Investment Management Firms Find Economy, Regulations, Hampering Growth: KPMG Survey

NEW YORK, Aug. 16, 2011 /PRNewswire/ -- The dual impact of the persistently weak economic environment and new regulations is keeping investment management companies on a slow growth track, according to industry executives surveyed by KPMG LLP, the audit, tax, and advisory firm.  

While the survey of 100 U.S. investment management executives conducted in May - June 2011 revealed at the time that their biggest concern was around regulatory and legislative pressures, their views about an overall economic recovery were equally dour.

The burden of new regulations was a focal point, with 61 percent of the asset managers indicating those pressures pose the most significant barrier to their company's growth. In addition, 70 percent of the executives said they are concerned with the overall regulatory climate in the U.S.

Concerns Over Economy

Investment management executives were not optimistic that the economy will experience a recovery anytime soon. While more than half of the executives said they expect a moderate improvement next year, in a separate question, 57 percent indicated they don't expect a complete recovery until the end of 2013 or even later.  

"The executives told us that the combined impact of the uncertain regulatory and constricted economic environment is significantly inhibiting growth as they try to determine what moves they will need to make to maintain their competitive edge," said Dave Seymour, head of KPMG's Investment Management practice.  

"The good news is that they are putting cash into play to improve their infrastructure and to prepare for future business needs," he said.

Dealing with regulatory and internal control needs is expected to represent the second largest increase in spending over the next year, according to the asset managers, coming in behind information technology.

Asked to identify what actions (multiple) they would need to take to comply with regulatory changes, 68 percent identified improving existing internal policies and procedures, 63 percent pointed to strengthening information technology platforms and enabling applications, 59 percent said strengthening risk management processes, 46 percent identified developing a strong internal training program for staff, and 40 percent chose enhancing financial reporting procedures.

'Significant' Cash Investments in IT, Acquisitions, Market Expansion

In the KPMG survey, 75 percent of the asset managers said their companies have "significant" cash on their balance sheets and 24 percent already are investing the cash, and an additional 27 percent expect to be investing by the first quarter of 2012.  The top three high-priority investment areas they expect the cash will be applied to include: technology (25 percent), strategic acquisitions (21 percent) and expansion into new markets (18 percent).

When asked to choose areas in which they are looking to increase spending over the next year, 57 percent said information technology, 29 percent identified regulatory and control environment, and 26 percent said new products and services.  

"Information technology is among the most important areas for these executives right now because system platform upgrades will be required for many firms to maintain their competitive advantages in addition to meeting new regulatory requirements, such as cost basis reporting, FATCA (Foreign Account Tax Compliance Act), and certain components of Dodd Frank," said Seymour.

Headcount Increases

In the KPMG survey, 61 percent of the investment management executives said they are expecting to increase headcount over the next year, with 29 percent expecting an increase of between 1-3 percent, 20 percent expecting a 4-6 percent increase and 10 percent saying the increase will be in the range of 7-10 percent. Only 2 percent expect an increase of more than 10 percent.  In addition, 29 percent expect headcount will remain about the same and 11 percent expects a decrease in headcount.  

Transparency and Relationships between Asset Managers and Investors Improving

More than half (54 percent) of the executives surveyed believe that transparency has improved between investment managers and investors since the financial crisis, while 38 percent have seen no real change.  Nine percent said it is too early to tell.  

In addition, nearly half of those surveyed (49 percent) said they believe that relationships between investment managers and investors have improved, while 37 percent said they have seen no real change, and 15 percent said it is too early to tell.  

"The current market turmoil reminds us again that rebuilding trust with investors is a critical step to seeing a full recovery in the industry," said Seymour.

In other survey findings:

Executives believe that over the next 12 months, investors' capital will continue being invested in traditional funds, with 46 percent choosing long only funds,  15 percent said real estate fund offerings, 14 percent said private equity and private equity fund of fund offerings, 14 percent said hedge fund and hedge fund of fund offerings, and 11 percent said venture capital.

The KPMG Investment Management Pulse Survey

The KPMG survey was conducted in May/June 2011 and reflects the responses of 100 senior executives in the investment management industry.  Based on revenue in the most recent fiscal year, 34 percent of respondents work for institutions with annual revenues exceeding $10 billion, 31 percent with annual revenues in the $1 billion to $10 billion range, and 35 percent with revenues in the $100 million to $1 billion range. Sixty-three percent of the respondents work for publically held companies, while 37 percent represent privately held firms

About KPMG LLP

KPMG LLP, the audit, tax and advisory firm (www.us.kpmg.com), is the U.S. member firm of KPMG International Cooperative ("KPMG International.")  KPMG International's member firms have 138,000 professionals, including more than 7,900 partners, in 150 countries.

SOURCE KPMG LLP