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How investment houses can offer attractive opportunities and manage risks


Global Banking & Finance Review    

Gavin Neilson and Benjamin Revillion

11 December 2014

Following Scotland’s decision to protect 307 years of union with England on September 18, uncertainty over the future of Scotland within the UK seems to have diminished. The run up to the referendum was eventful – with a significant outflow of funds from UK markets and threats by key Scottish financial services players to move operations south – so it is safe to say that asset managers with exposure to the UK had a lot to think about.

Even though the immediate risks and uncertainties are gone, the referendum was not the end of the line for pro-independence parties. The SNP now boasts more than 65,000 members, making it the third largest party of the UK, and it is expected to be stronger than ever at the 2015 general election. This reinforces the danger of a repeat of what happened in Canada in the 1980s and 1990s, when Quebec unsuccessfully tried to gain independence twice. As a result of ongoing economic and political uncertainty, several of Canada’s largest companies, including the Bank of Montreal, moved out of the capital, along with one million Quebecois. If the Montreal effect were to be repeated in Scotland, pressure would be put on the country’s economic growth potentials and its attractiveness as an investment location. In addition, if Westminster devolved some powers to Holyrood, it may need to reciprocate across Northern Ireland, Wales and some English regions to avoid political conflict – impacting the UK’s political profile.

This scenario reinforces the fact that the relief felt by asset managers, bankers and insurers after Scotland’s no vote is not to be relied upon. Investment managers heavily exposed to the UK market have asked us how they can continue to offer attractive investment opportunities while managing operational risk appropriately.

A key factor to the ongoing success of investment houses will be their ability to be nimble and flexible to address the uncertainties ahead. We have set out three actions asset managers need to pursue in order to achieve this goal.

Assure and strengthen contingency plans 

While the need to quickly act on contingency plans has faded, asset managers need to realise the storm is not over. The foreseeable future is full of significant political milestones that could profoundly impact day-to-day operations, competitive pressures and customers’ risk profile. Assuring that contingency plans can cope with any eventuality will remove the risk of critical operational disruptions. Shareholders need to believe in the long-term strength of their company and a loss of trust due to incomplete planning could be devastating for a firm’s market value, its shareholders’ return and customer retention.

From our experience, the correct use of scenario planning can create exceptional internal and external value for businesses. We recently worked with a commodities exchange to verify its value before an acquisition, and by analysing the impact of several market scenarios on the intrinsic value of the business, we showed the exchange was £1 billion more valuable than the original price of £400 million it was ready to sell for; an increase of 250%.

Transition operations towards digital solutions 

Migrating operational systems to digital solutions will enable the removal of certain legacy hardware/software dependencies. This will lead to improvements in flexibility, which allows fast responses to the rapid and dramatic operational challenges on the horizon. A new digital platform will not only provide a competitive edge, but remove any fragmentation in business processes, and a cloud solution like ‘Software as a Service’ could lead to considerable cost savings. Several leading asset managers have made significant investments in digital services – from mobile apps to advanced content management systems – and we have worked with global pension providers and insurance companies to integrate social intelligence into their businesses. We recently helped an insurance company to become digitally ready and identified an opportunity to save them more than £5 million of cost annually.

Ensure that asset pooling solutions are in place 

Finally, to enhance investment offerings and provide individual and institutional clients with advanced investment management services, a robust asset pooling solution could also be considered. A significant inhibitor to realising asset pooling is the complexity, resulting time and cost involved in the implementation. This intricacy is driven by strong interdependencies, in most cases combined with a conflict of interest, between other business segments of the organisation, the fund’s clients and the tax and legal authorities of countries where the firm has its investments. However, well aligned asset pooling quickly develops institutional sales, grows assets under management (AuM) and improves economies of scale, purchasing power and attractiveness as an employer. In the Netherlands, we designed and implemented an asset pooling structure for a large investment manager, helping them to acquire new business and increase their AuM by €3 billion in the first year of operation. The key change included a shift from individually managed funds to asset pools that can be shared by multiple clients.

Contingency planning, transitioning operations to digital and asset pooling will allow you to ride the upcoming uncertainties more peacefully than your competition. After all, the challenges brought by the UK’s political situation are only the risks we know about; further dangerous risks are still to be uncovered and will surface sooner or later.

Gavin Neilson is head of PA Consulting Group’s financial services in Scotland and Benjamin Revillion is a financial services expert at PA Consulting Group    

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