Series 7 Episode 3: Financial services in transformation - asset and wealth management

Transcript

Tessa Norman: Welcome to this episode of Risk and Regulation Rundown, the podcast where we share our views on financial services, risk and regulatory hot topics. Today, we're recording the first of three special episodes, where we will be providing a deep-dive into trends in asset and wealth management, the banking and the insurance sectors. We're kicking off today with asset and wealth management. We'll be talking about the regulatory and market drivers of change in the sector and how firms can navigate the resulting opportunities and challenges. Some of our listeners, you might remember the episode we recorded earlier this year, where we were reflecting on changes which are reshaping financial services as a whole, such as technological transformation and shifting customer behaviours. And for that episode we were joined by PwC's financial services leader, Darren Ketteringham, and TheCityUK CEO Miles Celic.

Today we will be building on some of those themes and really bringing to life what the impacts are for asset and wealth managers. I'm delighted to be joined today by two guests, Albertha Charles, who is PwC's UK and Global AWM leader, and Andrew Strange, who is the director leading AWM within PwC UK's Financial Services Regulatory Insights team. And for long-time listeners, you may recognise Andrew as former host of this podcast. Albertha it now feels like a really timely moment for us to be talking about asset and wealth management, as we're seeing a lot of change and a lot of transformation in the industry. Can you start off for us today by characterising how is the environment looking for asset and wealth managers?

Albertha Charles: Thanks Tessa. I have to say that asset and wealth managers are operating in one of the most dynamic and demanding environments we've seen in decades. Margin pressure is not new, we've had fee compression, rising costs, and growing regulation squeezing profitability for sometime, but it's intensifying. Fees are still falling across both passive and active strategies, and a surge in ETFs, especially active ETFs is really fundamentally reshaping the economics of traditional models. But what's changed is how those pressures are now converging with a number of much deeper structural shifts. We're talking about impact of transformative technologies, shifting demographics, evolving client expectations. The democratisation of private markets, and a much more fractured macro and geopolitical environment. And so it's really forcing firms to re-think, how do they create value? How do they stay relevant? How do they lead? And technology is front and centre. From Agentic and Gen AI, to blockchain, big data analytics, these tools are reshaping how we serve clients and unlock growth. But there's still a big investment gap, particularly between the leaders and the rest of the pack. In our AWM Revolution 2024, merely 70% of firms said they spent less than 1/6th of their capital expenditure on truly transformative technology. Another shift that is really important is the geopolitical reset that we're seeing. And that's aligned to one of the five mega trends that we talk about at PwC. We call it the fracturing world?

And so what you have is economic nationalism is driving volatility and uncertainty, and divergence in trade and regulatory policies, all of which are fragmenting global markets. In Italy we saw an example of that. One of the EU's largest funds, cross-border fund markets, investors pulled fifteen billion Euros out of that market from international funds. But if you looked at what happened with their local domicile funds, that doubled. And so that's a real challenging dynamic for firms that have built scale around global platforms. The next really key area is the surge in private markets, that's continuing, and at PwC we're projecting 7% average growth over the next three years. And that's driven by a number of things. You've got reforms in the UK, like the long-term asset fund regime, Mansion House reforms, changes we're seeing in the US and 401K rules. All of that is pointing in the right direction, but firms still need to get ahead of some challenges around this. So there's liquidity, suitability, investor understanding, really important. And then, I'd say, the other areas are probably convergence. We are seeing convergence across financial services, that's accelerating and that's driving greater M&A and market consolidation, just look at the recent deal announced by BNP Paribas looking to acquire AXA Investment Managers. Dai-Ichi Life just announced a stake in M&G, clear signals that asset management is becoming the strategic core of a more integrated financial services proposition. And finally, I would say, it's the wealth story that's shifting really fast.

With seventy trillion dollars of intergenerational wealth transfer, the rising mass affluence segments, and ageing populations entering the accumulation. That's turning wealth into a real strategic battleground. And so, yes, it's a complex and demanding environment, but it's also a time for extraordinary opportunity. We project global AUM to grow to 171 trillion by 2028. And also the UK government's latest spending review with priorities from defence modernisation, infrastructure renewal, energy transition, AI-led transformation, all of this requires long-term private capital to fund it. And so asset managers, particularly those leading in private markets and real assets have a real critical role to play in mobilising that capital and delivering the investment outcomes that underpin sustainable growth. It creates space for the sector to lead with confidence, purpose and impact.

Tessa: Thank you. I think there's so much to unpack there and we'll be diving into both those challenges and opportunities as you set out throughout our conversation. I think before we move on to talk a bit more about the policy agenda that you've mentioned, I wanted to get your thoughts in a bit more detail, and you touched on it in terms of the geopolitical fragmentation. But as well as those broader trends, how are you seeing firms respond to the recent market volatility that we've seen? What does that really mean for asset managers?

Albertha: You're right. The volatility and geopolitical risk have become a defining feature of the current market environment, and it's really reshaping how managers operate. Yes, there's been a hit to asset values and fee income, but the bigger challenge for many I think is the unpredictability of flows. Investor sentiment is swinging rapidly. We've seen sharp shifts into cash, then bonds, then back into equities. And sometimes within the same quarter. And that's making portfolio construction far more reactive, and it's harder for managers to build conviction around long-term positions. There's growing demand for capital preservation, multi-asset income strategies, high liquidity, and that's influencing how portfolios are being designed at the moment. But this goes deeper than product. The Bank of England's system-wide stress testing and the FCA's scrutiny of private market valuations are all clear signs that asset managers are now firmly in the systemic risk conversation. And so in response, firms are really re-thinking how their businesses run, not just looking at portfolios, but the operations, the governance, and particularly the footprint. And so how are they responding? I think they are working to embed resilience across the entire business. On liquidity we're seeing firms put liquidity stress thresholds in place across the business, not just at the fund level. We're building bigger liquidity buffers, improving stress testing, and investing more in real-time risk monitoring. Those are some of the responses that we're seeing.

Tessa: Really interesting, and there's lots of regulatory angles to those points. Andrew, it would be great to bring you into the conversation here, and how are you seeing the current regulatory landscape, and how is that being driven by the government's growth agenda? And again, how is that impacting firms?

Andrew Strange: Thank you, Tessa. Yes, and I would say this. It's a really interesting stage in the regulatory cycle, and you're right, the growth agenda is permeating a lot of what we're seeing from regulators. I think actually it's quite a politically-charged regulatory environment at the moment, and we're seeing that both in terms of the approach of regulators, but also some of the initiatives they're taking as well. And this is the FCA clearly but other regulators too. If I look at the FCA, over March and April we saw their new five-year strategy, we saw their annual work programme, and they feel different. They feel tangibly different, and I think firms are still trying to process what that might mean for them. If I can talk about a couple of examples, I think one of the things that's most exciting in perhaps more of the wealth space is actually the advice guidance boundary review, which is a key initiative, and it seems like a bit of a panacea to a whole load of the objectives that regulators have got. It's going to help drive some of that investment into UK assets that we want to see, it has the potential to help create better returns for consumers, which is important. It clearly plays to that technological agenda and use of technology. And actually, from a regulatory perspective, it opens up some of those concepts that we've seen around perhaps not perfect outcomes. Lots of good outcomes for the majority of people, but not necessarily perfect outcomes for all.

I also think it sets quite an interesting longer-term tone. It has the potential to help serve underserved customer groups in the future, beyond that de-accumulation space that the regulator is looking at at the moment. We are already seeing it in things like some of the definitions of advice in the mortgage market, where the regulators begin to think about what makes sense or doesn't make sense. And also, linked to it is things like perhaps some of the softening we're seeing around some of the charging models in vertically integrated firms, picking up on Albertha's point around firms looking for M&A to look at the asset management space rom both sides of banking and insurance. This becomes an interesting challenge as well for firms to think about, or potentially an opportunity.

I also think that the growth agenda from the FCA, clearly they're trying to reduce the burden on firms themselves. There are some simplified reporting things that we're seeing consulted on at the moment, which firms can capitalise on, hopefully, and perhaps meet some of those margin pressures. But equally there are lots of new areas that I think are quite interesting. It's only in the last few weeks that we saw the conclusion of the re-bundling of research payments into doing commissions in the asset management space. Now there's a lot of guard rails that the FCA has quite rightly put in place around that. And if you go back six, seven years ago, I'm showing my age here, the approaches we saw of firms when we went through the unbundling phase were quite diverse. But there were some firms that took some of those research costs onto their P&L at a time where margins are really important, absolutely I think some firms are thinking about how they can capitalise on that newfound flexibility from the regulator.

The final point I'll just make in terms of that growth piece is the efficiency of the regulator itself as well. It's often talked about being a data-led regulator, but it really does begin to feel like that, and they're making some pretty substantial investments in technology as well. I think firms should be seeing fewer data requests, clearly things like some of the portfolio letters are being retired, and we'll see less of those in the future. But they're also looking at how they can reduce that duplication and the burden on firms. They're thinking about strategically, what are the rules that should apply when you're dealing with a customer who is not in the UK? Why have UK rules and rules of wherever your customer is situated? Is there something more efficient we can do there? What protections are really needed if you're an SME for example, and we've seen that in the commercial insurance space. The regulator is trying really hard to minimise itself in the role of firms too.

Tessa: I think that agenda on looking to reduce the burden where the regulator can is certainly really positive, but I think we shouldn't forget as well that there's still a very busy policy and supervisory agenda. It doesn't mean that the regulator is stepping back. What are the FCA supervisory priorities that you're seeing?

Andrew: There's an awful lot going on, you're quite right, and I'm not going to go through a laundry list of things that were in the grid and the work plan. I think there are a couple I'd pull out just for being interesting, and some of them are more policy-related, some of them more supervisory-related. One of the ones that I think presents some really interesting challenges and opportunities for firms is the revisions to the composite consumer investment disclosures, and bear with me, it is interesting, I promise. This is the disclosures that are given out when you're selling investment products. Now in the old world we had the PRIIPs regime where it was pretty formulaic what people were given. The new CCI regime allows firms to create much better communications, which are much more usable by consumers, much more interesting. Machine-readable communications, which allow those actors up and down the value chain to work together on things. But all of a sudden, the onus is on firms to get it right. I think that's quite a significant risk transfer to the market. I think if you look at things like the changes to the assessment of value in the asset management space that have, again, been recently consulted on, it's going to be great to give firms the ability to better communicate with their customers. But firms do also need to understand that in that case, there's not really a change in expectations. It's about how firms are delivering something, and the end outcome. That outcomes focus piece is very important. And on top of that, as you quite rightly said, the supervisory agenda is also very busy.

I think some of the interactions that firms are having with the regulator are a little more challenging on occasions at the moment. Albertha talked on the work of in private market valuations and conflicts of interest, where there's a lot of activity going on at the moment. I think about the wealth space, there's a new data request out with wealth management firms at the moment, and a lot of focus on things like consolidation. The bit that's different is that by removing some of the prescriptive rules that firms are having to work to, and thinking about this in a more outcome-focused way, actually that puts more onus on supervisors and the way they interpret rules. And therefore, that relationship and having those discussions is almost more important. But potentially, on occasions can result in different interpretations, which is more challenging for firms to deal with. I'm afraid to say, on top of that, we should bear in mind despite the fact summer is coming, in July we've obviously, got the Mansion House speech, we have the new FS strategy. My understanding is that there's a range of issues that we will see in there, so things like reform of the ombudsman service, which I think will be really interesting, and the long-awaited reforms to the senior managers and the certification regimes will be coming through too. Lots of regulatory issues, lots of supervisory focus. Much going on really.

Tessa: Absolutely. I wanted to turn our discussion now to technologies, I think that's clearly so front of mind for pretty much everyone in the market at the moment. And Albertha, you mentioned earlier, a lot of the transformation changes that we're seeing, and the margin pressures that firms are contending with. Can you talk us through the ways in which you're seeing firms successfully using technology to enhance operational performance and drive efficiencies?

Albertha: Yes, sure. The first thing I'd say is, there is a strong consensus in the market on the benefits that technology can deliver, in terms of operational efficiency. I will quote our report again, because it really focused on the use of technology in the AWM space. That report, 80% of AWM firms said they would expect to see 50% in cost-savings and efficiency gains from better use of technology. 71% said they believe that cloud infrastructure and technology would re-shape the future of the industry over the next two to three years. Good consensus, but the reality is, firms are at very different stages on that journey. Many are still grappling with the costs and complexity and the risk of retiring legacy systems. And that makes it harder for them to scale and integrate data or respond quickly to change. With that said, the momentum is building. We're seeing progress in a few key areas, so as an example, robotic process automation is being used to streamline compliance, onboarding, reporting, and fund administration, so reducing manual error and freeing up capacity for higher value work. Firms using data lakes and AI engines, so flagging anomalies in fund flows and compliance breaches much earlier. We're also seeing use cases with Gen AI gaining traction, not just in the large firms, but also in mid-tier firms. I know one mid-sized firm, they cut their quarterly reporting workload in half. And that's using Gen AI to draft updates that the analysts simply had to review and refine. Others are using it to automate research summaries, so producing multi-lingual client communications, tailoring content based on sentiment analysis, and really helping teams to personalise portfolios and reporting at scale.

We've seen hybrid advisory models and growing use of reg-tech platforms to manage diverging regulations, like SFDR and the SEC ESG rules. And also more fundamentally, firms are really taking a hard look at what they consider to be non-core activities, non-core operations, like fund accounting and transfer agency. There really looking to strategically outsource these to manage services platforms, to reduce the fixed costs and to really achieve greater skill and efficiency. And while progress is uneven, the firm is moving faster, so using technology not just to improve, but really to rewire how their businesses are working.

Tessa: Some really interesting examples in there, thank you. And I think as well as the focus on efficiencies, we're also seeing a number of firms really looking at how technology can create value. Can you share with us some insights on how firms are using technology in that respect?

Albertha: Yes, that's really interesting. Technology has long been seen, as you say, as a way to drive middle and back-office efficiency, and take cost out of business. But in our latest report, we saw a real shift and in talking to clients, I'm hearing something very different. 80% of the asset managers we spoke to said that technology was already having a meaningful impact on revenue growth, and many of the asset managers I talk to, CEOs, they all see technology very much as a driver of growth and a way to create value. And they are looking at technology as 'How do I use technology to open new markets? How do I generate new revenue streams?' And really thinking about it as a core competence to gain a competitive advantage in the market. And one of the clearest examples is probably tokenisation. Firms are using blockchain to fractionalise ownership of private assets in the way that they did with your more liquid money market funds, and they're extending tokenised funds into private credit, real estate, private equity, making it much more accessible to mass affluent and younger investors. We've predicted actually, this is going to be quite a booming space for us over the next three years with tokenised fund volumes projected to grow from 40 billion in 2023 to 317 billion by 2028. And I'm talking about just tokenised funds, not tokenised real assets, which is a much bigger number.

Another area we see is tech as being offered as a service, and a number of larger managers have now commercialised their own in-house platforms and they're offering, loud-based portfolio tools, data as a service, risk analytics tools to the asset and wealth management space, and that is really diversifying the revenue stream and really providing much greater resilience to the bottom line in an era where we're seeing, as I said, margin pressures continuing. And so for those we talked about, for early movers in that space, the estimate to revenue from offering tech as a service is a 12% boost to your top line. That is very significant. We're also seeing firms deliver personalised experience at scale, so using smaller, smarter segmentation and behavioural data to offer dynamic dashboards, nudges, planning tools, and that's really boosting retention and deepening relationships. We talked about wealth before, Andrew, and some are building wealth as platform ecosystems. Integrating lending, insurance, tax planning, philanthropy via embedded finance. And that's creating much stickier client relationships and developing new revenue beyond, AUM-based fees. This isn't just about doing the same things faster. It's about using technology to expand access, personalise the experience, and really reinvent how growth is being delivered in the industry.

Tessa: And for firms that are looking to take some of those more innovative approaches and to diversify their offerings, Andrew, are there some regulatory considerations that firms would need to bear in mind?

Andrew: Yes, absolutely. It's true, everything Albertha has said almost is also true of the regulator itself. It's trying to be data-led, it's always talked about outliers. Well, actually if you look at the strategy, it talks about taking a less intrusive supervisory approach for those firms that want to do the right thing. And they'll be making that judgement based on the data that it has. So yes, they're having the same data challenges. But yes, I think the regulator is doing some really good stuff. Things like the sandboxes, of which there are a zillion different varieties, and sprints, and things. They're really engaging with the industry and trying to take forward some of these new ideas in a safe and controlled way. We've seen some recent changes, so they've removed the ban on crypto ETNs, for example, so not going gun ho, but just making some tweaks to try and encourage development and use of technology where possible. Tokenisation, we're expecting another consultation paper on that from the regulator, I think, in August, September, October time. But its worked really hard with industry to get to the right point on this because as Albertha's numbers say, this is a huge opportunity for firms. There's lots that the regulator is doing. I think more broadly, there's a really interesting public debate on risk appetite that needs to happen or is happening slowly. I think if you go back a couple of months ago, Nikhil sat in front of the Treasury Select Committee and talked about the level of risk that politicians wanted there to be in the mortgage market. What level of arrears or repossessions is acceptable? And I think you can extrapolate that out to a whole variety of other parts of the sector. What risk do you want in asset management or wealth management? How adventurous do you want to be? Because risk brings the opportunity, but potentially if you're trying to protect consumers, there's a downside too. It's a balance.

Tessa: I think you're right. That debate that we're continuing to see play out about how you get that balance right between consumer protection and growth is a really interesting one, and it feels particularly relevant for wealth managers. Would you be able to tell us a little bit more about what you're seeing in the wealth management sector, how firms are thinking about that question, or what are their other priorities?

Andrew: Yes. Albertha touched on some of the use of technology in terms of those platforms that are being created, and thinking about newer, wider service offerings, which I think is really interesting. I think if you look at some of the regulatory drivers within that, so things like the targeted support-type model, where you have the ability potentially to say, 'People like you might benefit from this better value product.' And when you've looked at situations over the last few years where we've had lots of consolidation, people do have back books, where people could be moved into more modern offerings, more appropriate or better value offerings. I think there's a lot of work around that going on. And I think the consolidation piece itself is really interesting. You know, it's building bigger, more resilient firms. But actually how do you bring together different cultures, different businesses, but actually with that view on the end customer outcome piece. Linked to that the FCA is really interested at the moment in things like ongoing advice, so it published a review at the start of this year, where the vast majority of consumers who were getting ongoing advice were getting the service they were paying for. But then I think it was 13% of cases the regulator couldn't find any evidence of it. It wasn't that they found wrongdoing, but they just couldn't identify the good outcomes either. I think if you look at the flexibility firms are going to have around disclosures. If you look at things like targeted support or areas around the advice guidance boundary review where there are new rules, I think there are new opportunities to think about this in different ways and potentially to harness technology to do that as well, to drive some better outcomes.

The final one, which I feel like we always talk about, and it's always on the list, but it's also financial crime. It's one of the four key pillars within the FCA's five-year strategy piece. I didn't feel there was a huge amount of “new things”, they were talking about in the AML space for wealth, but it's a massive area of focus for them. And maybe that goes to that difference between supervisory actions and regulatory initiatives. The FCA set up a team last year, which went in and did unannounced visits to wealth firms, to look at anti-money laundering type procedures, how well you know your clients, and things. And some of the outcomes they found were not good. I think, if I was in the wealth space, I would be very focused on financial crime as well.

Tessa: Albertha, you mentioned the wealth transfer that they were expecting to see over the next few years at the beginning, is there anything you would add to what Andrew's set out in terms of changing customer behaviours and preferences?

Albertha: Yes. I would add that for that, intergenerational wealth transfer I talked about, what you have is the rising of fast-growing mass affluence, is a younger generation of investors who have become accustomed to high levels of tech enablement. And so, there's really a question on, you know, understanding the impact that they have in terms of wanting greater demand for bespoke tech-enabled, cost-effective solutions, they want transparency, but they also want that hybrid experience They do want the tech, but they also want to talk to a real human being, particularly around the moments that matter in their lives. And so really, it's that hybrid platform, I think for a lot of wealth managers I talk to, is the way they're looking at how you serve this new younger generation.

Tessa: I think we've covered a lot of ground in our conversation today, and it would be really interesting to get both of your thoughts on, what's the cumulative impact of all of these changes and trends that we've talked about? How do you see them influencing and informing firms' strategic thinking, and potentially, market and competition dynamics too?

Albertha: When you step back from, and look at all the forces we've discussed, we've talked about geopolitical volatility, tech disruption, regulatory divergence, cost pressures, and evolving client expectations. These aren't isolated trends. They are converging and they are demanding a fundamental re-think. The leading firms are responding with ambition and intent around this. They recognise how transformative it is. And as we explored, I know you have seen our latest research, but our value in motion research. And if you think about the role of asset and wealth managers, what that's saying is the rule will expand, and so helping to fund national priorities like I talked about, infrastructure, defence, tech transformation, that shift is raising expectations. Not just for performance, but for relevance and long-term contribution that the sector can make. I would say, one of the clearest responses we're seeing is convergence and collaboration, in terms of how is the sector responding? Firms are partnering across banking, insurance, and private markets to broaden their reach. But also to secure long-term capital flows. Some of the examples, the earlier transactions I talked about were exactly about that. They are also forming strategic alliances in tech and data, so recognising that collaboration is now a core capability, especially where budgets are under pressure and scale is critical. And so this is driving a broader wave of business model reinvention, I'd say.

Some firms are acquiring private market players or wealth platforms to gain that greater share of the value chain, as we talked about before. Others are launching tokenised products, embedding advice into broader ecosystems, offering tech as a service to diversify revenues. These are all forms of reinventing your business model. Different elements of it. And firms are also taking a more strategic view of outsourcing, as I talked about. And to stay focused on alpha generation and client delivery, many are moving, as I say, tax, regulation, legal operations into managed service platforms. And this isn't traditional outsourcing. This is about freeing up internal capacity to scale what truly differentiates the business. And at the foundation of all of this is talent. We are seeing renewed investment in workforce planning and re-skilling, particularly as you look at the use of AI, and how that displaces skills. How do you re-skill and re-deploy people, and that's across data, risk, digital, operations. And AI oversight, as firms compete for capabilities that don't exist in traditional models. While it's a challenging time, there is still exciting opportunity. I will go back to that, for firms who step up, build the right partnerships, and commit to the level and speed of transformation that the moment we're in demands.

Tessa: And Andrew, can I ask you for your closing thoughts? Is there anything you'd add to Albertha's points in terms of cumulative impact and how firms can best position themselves to take advantage of those opportunities?

Andrew: Everything Albertha says is spot on. I think I have some really interesting conversations with what I consider to be quite traditional firms who are doing some different stuff, and there are a huge range of small and new interesting, new entrant tech-type firms out there that are going to disrupt things even more. From a regulatory perspective, I would say this, wouldn't I? But it feels like genuinely, it's a once-in-a-generation period of change. And the FCA really does believe some of this, so they're open to change, you just need to be able to demonstrate how what you're doing really benefits consumers and plays to that agenda. But actually, they're open to industry solutions and they want this to work.

Tessa: Thank you both so much for joining us and for sharing your insights, it's been a fascinating discussion. To our listeners, I really hope you've enjoyed this special episode. Please subscribe to our series if you haven't already, and please rate and review the series, as it helps other listeners to find us. If you'd like to access more of our analysis, you can find our regular publications on our website, which we'll link to in the show notes. And we'll be back next month. And please do look out for our follow-up episodes in this mini series over the coming months.