GLOBAL TRENDS IN THE ASSET AND WEALTH MANAGEMENT INDUSTRY 2020 2 | Global Trends in the Asset and Wealth Management Industry 2020 External Document © 2020 Infosys Limited Contents Foreword 4 COVID slowdown will not stop the shift toward passive funds and alternate investments 5 Trend 1: Demand for increased transparency and lower fee-based products to disrupt fee models 5 Trend 2: Alternative investments will cautiously evolve 7 Disintermediation and democratization of wealth management to help lower costs and fees charged 10 Trend 3: Digital distribution models will evolve and take products directly to the end customer 10 Trend 4: Open APIs enable data sharing and interoperability in a connected ecosystem 11 Personalized offerings for the new-age client 13 Trend 5: Hyperpersonalization of services to meet customer expectation 13 Trend 6: Intergenerational transfer of wealth is driving the need for digital preparedness 15 Digitization supporting industry pain points 17 Trend 7: Machine learning to help eliminate cognitive biases in investment decisions 17 Trend 8: Blockchain will increase process efficiency and transparency and lower costs 18 Trend 9: Client lifecycle management (CLM) processes will be streamlined using emerging technology 19 Trend 10: Amidst digitization and increased work from home, cybersecurity gains criticality 21 References 23 Infosys contributors 24 External Document © 2020 Infosys Limited Global Trends in the Asset and Wealth Management Industry 2020 | 3 Rajneesh Malviya Ashok Hegde Swaran Kumar Patnaik Senior Vice President, Vice President, Head, Asset and Wealth Management, Financial Services, Infosys Financial Services, Infosys Financial Services, Infosys Foreword COVID-19 is pushing many focusing more on performance- with an aim of eliminating economies into an unprecedented based fees and developing multiple intermediaries. recession. Economic activity low fee-based active investing Digitization and the new work- has shrunk, impacting income products. The recent market from-anywhere model will make levels and capital. The asset and volatility has made active cybersecurity a key concern. wealth management industry investing prevalent in the short COVID-19 will accelerate adoption experienced a decline in asset run. But in the long run, active of these business and technology accumulation, assets under investing is set to become less trends over the next few management (AUM), and attractive, and more investors will quarters. Prodding further into revenue in the first quarter of move toward passive investing their consequential impact, the 2020. Over the next few years, and alternatives due to the insights derived are likely to guide asset accumulation, net new market slump. technology service providers to AUM, and revenue are expected Personalized offerings and digital plan and take calculated steps. to grow at a slower pace. The channels will attract millennials This paper documents our view industry’s operating model and the mass affluent. Application on how things will evolve in this and technology infrastructure programming interfaces (APIs) sector in the near term. We write need to be reimagined to meet will increasingly be used for better these views in the full knowledge both economic and consumer connectivity and interoperability. that predicting the future is an demands. Increased use of blockchain uncertain art, and even more so Fee income, already under and artificial intelligence (AI) to given the lack of clarity around pressure due to regulations, is generate process efficiency will how recent events in the first half expected to decline. Changes help optimize costs. Distribution of 2020 will play out in the second. in fee models will be required, models are set to be disrupted 4 | Global Trends in the Asset and Wealth Management Industry 2020 External Document © 2020 Infosys Limited COVID SLOWDOWN WILL NOT STOP THE SHIFT TOWARD PASSIVE FUNDS AND ALTERNATE INVESTMENTS In the wake of COVID 19, there is an adverse impact on new investments and the need for a change in fee model has accelerated further. Alternative investments are slowly gaining pace with the evolution of technology and improvements in valuations, making them attractive for investors. Trend 1: Demand for increased transparency and lower fee-based products to disrupt fee models Fee income had been declining to fall further through 2025 — the market, fees generated will prior to COVID-19 due to stringent revenue per AUM for traditional continue to decline. transparency requirements from long-only managers is expected Asset prices across the world have regulators and clients’ demands to drop from 0.40% in 2017 to declined due to COVID-19, and for lower fee-based products. 0.31% by 2025. fee income for asset and wealth Historically, as AUM grew, fee As more investors shy away from managers has followed the trend. income declined, indicating that the active investment market and In response, firms may conduct the operating model was not move toward passive investments, a thorough revision of fees, optimum, with rising costs pulling and new low fee products such commissions, and charges on their margins lower. As per estimates, as Smart Beta — an actively products and services. Regulators the ratio of revenue to AUM managed fund that uses AI and could also continue to further gradually declined by almost 10% machine learning to self-correct review fees and commissions from 2012 to 2017. This is likely and generate alpha — enter charged by industry players. External Document © 2020 Infosys Limited Global Trends in the Asset and Wealth Management Industry 2020 | 5 Figure 1. The revenue of the top 25 public asset managers has been declining, hastened by COVID-19 27.5 40 25.8 34 Net revenue (US$ in billions) 24.0 28 AUM (US$ in tillions) 22.3 22 20.5 16 1Q 2017 1Q 2018 1Q 2019 4Q 2019 1Q 2020 AUM (LHS) Net revenue (RHS) Source: Pionline.com Figure 2. Key fee income trends Lower fee-based New outcome-based Need for products like Smart active investing will transparency will put Beta will continue to emerge more pressure on attract attention fees Overall ratio of fee income to AUM will decline through 2025 Source: Infosys Building an effective business performance, building more Increased transparency in fees will operating structure is key to outcome-based investment also enhance confidence in asset tackling the decline in fee income themes, and aligning innovation managers — both from clients and maintaining profitability. and offerings around what and regulators. This means connecting fees to customers want as their goals. 6 | Global Trends in the Asset and Wealth Management Industry 2020 External Document © 2020 Infosys Limited Trend 2: Alternative investments will cautiously evolve Alternative investments have seen a heightened interest from clients in the 18 months prior to the COVID-19 crisis. These assets held by investors are expected to grow nearly six fold to US$13.9 trillion in 2020 from US$2.5 trillion in 2004, according to PwC research. Figure 3. Alternative investments have steadily grown over the last two decades 21.1 13.9 11.4 10.0 In US$ trillion 7.9 6.5 5.3 2.5 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2025* 2020* 2021* 2022* 2023* 2024* * Estimates Source: PwC Historically, there have been transparency and liquidity concerns around alternative asset classes including corporate debt, real estate debt, micro finance debt, real estate development projects, and real estate rent- oriented projects. But this has changed in the past five years. Figure 4. Alternative investment growth indicators Number of sovereign More pension funds Large institutions are investors is growing are investing in looking for customized in this area alternatives alternatives Asset managers are Investment in developing full-service, technology, multi-asset class distribution, and solutions data has grown immensely Source: Infosys External Document © 2020 Infosys Limited Global Trends in the Asset and Wealth Management Industry 2020 | 7 Figure 5. Globally asset prices have been extremely volatile since the outbreak of COVID-19 125.0 112.5 100.0 87.5 75.0 3 Feb 20 3 Mar 20 3 Apr 20 3 May 20 3 Jun 20 3 Jul 20 EURO STOXX 50 Nikkei 225 MSCI Emerging Markets S&P 500 Brent Dow Jones Airlines Dow Jones Oil & Gas MSCI US REIT Indices rebased to 100 Source: Investing.com, Infosys Alternative asset prices and be impacted, as lockdowns market uncertainty and lower valuations have plummeted due have resulted in a dearth of liquidity. to COVID-19. Investors holding consumption. Late-stage startups, With the vast volumes of data cash may reconsider investing irrespective of sector, will find available, AI and machine learning within these asset classes. it challenging to deal with the are increasingly being used to downturn. Enterprise technology Smaller companies will find it value real estate assets and deliver startups are likely to fare better difficult to seek investments from outcomes. than others. Growth-stage firms private equity firms in the current will attract better valuations and Alternative managers have environment, despite private investments, and noncyclical firms invested heavily in areas that equity firms having access to US$2 and businesses that promise high were not so mature earlier such trillion of reserves. Private equity cash generation are likely to be as data, analytics, operations, firms will invest in areas that offer businesses of choice in a wealth customization, procurement, recurring