Churchill is Britain’s greatest wartime leader. It was, as Churchill himself saw it, his tryst with destiny. However, at the very point of victory he was thrown out of power in favour of a party with a programme of radical social reform. Churchill was part of the old guard, and not deemed capable of implementing the changes most thought critical for the country’s future success. There are parallel pressures facing some of today’s asset management leaders. The asset management industry is undergoing seismic changes. Incoming European regulation, a recent challenging review of the sector from the FCA, and continued uncertainty around the future of the UK financial services sector outside the European Union, have all put immense pressure on margins and have forced asset managers to reassess their business models.
These stresses fall on the shoulders of the management team, and in particular the chief executive. As the industry is forced to adapt to an environment of fee compression and rising costs, so too must the C-suite re-evaluate its role, acknowledge the new complexities of their business, and develop strategies which will allow them to thrive in a competitive and pressurised industry. While each firm will have different priorities and requirements, there are some essential characteristics asset management CEOs will require if they are to successfully overcome the inevitable challenges ahead.
Incoming regulation is placing a significant burden on asset managers. The requirements are admittedly complicated and arduous but most firms are now managing the various deadlines effectively. The FCA review is putting further pressure on executives, as the regulator has stipulated that it will look to enforce accountability through the upcoming Senior Managers’ Regime, but savvy CEOs are developing ever more solid relationships with the regulator – often in the shape of a dedicated resource – in order to build trust, discuss any potential changes and to receive some warning of future initiatives.
New regulation also requires executives to make important operational decisions, in particular regarding which functions should be outsourced and which brought in house. Whilst asset managers have often relied on outsourcing in the past, in part thanks to the cost and operational efficiencies it delivers, the stringent requirements of MiFID II alone may cause this to change. Bringing more capabilities in house will affect a company’s profitability: although firms have now largely decided whether to bring research costs in house or pass them on to clients, it is the larger players who can afford to absorb the expense – smaller asset managers may struggle.
The revolutionary impact of technology will also necessitate new skills and understanding. Leaders must be increasingly open to harnessing tools which provide a competitive edge, but not all asset managers will be able to become digital experts. A wise CEO will learn instinctively to recognise the right capabilities with which to engage to meet their company’s needs.
Against this backdrop of regulatory and technological change, asset management CEOs must be master tacticians, able on the one hand to navigate the regulatory minefield whilst on the other hand simultaneously taking a view on how to play into the future landscape.
Mergers and acquisitions bring about their own questions of leadership. It has taken time and effort to communicate the advantages of the co-CEO model post-merger, but in a world of increased M&A, executives will recognise that consolidation is not simply the fusing together of two firms, but also the creation of a new entity. Preserving the incumbent CEOs can make sense in the short term, but eventually a new company will require new management.
To some extent, these difficulties and decisions have always plagued chief executives; consolidation comes in waves, regulation, although necessary, has always caused constraints, and financial services firms have always had to adapt and innovate in order to remain competitive.
The major challenge facing the industry is untrialled and untested however; for some, how a UK asset manager operates outside the EU, and vice versa, is probably the single most important decision a current CEO will make. The City is lobbying valiantly for mutual access between the UK and EU, but clarity around the terms of Brexit remains opaque and many firms have already seen fit to rely on first mover advantage and establish subsidiaries on the continent rather than wait for the outcome of negotiations. Since the triggering of Article 50, a few have begun moving staff and operations abroad, suggesting that some leaders are braced for a hard Brexit and are in full contingency planning mode.
The industry is facing a perfect storm and, at best, the uncertain outlook is not about to change. In order to thrive, executives will need to make more decisions more quickly under greater competitive pressure than ever before. Some firms are fortunate enough to have embraced change already. For others though, new CEOs will have to emerge because, like Churchill found, having battled through turbulent times new blood will be required to take companies towards those sunlit uplands.
Charles Harvey is asset management practice leader at Per Ardua