Tuesday, February 23, 2021

How COVID-19 impacts the field of asset and wealth management

 


Convenient measures to respond to the coronavirus crisis


For customers, companies, and societies worldwide, the coronavirus (COVID-19) pandemic is causing widespread fear and economic hardship. To assist, we prepared COVID-19 guidance: What US business leaders should know: crisis management and response, workforce, supply chain and operations, finance and liquidity, tax and trade, and policy. Below, you can find guidelines unique to asset and wealth management companies.


Most businesses do have business continuity plans, but those do not entirely address an outbreak's fast-moving and unpredictable variables such as COVID-19.

The widespread quarantines, business, and community disturbances, and added travel restrictions of a global health emergency such as this one are not usually taken into account by traditional contingency plans.


There are a variety of particular issues posed by the crisis. Finance leaders in the United States and Mexico expressed their top priorities in PwC's COVID-19 CFO Pulse Survey.

Considerations for the business of asset and wealth management: Managing and responding to emergencies

Challenges facing the asset leadership industry:

Given how closely revenues are tied to the financial markets, the asset and wealth management sector may be considered a bellwether for the overall economic climate.

After their February market highs, publicly-traded fund managers have seen their share prices drop 20 percent to 30 percent or more. Significant liquidity is generally untested in passive items. There are increasing signs of stress in broad areas of fixed income markets, such as corporate credit. The potential for significant market uncertainty could be in play for weeks or months, and there are rising forecasts of a decline. Until markets recover, the M&A and IPO markets can contract. Being an investor is a difficult time.

Business continuity plans could not have envisioned a crisis requiring more than transferring activities or deploying remote server backups from one site to another. There are disaster recovery plans for different operations. Still, they may not be adequately comprehensive to cope with multi-pronged problems that may emerge from a ripple effect on suppliers and markets (processes, technological breaking points, third-party risk, estimation and determination of net asset value, people's concerns, and financial reporting). There will invariably be certain manual activities that might have missed all the best company continuity preparation. Asset and asset managers rely on a network of service providers. Still, administrators, custody, pricing, and other resources, do not have adequate insight into third-party crisis management plans.

Cybersecurity is always a top priority; with higher levels of remote access to core systems, asset management companies can face extra threats and vulnerabilities. Employees and management may be more vulnerable to the efforts of social engineering.

Employees: Challenges facing the asset management industry

People (human capital) are the most excellent resource of asset management companies, meeting customer needs, portfolio management, operating operations, and more. After recent disasters, several businesses have developed contingency plans for personnel, including shifting to a secondary venue. Backup sites can often become unavailable in this case, and social distancing can enable workers to operate remotely for long periods. Companies will not be completely prepared, except for job categories where it is possible to incorporate this transition on a scale. As an increasing number of workers work remotely, cyber threats may also rise.

Market instability and business continuity communications can not provide adequate clarity and data to keep workers updated and reduce their concerns regarding their job situations. Stress may arise from rising consumer demands, market uncertainty, possible exposure to disease, and absenteeism that may render business operations more difficult to sustain.

These variables could leave asset management companies with a workforce more likely to control breakdowns, mistakes, and other risks that could lead to exposure to regulations.

Operations and chain of supply: Challenges facing the asset management industry

The roles of risk investment, management reporting, and asset managers’ investor services are still under pressure. Customer questions and concerns about the exposure of assets to affected territories, asset classes, and sectors could continue or even increase in number.

If their staff or activities are interrupted, third-party service providers that drive key processes may run into problems. If counterparty settlement becomes compromised or problematic, vendor exposure to company and employee illness risks may change the best execution formula.

As more workers operate remotely for extended periods and pressures on the systems increase, technology infrastructure may be strained or show weak spots. Companies could freeze code and site changes, which could have customer and security consequences. New cybersecurity threats may be generated by introducing new infrastructure components to cope with outsized volumes. COVID-19-related phishing attacks are on the rise.

Finance and liquidity: Challenges facing the asset management industry

In financial statements or other SEC filings, asset management companies can need to make reports about the impact of COVID-19 on their company, based on applicable GAAP and SEC disclosure requirements. In addressing operational outcomes and adjustments in balances, these could include risk factors, deterioration, debt, liquidity, management discussion, and analysis (MD&A). Investors in private asset management companies are likely to concentrate on these and other market concerns. Investors in the fund can also expand their inquiries to include possible disruption to the advisor's activities.

Macroeconomic and industry situations can lead to events requiring assessments of disability being triggered. Forecasts, models, and assumptions, if disability evaluations are warranted, could all need to be checked and, possibly, updated. With increased market volatility, uncertainty, and illiquidity, the valuation of less liquid and private assets is becoming more difficult. It is also likely that considering COVID-19-related uncertainty, you would have difficulty estimating NAV (net asset value), which might cause NAV determination problems.

Asset management supply companies often rely on their supplier network to fulfill their obligations. In territories impacted by COVID-19, some of those suppliers may have operational footprints, which further complicates the situation. Your suppliers and their suppliers may affect your ability to generate timely financial statements, depending on the degree of business interruption.

With possible delays in processing financial reports, combined with extensions to tax filing deadlines given by the US and state and local governments, the production and distribution of information reporting to fund-limited partners may be affected.

Taxes and trading: Challenges facing the asset management industry

If significant portfolio sales are made to satisfy redemptions, funds may face tax implications and may meet illiquid markets and distressed values.

The demand for capital could become less available. Lending conditions could tighten rapidly, and refinancing or issuing new (original) shares could be more costly or impractical for you.

For individual workers mandated to operate from home, it is essential to review payroll tax withholding, nexus/permanent establishment, and revenue distribution. Also, asset managers would need to discuss regional policies in jurisdictions that handle their employees’ business continuity/disaster recovery.

Strategy and trademark: Challenges facing the asset leadership industry

For business planning and research, estimates, models, and assumptions could all need to be checked and updated theoretically. On whether disability tests are required, a decision should be made.

Additional considerations: Business model

Issues that the asset management sector may face:

Traditional 60% /40% equity/fixed income wealth management portfolio models do not perform as expected. This has the potential to add to pressure on consumer trust and spending.

In upmarket, passive products have recently become popular, but they could lose popularity in a volatile or down market.

In comparison, alternative managers and distressed firms could be placed to invest in special opportunities at more favorable valuations.

Reporting for regulatory purposes

Issues that the asset management sector may face:

New guidance and relief are being provided by the SEC, FINRA, IRS, and other reporting regulatory outlets, and they may offer more in the coming days and weeks. Planning for people, monitoring, third-party risk, and other contingencies may be influenced by regulatory changes.


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