The COVID-19 pandemic and related shutdown of global economies will be remembered as one of the most significant shocks to the investment management industry.
In early 2020, global economies were generally strong. By mid-March, the U.S. was in a full-blown credit crisis, with credit markets seizing, buyers were avoiding even “safe” investments like U.S. Treasuries and investors were fleeing money market funds. On March 16, the Dow Jones Industrial Average suffered its second worst day in its history. Governments around the world stepped in to provide massive amounts of liquidity to stabilize markets.
What are the Implications?
As with any major disruptive market event, there are meaningful impacts to investment managers resulting in lasting changes. Looking ahead, we see changes to how work is done, the rise of market volatility and an expected regulatory response. Each of these implications will increase complexity and challenge a firm’s compliance staff.
How Work is Done
The deployment of people and resources to “work from home” was largely successful throughout the global investment management industry. The rise of improved connectivity, Web-based telephone and video services and collaboration tools shattered long-held views on what types of work could be performed remotely. Employees in a wide-range of functions were able to access their work and stay productive. 2020 will be the year that “Zoom” became a verb and household pets joined in meetings. The flexibility unlocked by all these tools makes it clear that remote work is here to stay and available to a wider variety of jobs than previously imagined.
Investment managers have been increasingly challenged with downward fee pressure over the past few years. The rise of ETFs and other passive investments and the democratization of information have led to steady decreases in fee rates. The increase in market volatility and the “instant” global recession create additional revenue pressures for investment managers. Throughout the spring and summer of 2020, 4-5% moves in the S&P 500 index were all too common. While the liquidity crunch of mid-March was eased with massive amounts of government intervention, the increased uncertainty weighs heavy on budget decisions.
As a result, investment managers are focusing more heavily on their expense line. While well-run firms understand the importance of effective compliance programs, spending constraints will challenge compliance teams to do more with less.
When the market goes to the brink of collapse and needs a massive amount of government support to bring stability, the regulatory framework is sure to be reviewed. In the immediate aftermath of the crisis, regulators have taken an active exam posture, reviewing for compliance while also gathering information as to how investment managers reacted to the crisis. If past crises are an indication, this is often followed by new rules designed to shore up the financial system from future shocks. In the coming months, we will need to pay attention to regulators around the globe for signals of future reforms.
To read the full chapter the Lasting Impact of COVID-19 on Investment Management, download The CCO’s Playbook.
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