructure in order tostrengthen their market position, revenueand earnings. They need to have theinfrastructure and processes in place tosupport growth initiatives, includingrobust information technology networks,current operations models and platformsand accurate and timely managementreporting systems.

Pursuing Growth


The asset management industry continues to face headwinds even in the midst of a multi-year recovery. Withoutaggressive pro-growth measures, these headwinds could stall the industry’s recovery.


Looking aheadOrganic growth, in the absence of marketappreciation, may be difficult to achieveand remain elusive for many managers.Nevertheless, organic growthopportunities can be seen in severalareas. They all will require sustainedfocus and investment. This is far easiersaid than done because operatingmargins also can be expected to comeunder pressure as cost structuresgenerally remain inflated and structuralchanges to the industry decrease revenue yields.

Asset managers may wish to carefullyreview their current go-to-marketstrategies and related functions todifferentiate themselves and becomebetter aligned with customers,distributors and the global opportunitiesavailable to them.

A renewed focus on branding can beexpected. Those firms with strong brandsand clear alignment across firm strategy,

brand and product offerings will attract adisproportionately large share of assetflows. Marketers have an opportunity toengage financial advisers more deeply tobetter understand end customerinvestment needs and inform the productdevelopment process. New channelsprovide another opportunity to improveengagement with both advisers and endcustomers. Mobile technologies, socialmedia and related community-basedchannels can help to provide adifferentiated experience in terms of bothofferings and service.

Investor preferences continue to evolvealong lines similar to those in 2011 withcertain product classes representinggrowth opportunities for productdesigners who can support differentiatedstrategies. Pending innovation in liquidinvestment products (e.g., activelymanaged exchange traded fundscurrently awaiting SEC approval), globaland emerging market-focused products

and customized solutions such asliability-driven investing are all promisingareas for asset managers seeking new markets.

Distributors have an opportunity todevelop sophisticated analytics usingdata about their financial advisers, salesteams and customers. These analytics canhelp asset managers to identify superiorperformers, provide information on theirbest-selling or best-performing productsand cultivate their distribution networkby further understanding investor needs.

Finally, the expansion and enhancementof client-facing services can improve the customer experience and providegreater transparency throughsophisticated reporting delivered throughmultiple channels.

How PwC can help

• Assist asset managers to improvealignment between their strategy,market brand and internal operatingmodel (people, process and technology).

• Exploit new channels such as mobiletechnologies and social media todifferentiate brand identity, betterengage partners and clients andprovide improved access to products,services and information that canimprove investor outcomes.

• Assist asset managers in workingclosely with their distributors andintermediary partners to usesophisticated analytics to betterunderstand their clients’ investmentgoals and develop products that aremore closely aligned with those goalsand more responsive to identified needs.

• Work with designers to identifyproducts and strategies that bettermeet evolving client needs and alsohave economics that are attractive tointermediaries, distributors and other stakeholders.

• Assist firms in enhancing the customerexperience by helping to developsophisticated reporting, improvedtransparency and better insights intometrics for performance, risk levels andother important measures.

• Assist fund managers in implementingthe infrastructure necessary to supportgrowth, including a governance andrisk control framework, informationtechnology systems, financial reportingcontrols and an operational model thatpermits firms to quickly take advantageof new opportunities.


Asset management historically has beenregarded as an industry in which themost important assets walk out the dooreach evening. This has never been truerthan it is today: Regulatory flux,globalization and significant changes inpersonnel practices have combined toplace talent – attracting it, developing itand retaining it – high on the agendas ofasset management firms.

New regulations being developed underlaws such as the Dodd-Frank Act areforcing a reorganization of work anddecision-making and have implicationsfor compensation practices, such as thedevelopment of claw-back provisions tomanage risk-taking.

Regulatory changes also are causing anincreased focus on the risk function,which in turn is affecting howperformance is measured and analyzed.Changes in compensation practices firstseen in Europe may make their way ontoUS shores through legislation,rulemaking and changes in marketpractices. As firms respond to these

varied demands, it is crucial that theymanage regulatory fatigue and avoid a“tick-the-box” mentality.

The globalization of asset managementalso is driving efforts to deliver a trulyglobal organization strategy whichincludes an increased need to establish abase-line and manage global workforcedata as well as establish flexible and adaptive organization structures that drive collaboration across traditional business unit, product and geographic silos.

Significant changes in hiring, on-boarding, development and successionplanning practices – the latter in responseto pressure from regulators to providecontinuity in critical functions at both theexecutive and sub-management level –pose challenges to existing practices.

Firms are once again investing heavily inattracting and retaining talent. In concertwith today’s business issues, this isdriving an unprecedented effort to alignpeople strategy with business strategy.

While a majority of companies have adefined people strategy, environmentalpressures create challenges in executingthe strategy and there often is aninconsistency in application. Effectiveexecution of a people strategy requires abalanced focus on building and sourcingcapability, including the use ofalternative talent pools models tomanage supply and demand peaks andtroughs and creative approaches tosourcing both entry-level andexperienced talent.

It also requires increased rigor inconducting functional and enterprise-wide talent assessments; and targetedinvestments in talent development. Manyasset management leaders are committedto addressing the challenges they face bydeveloping an integrated business andpeople strategy.

Growing and LeveragingHuman Capital


For many asset managers, the most significant workforce-related challenge is not in formulating a people strategybut in aligning it with the business strategy and executing it consistently against that strategy.


Looking aheadAs signs of market recovery continue,asset managers are once again investingheavily in recruiting and retaining talent.They face many challenges in this area,from dealing with regulatory, investorand media scrutiny over compensation topreserving shareholder returns in theface of increasing payroll expense.

Changes in personnel practices are driven partly by new regulatory demandsand partly by an increased need to design for improved productivity andcapacity management.

Leading managers are establishingflexible and adaptive organizationstructures that drive collaboration acrosstraditional business unit, product andgeographic silos. They also are realigninghow they work, seeking to operateglobally with effective decision-makingand speed of execution.

How PwC can help• Aid asset managers in defining, leading

and sustaining the enterprise culturechanges that can help them to becomemore competitive.

• Assist in establishing commonapproaches to workforce planning, managing change and organization design.

• Aid asset managers in enhancing theirbusiness partner capabilities.

• Help to establish flexible, yetconsistent, practices in the areas ofincentives and rewards.

• Enhance the business partnershipcapabilities, business acumen andproduct, functional and regulatoryinsights of human resource functions toenable them to demonstrate relevance.

• Assist human resource offices indeveloping the capacities that can drivesuccessful innovation and serve as rolemodels for the implementation of theirorganization’s people strategy.



Conclusion

The asset management industry has seen greater changes in the past severalyears than at any comparable period inits history:

• Volatile and unpredictable marketswith assets that seem increasinglycorrelated in times of stress;

• Regulatory changes that, while theyhave the potential to produce morestable markets, also could imposesignificant costs and limit returns; and

• Investors, regulators and otherstakeholders are demanding greater transparency.

Each of these factors poses its ownchallenges to asset managers. An evengreater challenge is the possibility of

complexity risk, when the very intricacyof these factors and the uncertainty oftheir interrelationships can addsignificant, and as yet undetermined,risks. It is difficult to understand theimpact among the hundreds of newsecurities industry regulations beingadopted around the world, or how theirinterplay may yield unexpected results.

The one certainty is that the assetmanagement industry is in a period oftransition that likely will take years. At the end of it, there will be winners:those firms and individuals that arequickest to grasp the potential emergingfrom the changes the industry is goingthrough and act upon their knowledge. They will be the asset managementleaders of tomorrow.

PwC Asset Management Contacts

Gary Meltzer US Asset ManagementAdvisory Leader +1 646 471 [email protected]

Shawn BakerUS Tax Leader for TraditionalFunds+1 617 530 [email protected]

Paul RyanUS Tax Leader for RealEstate+1 646 471 [email protected]

Paula Smith US Assurance Leader forAlternative Investments+1 617 530 [email protected]

Mark CasellaUS Alternative InvestmentLeader+1 646 471 [email protected]

Barry BenjaminUS & Global AssetManagement Leader +1 410 659 [email protected]

Will TaggartUS & Global Asset ManagementTax Leader+1 646 471 2780 [email protected]

Tim ConlonUS Real Estate Leader+1 646 471 [email protected]

Peter FinnertyUS Assurance Leader forTraditional Funds+1 617 530 [email protected]


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This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.

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