Financial reporting by investment managers The need for clarity December 2015 kpmg.co.uk © 2015 KPMG LLP, a UK limited liability partnership and a member firm of the KPMG network of independent Financial reporting by Investment Managers member firms affiliated with KPMG International (“KPMG International”), a Swiss entity. All rights reserved. 02 Executive summary Contents 04 Benchmarking 12 Survey 18 Narrative reporting 24 Corporate Governance 26 Remuneration 29 Accounting update 34 Conclusion © 2015 KPMG LLP, a UK limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International (“KPMG International”), a Swiss entity. All rights reserved. Financial reporting by Investment Managers 01 01Executive summary Welcome to the 2015 A complex task more information in reports – without fully considering how that information edition of Financial Factors such as increased regulation is selected, presented and structured Reporting by Investment and market volatility are impacting – preparers will deliver documents that upon performance. In this respect, are opaque rather than enlightening. Managers. there is a real challenge inherent in As new risks emerge, arguably one of The investment industry is working in preparing reports that take account of these factors, while also providing the greatest challenges is to quantify an ever-more complex environment. the threats in a way that is meaningful. Businesses in the sector are not only a true and accurate picture of the performance of individual businesses This year’s reports suggest that cyber faced with tighter regulation, at a time risk, in particular, has been under when investor pressure to deliver that can be compared to reports published by other firms in the sector. reported, perhaps because firms have improved performance is increasing, struggled to quantify the danger to but they are also faced with a This raises questions of consistency. their business. significant degree of market volatility In addition to the financial report, the and the arrival of new technologies. alternative performance measures The pressure to produce better reports cited by investment managers highlights the importance of the They are also facing new risks. Across finance, risk, compliance and internal the financial services sector as a whole, continue to play an important role in providing investors and analysts with audit functions within companies. challenger companies are entering the This year, for the first time, we have market, typically harnessing the potential the information they need to assess the performance of individual firms. It conducted a survey of how these of new technologies. The investment functions are resourced and run. management industry is unlikely to is therefore vital that commonly used remain immune from these disruptive measures – such as Assets Under forces. Meanwhile, cyber and IT risks are Management – should be compiled becoming ever more acute. Technological according to parameters that are changes are helping investment consistent across the industry. Equally managers to deliver a better service important, within each individual but this in turn exposes companies to company the parameters should be the threat of malicious attack or indeed consistent year to year. damaging systems failures. Reporting is also affected by Against this backdrop, the demands regulatory requirements that on firms to produce annual reports ultimately result in reports becoming that provide a clear and transparent larger: the new rules on enhanced risk account of performance goals, the reporting are a case in point. Providing progress being made towards those shareholders with a greater degree of goals, and emerging risks has probably insight is clearly a good thing but there never been greater. is a danger that by simply including © 2015 KPMG LLP, a UK limited liability partnership and a member firm of the KPMG network of independent 02 Financial reporting by Investment Managers member firms affiliated with KPMG International (“KPMG International”), a Swiss entity. All rights reserved. The need for clarity Narrative reporting Accounting Annual reports in the investment Longer annual reports are in part The consolidation suite of standards management sector are, on average, due to preparers responding to the (IFRS 10, 11 and 12) were effective for 24% longer now than they were requirement for enhanced narrative EU preparers for accounting periods in 2011 and that increase in size is reporting. The challenge is to provide that began on or after 1 January 2014. understandable given the factors greater clarity and ensure consistency As a result of the changes, a number outlined above. However, it is vital that when non-GAAP alternative of groups are including consolidation a bigger word count is accompanied performance measures are used. as a key policy judgement. by more, rather than less, clarity. The Preparations for transition to UK GAAP sections in this year’s report cover Corporate governance and the implementation of IFRS 9, 15 investment management firms, wealth and 16 continue. The coming year’s annual reports managers and alternative managers. will mark a first attempt by firms to comply with the new risk-reporting The benchmarking report requirements. It will be necessary for This year’s report suggests the businesses to provide an assessment performance of investment managers of risk management, a review of has been relatively resilient in internal control systems and the recent years, with firms in the viability of the business, but also to sector diversifying to drive improved provide a full account of the underlying performance. Pressure on fees has assumptions. Meanwhile, investment been less acute than expected. Wealth managers are lagging the wider FTSE- manager performance has been 250 community in terms of gender more mixed, with increased Financial diversity. Conduct Authority (FCA) regulation being a factor. Remuneration The trend towards increased use of Annual survey variable remuneration components is In the first of what will be an annual continuing and there are indications survey, we have compared the that recently implemented shareholder resourcing and cost base of the voter rights are having an impact on finance, compliance and internal audit remuneration policy. This is evidenced functions within firms. The growing by one company in our sample, importance of these functions is in acknowledgment of the views evident, but this is not in all cases expressed by a significant group of reflected by a commitment to investors, not pursuing a proposed increased resourcing. policy change, despite shareholder voting not being binding. © 2015 KPMG LLP, a UK limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International (“KPMG International”), a Swiss entity. All rights reserved. Financial reporting by Investment Managers 03 02Benchmarking The performance of investment The variation in the performance Adjusted PBT arguably provides managers has been resilient in of wealth managers may in part be the focus when investors scrutinise the financial years under review due to the impact of regulation in annual reports but the figures and there are signs that there is the sector. In particular, the industry need to be treated with a certain more diversification in their product has been grappling to keep up amount of circumspection. As we offerings. Performance of wealth with changes in the expectations explore in greater depth in the managers on the other hand has from the regulator over suitability. section on Narrative Reporting, been more mixed. This has eaten up resources and the criteria underpinning the move placed pressure on performance. from statutory to adjusted PBT It may also be the case that wealth are not necessarily consistent Adjusted profits before tax managers are feeling the heat from one business to another, so from new competitors coming direct comparisons are not always The profits before tax (PBT) into the marketplace. A number of straightforward. figures contained in this year’s wealth managers are consequently reports suggest that investment rationalising their client base with the management firms have been aim of exiting/reducing the burden stable overall. In contrast, there is of smaller clients that are no longer significantly more divergence among profitable. This may help to shore up wealth management firms. performance in the longer term, but could also limit access to the next generation of savers. IM – Adjusted PBT Growth 2010/2011 to 2014/2015 WM – Adjusted PBT Growth 2010/2011 to 2014/2015 300 200 250 160 200 120 150 80 100 40 50 % growth from 2010/11 adjusted PBT % growth from 2010/11 adjusted PBT 0 0 2010/11 2011/12 2012/13 2013/14 2014/15 2010/11 2011/12 2012/13 2013/14 2014/15 Schroders Henderson Group Rathbone Brothers Charles Stanley Man Group Ashmore Group IFG Group Brewin Dolphin Jupiter Fund Management Aberdeen Asset Management © 2015 KPMG LLP, a UK limited liability partnership and a member firm of the KPMG network of independent 04 Financial reporting by Investment Managers member firms affiliated with KPMG International (“KPMG International”), a Swiss entity. All rights reserved. “In order to assess the performance of investment management businesses, shareholders and analysts need to understand the underlying factors driving higher or lower AUM figures. This in turn raises the question as to whether