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www.pwc.com/assetmanagementAsset & WealthManagementInsightsAsset Management 2020:Taking stockSpecial EditionJune 2017

Asset & wealth management insights: Asset Management 2020: Taking stockContentsAsset Management 2020: Taking stock3The landscape in 20204The industry expands, the investor base morphsPressures on the industryNothing to hide, nowhere to hide and nothing at risk578Game changers set to redefine the industry9Asset management moves centre stageDistribution is redrawn – global and regional platforms dominateFee models are transformedAlternatives become more mainstream, passives are core and ETFs proliferateNew breed of global managersAsset management enters the twenty first century101112131414Conclusion15Contacts152 PwC AWM Insights May 2017

Asset & wealth management insights: Asset Management 2020: Taking stockAsset Management 2020: Taking stockBarry BenjaminGlobal Asset & Wealth ManagementLeaderPwC US 1 410 659 3400barry.p.benjamin@us.pwc.comThree years ago, we predicted that the asset management industry wason the precipice of several fundamental shifts that would shape its future.Our paper, Asset Management 2020: A Brave New World, predicted ahuge rise in assets and the emergence of several game changers that woulddramatically alter the industry’s landscape.At the time, asset managers were still distracted by the economic turmoil andregulatory change that followed the Great Financial Crisis, which spanned2008-2009. The paper laid out trends and drivers to help asset managers plan for thefuture by anticipating changes in the competitive environment.Fast forward to today and our projections for an increase in assets undermanagement (AuM) are proving broadly correct, although slightly pessimistic.At the time, we forecast worldwide AuM would rise from US 63.9 trillion toUS 101.7 trillion by 2020,1 a compound growth rate of nearly 6%. In fact, growth inAuM is running ahead of our original forecasts, leading us to raise our 2020AuM forecast to US 111.2 trillion.2Turning to the game changers, the pace of change in the asset and wealthmanagement (AWM) industry is accelerating, and following a path of creativedestruction. The environment and game changers that we described in AssetManagement 2020 are evolving. Ahead of publishing a full paper in the autumn,we review our earlier predictions in the following pages.Barry BenjaminGlobal Asset & Wealth Management Leader1 We define worldwide AuM as assets managed by asset and wealth managers globally.2 PwC Global Market Research Centre.PwC AWM Insights May 2017 3

Asset & wealth management insights: Asset Management 2020: Taking stockThe landscape in 20204 PwC AWM Insights May 2017

Asset & wealth management insights: Asset Management 2020: Taking stockThe industry expands, the investorbase morphsHuge rise in assets and shiftin investor baseJust as outlined in the original paper,changing markets and investor needshave combined to produce a positiveenvironment and huge opportunitiesfor AWM players. The rise in valueof investable assets over the last twoto three decades has been driven byincreasing financialisation across majoreconomies, ageing of OECD marketpopulations and the shift towardsfunded / defined contribution plans,disintermediation of commercial banksas regulators have constrained theirgrowth, and imbalances in trade-drivenflows and financial savings versuslocal investment needs across majormarkets. This is continuing and assetsThe rise in value of investableassets that has occurred overthe last two to three decades iscontinuing and they’re expectedto be significantly larger by2020 than today.are expected to be significantly larger by2020 than today. The increased headlinefigure of US 111.2 trillion (up from ourearlier forecast of US 101.7 trillion),compares with US 78.7 trillion at theend of 2015.3What’s changed? Both a faster rise todate in high net worth individuals’(HNWIs’) assets, causing us to increaseour forecast for total clients’ assets fromUS 277.8 trillion to US 283.4 trillion,4and the sector’s growing ability tocapture those assets. We now anticipatethe sector will manage 39.2% of themby 2020, up from our original forecast of36.6% (see table below).5Clients2004200720122013201420152020*2020 (new)Pension funds21.329.433.935.838.738.256.555.8Insurance companies17.721.224.126.126.227.135.138.8Sovereign wealth 69.667.876.983.5Mass affluent42.155.859.564.267.262.5100.496.3Total client assets120.9159.8175.2191.4208202.3277.8284.4Global 5%37.6%37.5%38.9%36.6%39.4%Penetration rateSources: PwC Market research centre analysis. Past data based on City UK, Insurance Europe, Financial Stability Board (FSB), Credit Suisse, Towers Watson,OECD and World Bank.* 2020 estimate from the report Asset Management 2020 – A Brave New World3 PwC Global Market Research Centre.4 We define total client assets as investable assets from pension funds, insurance companies, sovereignwealth funds, high net worth individuals and the mass affluent.5 PwC Global Market Research Centre.PwC AWM Insights May 2017 5

Asset & wealth management insights: Asset Management 2020: Taking stockGlobal AuM projection by region in USD 2.6%80.09.1%41.20.02004n Mutual funds n Mandates n Alternatives2020*2020 (new)CAGRSources: PwC Market Research Centre analysis. Past data based on Lipper, ICI, EFAMA, the City UK, Hedge Fund Research and Preqin.Note: Numbers might not exactly sum due to rounding. CAGR is calculated based on the underlying unrounded data.* 2020 estimate from the report Asset Management 2020 – A Brave New WorldThe rising importanceof South America, Asia,Africa, Middle East(SAAAME)Our prediction that AuM in the SAAMEcountries would grow faster than thosein the developed world in the years to2020 remains. This is beginning to createnew pools of assets that can be tapped bythe AWM industry. However, most assetswill continue to be in the US and Europe– the global distribution of wealth ischanging more slowly than the globaldistribution of nominal (or purchasingpower parity) income.Growth will be driven bypension funds, insurancecompanies, mass affluentand HNWIsThe increasing personal wealth of themass affluent and HNWIs, coupledwith increases in wealth overseen bypension funds and insurance vehicles,6 PwC Global Market Research Centre.7 PwC Global Market Research Centre.6 PwC AWM Insights May 2017will continue to drive the worldwideexpansion in AuM. However, theindustry is proving more successfulthan we originally thought at capturingthe assets of HNWIs – many of them inemerging markets. For this reason, weproject that total HNWI assets managedin 2020 will be US 88.6 trillion, ratherthan the US 76.9 trillion originallyanticipated. This compares with justUS 67.8 trillion in 2015.6 The singlegreatest contributor to the surge in massaffluent and HNWI assets remains theincrease in SAAAME wealth.Pension fund assets managed will growfrom US 38.2 trillion in 2015 to US 56.1trillion by 2020 (a little lower than ouroriginal US 56.5 trillion projection),7lifted mainly by the growth of definedcontribution schemes. Both developedand developing countries are seekingto bring more of their labour forcesunder the umbrella of funded definedcontribution retirement plans.

Asset & wealth management insights: Asset Management 2020: Taking stockPressures on the industryThe pressures on AWMs (Asset andWealth Managers) are changing andintensifying. Since the publicationof Asset Management 2020 in 2014,profit margins have been squeezed.Notably, the greater transparency inthe wealth management advice modelstarted by the UK’s Retail DistributionReview (RDR) and similar regulations,a shift to outcome-based solutionsand the expanding market share ofpassive strategies, are putting relentlessdownward pressure on fee levelsand asset flows, which are skewedtowards lower margin products. Thisis happening at a time when firmsmust invest in building outcome-basedsolutions and applying transformationaltechnologies, both internally andexternally.Determined to gain scale, severalinternational asset managers haveannounced mergers within the past 12months, including Janus Capital Groupand Henderson Group,8 Standard Lifeand Aberdeen Asset Management,9and Amundi’s acquisition of PioneerInvestments.10Broadly speaking, these mergers areintended to reduce costs as overlappingfunds are closed, distribution reachis leveraged and the fixed cost base isspread across greater scale. Additionally,some asset managers, mainly in Europe,have been acquiring wealth managers asthey seek to control distribution and thecustomer relationship. This also givesthe appearance of alleviating near-termmargin pressure as wealth managers’share of fees appears less vulnerableto the pressures described above, butmay not be a long-term solution asregulation increasingly focuses on openarchitecture distribution and pusheswealth managers towards greaterdisclosure and a fiduciary standardof care.Determined to gain scale, severalinternational asset managershave announced mergers withinthe past 12 months8 Janus Capital Group Inc. and Henderson Group plc. announce recommended merger of equals; ir.janus.com; 3 October 2016.9 Statement regarding the potential merger of Standard Life plc and Aberdeen Asset Management plc;standardlife.com; 4 March 2017.10 Project of acquisition of Pioneer Investments; about.amundi.com; 12 December 2016.PwC AWM Insights May 2017 7

Asset & wealth management insights: Asset Management 2020: Taking stockNothing to hide, nowhere to hide andnothing at riskThe drive to improve transparencycontinues unabated. Regulation, investorpressure and tax legislation are alldriving more openness. In addition tocreating a more fee competitive market,this is also leading to greater costsrelated to data and reporting.In short, the global tax systemis broken. As tax informationbecomes publicly available,and strong populist sentimentcontinues, so the public willjudge whether companies arepaying their ‘fair share’ of taxesin an emotionally chargedenvironment.8 PwC AWM Insights May 2017Since 2014, there has been little newlyplanned legislation but what wasalready planned has led to significantinvestment in systems. In Europe, recentlegislation includes the European MarketInfrastructure Regulation, PackagedRetail Investment Products, Markets inFinancial Instruments Directive I andII, as well as the Alternative InvestmentFund Managers Directive, RDR andUndertakings for Collective Investmentsin Transferable Securities V, VI and VII.In the US, there have been theDodd-Frank related amendments tothe Investment Advisors Act and twosignificant new regulatory developments– the Department of Labor’s FiduciaryRule (with implementation datescurrently set for June 2017 and January2018), and the SEC Liquidity RiskManagement Rule (with milestone datescurrently set for December 2018 andJune 2019). The new US administrationhas committed to grant some relief fromregulations, yet this remains a futureprospect.Investors, too, are demanding greatertransparency. As inexpensive forms ofbeta become easier to access, the marketplace has begun to break down whereasset managers add value.Turning to tax, what started as aregulatory issue is fast becomingreputational. In short, the global taxsystem is broken. As tax informationbecomes publicly available, and strongpopulist sentiment continues, so thepublic will judge whether companies arepaying their ‘fair share’ of taxes in anemotionally charged environment.Taxes must now be viewed as anoperational risk.

Asset & wealth management insights: Asset Management 2020: Taking stockGame changers set toredefine the industryAsset Management 2020 set out six likely game changers that wouldimpact the competitive environment. In our view, understanding,analysing and acting on these would prepare firms for theopportunities the changing landscape presented.These were:1Asset management moves centre stage2Distribution is redrawn – regional and global platforms dominate3Fee models are transformed4Alternatives become more mainstream, passives are core and ETFs proliferate5New breed of global managers6Asset management enters the twenty first century.These game changers have or are coming to pass to varying degrees. Below, weoutline to what extent these game changers have evolved in a period of acceleratingchange.PwC AWM Insights May 2017 9

Asset & wealth management insights: Asset Management 2020: Taking stockAsset management movescentre stageOur prediction that AWM would movedefinitively out from the shadows of itsbanking and insurance cousins by 2020 isproving broadly correct. We anticipatedthat regulation, retirement, urbanisationand the growth of sovereign wealth fundswould all thrust AWMs to the centrestage of finance. Broadly speaking, this ishappening, with AWMs often taking onthe role of first movers and innovators.AWMs, through new types of investmentproducts, have been continuing toexpand into areas vacated by banksrestrained by capital regulations. Whilethe Trump administration’s stated desireto roll back regulation may increasebank lending in the US, this trendremains powerful elsewhere. Withinthe European Union, for example, aproposed Capital Markets Union aims toincrease the role of capital markets and,1therefore, asset managers, in financialintermediation between savers and usersof capital.Through the private debt markets, assetmanagers are funding, among otherthings, real estate lending, leveragedbuyouts, SMEs and trade finance.According to Preqin, the private debtindustry managed assets of 595 billionin June 2016, having quadrupled in sizesince 2006.Turning to pensions, asset managersare playing a central role in pluggingthe global pensions gap as thepopulation ages, chiefly through definedcontribution pensions. We anticipate thatpension funds will grow from US 38.2trillion in 2015 to US 56.1 trillion by2020. The pensions gap is estimated at 41 trillion by the Geneva Association,the insurance industry think tank.11Asset Management 2020 also foresawurbanisation creating a huge need fornew infrastructure. PwC has estimatedthat close to 78 trillion will bespent globally on infrastructure from2014 to 2025.12 Given the long life ofinfrastructure assets, banks (with theirlevered balance sheets and weightedaverage duration of liabilities of 10years) are structurally unsuited tointermediating financial flows to fundthese assets. On the flipside, the longlifecycles match pension fund liabilitiesand sovereign wealth funds. Thismarket offers asset managers significantopportunities, although barriers relatedto political acceptability and transfer ofrisk are currently holding it back.Asset Management 2020 also foresaw urbanisation creating a huge need for new infrastructure. PwC hasestimated that close to 78 trillion will be spent globally on infrastructure from 2014 to 2025.11 The Pension Gap Epidemic, Challenges and Recommendations, November 2016. e-pension-gap-epidemic.pdf)12 Capital project and infrastructure spending: outlook to 2025.( -to-2025.pdf).10 PwC AWM Insights May 2017

Asset & wealth management insights: Asset Management 2020: Taking stockDistribution is redrawn – globaland regional platforms dominateOur prediction that, by 2020, fourdistinct regional fund distribution blockswould have formed, allowing productsto be sold pan-regionally, is lookingbroadly correct. We anticipated thatthe four blocks would be: North Asia,South Asia, Latin America and Europe.But, like other commentators, wedidn’t foresee the strength of politicaland economic nationalism, which hashindered this trend.In Asia, we correctly predicted thedevelopment of two regional platforms,although it’s happening more slowlythan we thought. The Hong Kong-Chinamutual recognition became reality in2015, but there is little sign of Taiwanjoining up to create a Greater China bloc.In Southeast Asia, the ASEAN platformhas moved forward, albeit much moreslowly than expected, but the APEC Asia2Funds Passport is on track to golive in December 2017. Singaporeremains outside this passport fornow, although that may change if theperceived taxation imbalances areaddressed in time.Meanwhile, the European UCITSstructure continues to gain strength.However, the UK vote for Brexit could,depending on the eventual trade dealbetween the UK and the EU, introducemore complexity into distribution withinEurope.Finally, the development of a LatinAmerican fund passport that we foresawremains at an early stage.PwC AWM Insights May 2017 11

Asset & wealth management insights: Asset Management 2020: Taking stockFee models are transformed3Our prediction that, by 2020, virtually allmajor territories with fund distributionnetworks would have introducedregulation to better align the interestsof the end consumer, distributor andasset manager is proving accurate.In most cases, this alignment isdesigned to ensure that the distributorrecommends a fund to the consumerentirely on its merits, and isn’tinfluenced by the level of commission.Labor’s proposed Fiduciary Rule has ledmost wealth managers to rationalise25-30% of retail mutual funds, and assetmanagers have responded by merging/consolidating mutual fund offerings withsimilar mandates, launching new shareclasses (‘T’ shares, clean shares) anddropping pricing. Although the Trumpadministration has placed the rule underreview, the changes envisioned havealready taken place.The UK’s Retail Distribution Review(RDR) started the trend by banningcommissions in 2012. Regulators havesince introduced similar measures inAustralia, South Africa, the Netherlandsand many other countries. Most recently,the European Union has bannedretrocessions. through its MiFID IIdirective. In the US, the Department ofIn Asia-Pacific ex Japan and Australia,no specific regulations are proposedbut there is significant pressure frominvestors for greater transparency intofees and costs.This transformation of fee models willcontinue to put pressure on revenues forboth asset and wealth managers.Our prediction that, by 2020, virtually all major territories with funddistribution networks would have introduced regulation to betteralign the interests of the end consumer, distributor and asset manageris proving accurate.12 PwC AWM Insights May 2017

Alternatives become moremainstream, passives are coreand ETFs proliferateJust as we discussed, asset flows awayfrom traditional active managementand towards passive and alternativestrategies are accelerating. As a result,the overall proportion of activelymanaged traditional assets undermanagement is shrinking.By 2020, we forecast in AssetManagement 2020 that activemanagement’s share of global AuMwould have declined to 65%, whilepassive grew to 22% and alternative to13%. We have since updated our forecastto predict that active management’sshare will be 66%, passive’s 21% andalternative’s 13%. (This compares with4active’s 74% share in 2015, passive’s 14%share and alternative’s 11% share.)13As a result, active management’s globalAuM will rise from US 58.4 trillionin 2015 to US 74.0 trillion in 2020,passive’s will rise from US 11.3 trillionto US 23.2 trillion and alternative’sfrom US 9.0 trillion to US 13.9trillion.14Within alternative management, webelieve that real assets, private equityand new types of private debt funds willtake on a stronger role in driving growth.Hedge funds will not fare so well, after aperiod of disappointing returns.13 PwC Global Market Research Centre.14 PwC Global Market Research Centre.PwC AWM Insights May 2017 13

Asset & wealth management insights: Asset Management 2020: Taking stockNew breed of global managersOur prediction that 2020 would seethe emergence of a new breed of globalmanager is happening, although not asquickly as we thought. We anticipatedthat these managers would emerge aslarge scale, targeted solutions for a broadarray of customers and more trustedbrands became more important.5While this hasn’t happened in exactlythe way we expected, the intense marginpressures playing out in the AWMindustry today are likely to force farmore consolidation of products and firmsin the years ahead.Asset management entersthe twenty first century665% of CEOs foresaw technologyreshaping or significantlyimpacting competition.Technology is poised to becomemission-critical for AWMs by 2020, justas anticipated in Asset Management2020. We stated that it would drivecustomer engagement, data mining forinformation on clients and potentialclients, operational efficiency, andregulatory and tax reporting. We alsopredicted that cyber risk would becomeone of the industry’s key risks.15 Key findings from the asset and wealth management industry; 20th CEO Survey; t three years is a long time fortechnology innovation. Since 2014, thelikely impact of technology on AWM hasincreased hugely. It’s likely to disrupt allareas of the industry – from investmentadvice, through the middle and backoffices to client engagement anddistribution.In the AWM section of PwC’s 2017 CEOSurvey, 65% of CEOs foresaw technologyreshaping or significantly impactingcompetition.15 Yet, even this majorityseemed to understate the potentialimpact; across financial services as awhole, 77% of CEOs anticipate thishappening.

Asset & wealth management insights: Asset Management 2020: Taking stockConclusionIn summary, the landscape and game changers that we identified in2014 are evolving. If anything, the forces of change are becoming morepowerful. As a result, this is a critical time of creative destruction.There are great opportunities for those understanding and actingon the likely changes, yet some firms are likely to disappear throughconsolidation. This update is a prequel to a fuller paper examiningthese trends that we plan to publish in autumn 2017.ContactsBarry BenjaminGlobal Asset & Wealth Management LeaderPwC US 1 410 659 3400barry.p.benjamin@us.pwc.comPwC AWM Insights May 2017 15

pwc.com/assetmanagementAt PwC, our purpose is to build trust in society and solve important problems. We’re a network of firms in 157 countries with more than 208,000 people who are committed todelivering quality in assurance, advisory and tax services. Find out more and tell us what matters to you by visiting us at www.pwc.com.This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the informationcontained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completenessof the information contained in this publication, and, to the extent permitted by law, PwC does not accept or assume any liability, responsibility or duty of care for anyconsequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.For more information about the global asset & wealth management marketing programme, please contact Maya Bhatti on 44 (0) 20 7213 2302 or maya.bhatti@uk.pwc.com. 2017 PwC. All rights reserved. PwC refers to the PwC network and/or one or more of its member firms, each of which is a separate legal entity.Please see www.pwc.com/structure for further details.

1 410 659 3400 barry.p.benjamin@us.pwc.com Asset Management 2020: Taking stock Asset & wealth management insights: Asset Management 2020: Taking stock 1e define worldwide AuM as as

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